What are we to make of the removal of tax relief on charitable donations by high earners?

As a former chief executive of a national charity, my first thoughts on Osborne’s sections in his budget on philanthropic and charitable giving were unprintable. He was capping the amount of giving that qualified for tax relief at £50,000 or 25 per cent of total income (whatever that means in days of deferred bonuses and share options). Discouraging philanthropic donations was going to hit a lot of charities. No wonder over 90 per cent of the Tory / Liberal Democrat coalition backbenchers were opposed.

But then I started thinking about it a bit more deeply, and realised that a more “nuanced” position was more appropriate.

First, let’s get some facts.

Those of us who are basic taxpayers can give to a charity and, by completing the tax-giving certificate, can ensure that the government pays back the basic income tax on that gift direct to the charity. Those on the higher level of tax can claim their philanthropic and charitable giving on their income tax return, and be given tax relief on that sum. The government, therefore, will subsidise our charitable giving from tax revenues. For basic taxpayers the sums are relatively trivial (though not to the individual making the donation) and, apart from our choice of charity, do not benefit us. However for those on higher tax rates, the sums are not trivial and represent a direct benefit to themselves. The tax relief goes directly into their own pockets. There is an argument, largely unsubstantiated, that this increases the amount those on higher tax rates give to charitable causes.

We do have some measure of tax avoidance amongst the very highest earners thanks to the release of data from a study by HMRC about those earning over £250,000 in the tax year 2010-11.

  • Of those earning £250,000-£500,000:
    • 27 per cent paid less than 40 per cent in tax.

  • Of the 10,000 tax-payers earning between £1m and £5m:
    • 10 per cent paid between 30-40 per cent in tax
    • 5 per cent paid between 20-30 per cent in tax
    • 3 per cent paid less than 10 per cent in tax.
  • Of the estimated 400 who earned between £5m and £10m:
    • 5 per cent paid less than 20 per cent in tax.

Without the full details it is impossible to calculate how much tax is being avoided, but these data are sufficient for us to say “quite a lot”. There is clearly a very strong case for closing tax loopholes, but is the charity loophole the number one priority?

Certainly there is something bizarre about charitable giving which is subsidised by other taxpayers. It allows the very rich to choose not to pay taxes to a democratically elected government, but to choose what they think the most important areas are. When I ran a charity we used to joke that people gave money to youth charities because it bought them immortality for longer. However if donations that would be used for hospitals and schools are going to donkey sanctuaries and cat homes, it starts to be less amusing. And what about charities that already have large reserves (as Dogs for the Blind had last time I looked a few years ago)? Should they be allowed to use their reserves to invest in fundraising activity just to grow their reserves?

I was also very aware, having run a charity whose President was Prince Charles, that giving was not necessarily about the cause but very frequently about what other benefits the donation would “buy”. For example, donors looked for invitations to meet royalty. It was a kind of Gucci handbag for the mega-rich: something their peers could not acquire. Should the wealthy be offered these kinds of prestige meetings, if that is what they are, funded out of tax relief? Is this charitable giving?

There are some very strong arguments to say, grieve me as it does, that George Osborne has a point. In an ideal world people should give to charities after they have paid their taxes.

However, after years of tax relief on charitable giving, to suddenly impose a tax-relief cap as the only tax avoidance loophole to be closed gives a very strong, and very wrong, message. The government appears not to approve of the rich donating to charitable causes. This belies their comments that charities need to replace government grants with rich donors and the government’s rather ungainly rhetoric on the “big society”. It also sits ill with the tax reduction afforded to the highest earners through his lowering of the highest tax band from 50 to 45 per cent.

Certainly many worthy charities are only able to do as much as they do because of large charitable donations from rich benefactors. To create a system where the donations on which many charities rely are suddenly in jeopardy is very destabilising. There has already been an 8 per cent drop in donations to charities which is likely to become a far steeper fall if there are no changes in the twelve months before the tax relief is capped. There will be a decrease in what charities can spend and, in all probability, redundancies amongst charity workers, rarely the best paid of workers. With even more public expenditure cuts to come and more people relying on charity, is this really the time for such a measure?

So what are we to make of this? In my view the problem is that the Chancellor has picked on an easy tax avoidance target and is so out of touch he does not understand the political messages it flags. If this was one of a whole raft of tax avoidance measures, it might be easier to countenance, but it is not. In his letter to the chief executive of HMRC under which Mr Osborne outlines the government’s priorities for the service, he invests £1 billion extra in the HMRC and asks them to find £4 billion from tax avoidance. What he does not say is what the government will do to close the loopholes. The tax loophole on charitable donations is the only avoidance scheme that the government has targeted, whilst giving money back to the highest paid. For this reason I am compelled to label this part of his budget foolish and likely to impact on the disadvantaged and poor – the very people this government is hurting most through all its actions. Its impact on the wealthy will be negligible. This just cannot be right.

by Laurie South, Chair, Kingston and Surbiton Constituency Labour Party