Charity tax reliefs: The Charity Tax Commission challenges the status quo
The Charity Tax Commission has published recommendations following the completion of its review of charity taxation. The Commission was led by Sir Nicholas Montagu, a former chair of the Inland Revenue.
Setting out its recommendations in its report Reforming charity taxation: towards a stronger civil society, the Commission states that it hopes these “will be seen both as prudent in the short-term and as setting a demanding agenda for improving the targeting, effectiveness and accessibility of charity tax reliefs over the longer-term”.
During its review, the Commission developed three principles which it believes charity tax reliefs should be designed to support:
- Functional activity towards a particular social good or public benefit.
- Individual donations to, participation in, and support of charitable activity.
- Avoiding disincentives and ideally encouraging charities to increase efficiency and effectiveness, and to innovate and collaborate.
ICAS welcomes the review report and submitted written evidence to the Commission. The Commission’s recommendations on the VAT treatment of charities are particularly welcome. However, the Commission’s objective of making fiscally neutral proposals means that the recommendations don’t include the extension of VAT shelter arrangements to charities providing public services. Existing arrangements mean that charities carry a financial penalty relative to public bodies and private companies which provide public services.
Charity tax reliefs cost the Exchequer an estimated £5.5 billion in 2017-18, with charities benefiting from £4.04 billion of reliefs and individuals benefiting from the other £1.46 billion.*
*Source: Charity Tax Commission report, Figure 1 - Charitable tax reliefs, £ millions, 2017-18.
For the short term
Recommendations for immediate consideration, with the Commission’s rationale for making them, include:
- Reforming Gift Aid to direct the additional value of relief above the UK basic rate to charities unless donors opt-out. Based on current levels of donation, this could boost charity sector income by about £250 million each year.
- Developing a Universal Gift Aid Declaration Database (UGADD) to provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities. This could improve the efficiency of the Gift Aid system and its governance.
- Simplifying VAT for charities, for example, reviewing the rules around shared services could encourage cross-sector partnerships and help the UK increase R&D investment. Both could boost productivity and economic growth.
- The provision of clear guidance by HMRC to public bodies so they can provide the VAT status of any charitable funding. Grants and contracts are treated differently for VAT purposes but can be difficult to distinguish in practice. This would reduce the need for expenditure on professional advice.
- Consulting on the extension of business rates relief to wholly-owned trading subsidiaries. Charities receive 80% relief on non-domestic business rates, which can be topped up by up to a further 20% by local authorities. However, charities can lose this benefit if they set up trading subsidiaries in order to comply with rules on charity trading.
- The publication by charities, with annual income of over £1m, of detailed information in their trustees’ annual reports on the value of charity tax relief they have received. This would increase transparency and therefore could increase public trust.
The Commission acknowledges that elements of the tax system are devolved but doesn’t address the implications of this in any detail within its recommendations. Proposals for reforming Gift Aid, developing a UGADD and extending business rates relief touch on devolved matters.
The proposals around Gift Aid have the potential to ensure that tax relief is received by the charity at the donor’s actual marginal rate of tax. For this to be achieved the system’s architecture will need to be capable of identifying donors as Scottish, Welsh or rest of the UK taxpayers and the marginal rates of tax they pay. Additional complexity will also exist where taxpayers have tax to pay on savings and/ or on capital gains where UK rates apply.
The next major review of the Charities SORP, which is due to start later this year, could well consider the proposals for greater transparency around charity tax reliefs in the trustees’ annual report. The trustees’ annual report is an area of the SORP where we expect significant changes to requirements to arise from this forthcoming review.
For the longer-term
The Commission’s intention had been to develop proposals for the far-reaching reform of charity tax reliefs but this was hampered by incomplete data on the distribution of the various reliefs available; insufficient evidence of their effectiveness in leveraging public benefit, or an absence of research into their administrative efficiency.
Nevertheless, it remains the view of the Commission that further reform is needed and that it is essential that those reforms should be enduring, offering certainty to charities as they plan for the future.
In the longer-term, it is, therefore, recommending the following:
- A comprehensive review of VAT for charities which could address systemic anomalies, improve efficiency and increase charitable activity.
- Reconsider business rates relief as it benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate. A review could consider the equity of the distribution of rates relief and the public benefit existing relief delivers.
- More research into Gift Aid as its distribution tends to favour certain types of charities working in certain areas and working on certain topics. Additional understanding could facilitate reform, such as different ways of distributing Gift Aid.
The UK government has been reticent to reform the VAT treatment of charities to the extent that it has scope to do so. VAT is a European Union tax and it is possible that at some point post-Brexit, the UK government could seek reform this tax, or introduce an alternative.
Business rates are an area of taxation which is increasingly being viewed as inequitable, disadvantaging the high street and favouring online retailers. In making its recommendation to reconsider business rates relief for charities, it is drawing a parallel with the retail sector. A similar point is also being made to support a review of whether tax forgone by the Exchequer in the form of Gift Aid could be distributed more effectively and in a way, that better reflects the charity sector of the 21st Century.