Tuesday, July 23, 2019

Charity Tax Commission (UK) Issues Report: "Reforming Charity Taxation -- Towards a Stronger Civil Society"


The Charity Tax Commission, a group set up by the National Council for Voluntary Organisations (NCVO) issued a report this month entitled Reforming Charity Taxation -- Towards a Stronger Civil Society.  The report focuses on UK's tax policy as it relates to charitable organizations.  Here is the executive summary:

A healthy civil society and charity sector are a crucial part of a good society. Charitable tax reliefs are currently worth around £5 billion a year. The Charity Tax Commission has looked at how this is distributed and set out to establish whether the current approach was the best way to support the sector, and whether it met public expectations. There is some urgency here. It has been over 20 years since charity taxation was last reviewed. New technology is changing the ways the sector evolves, and new forms of charity are emerging. The country itself seems divided, with certain geographic areas feeling ‘left behind’, while relatively tight fiscal policy necessitates every pound of tax relief to be targeted as well as it can be. Evaluating and analysing the tax treatment of charities. To help steer and shape our thinking, the Commission developed a set of principles by which we believe the tax treatment of charities should be judged. We propose that charitable tax reliefs should, taken together, be designed to support:  1.functional activity towards a particular social good or public benefit; 2. individual donations to, participation in, and support of charitable activity; and 3. avoiding disincentives and ideally encouraging charities to increase efficiency and effectiveness, and to innovate and collaborate. 

We have aimed to strike a balance between these principles, principally focussing on the three largest reliefs that charities receive: Gift Aid, business rates relief and VAT, along with other suggestions for incentivising giving and philanthropy.  Our proposals aim to discourage too much ad hoc political intervention, so that charities can plan with certainty; promote and buttress the democratic nature of individual giving; and address barriers and systemic anomalies that impede efficiency and fairness.  In addition to where immediate improvements are both needed and possible, there are areas where we feel we cannot propose immediate solutions. This is predominantly because of a lack of adequate data and robust research that would allow us to understand the consequences of various possible changes. However, we believe that bold and ambitious thinking is needed in several of these areas and have highlighted these so that they can become the focus of future research and debate.

Here are the "Short-term reforms" the Commission recommends:

Part A: Short-term reforms


Redirect higher-rate relief to charities The value of higher-rate and additional-rate relief should be redirected to charities on top of the basic-rate relief they already receive, with an opt-out from this if donors specifically requested it.  This change should be preceded by research to determine how best to overcome the administrative issues that this raises.

Universal Gift Aid Declaration Database

Allowing donors to complete a single, enduring universal declaration covering all their subsequent gifts to charities, a Universal Gift Aid Declaration Database (UGADD) would simplify the administrative requirements for Gift Aid. Charities could then access the database in order to see whether a given donation has a Gift Aid declaration against it. It would also help address HMRC’s concerns about the tax gap2 and ineligible Gift Aid claims. Government should therefore re-explore the feasibility of a UGADD, including how its operation would potentially impact on charities of all types and sizes. This would help future-proof Gift Aid at a time when donors are becoming more mobile and cash transactions are increasingly digital.


Consult on extending rates relief to wholly-owned charity trading subsidiary companies.  Many charities set up a trading subsidiary company in order to comply with the rules on charitable trading. However, this can lead to the loss of mandatory and/or discretionary charity relief when the trading subsidiary is separately assessed for business rates. However, the primary goal of raising money for charity remains the same. Government should therefore consult on whether to roll out rate relief to all wholly-owned charity subsidiaries.


Review VAT rules for shared facilities

Current VAT rules on the sharing of facilities, equipment and buildings create irrecoverable VAT for charities and restrict collaborative working and cost saving efficiencies between charities and partners, particularly research institutions.  VAT rules for charities using shared resources should be reviewed to support collaboration. This would help innovative public and private sector collaboration with charity research institutions and help the Government achieve its commitment to raise UK investment in research and development.

Require public bodies to provide the VAT status of funding

Whether the funding a charity receives is deemed to be a contract or a grant for VAT purposes can be highly subjective and open to interpretation. Charities consequently spend significant resources trying to determine whether some funding is within the scope of VAT.

Public bodies should be required to provide the VAT status of any funding, using clear guidance provided by HMRC on how to decide when income from a funding offer or tender is or is not subject to VAT. HMRC should work with the voluntary sector to develop this guidance to ensure public bodies do not automatically adopt risk-averse behaviour to the detriment of charities’ beneficiaries.


Make it mandatory for employers to offer a Payroll Giving scheme

Payroll Giving is an effective way of giving for donors, as donations are taken out of pretax income (enabling tax liabilities to be reduced by the amount donated), yet it remains a small part of the overall charitable giving landscape.  To increase take-up, the Government should make it mandatory for employers to offer a Payroll Giving scheme to employees. This could match the rules on pension autoenrolment, although a minimum size of employer might need to be considered.


The need for better government data

Knowing how tax reliefs are distributed is important for understanding how far they influence public and charity behaviour and deliver their intended social or economic objectives. However, it is currently difficult to determine with any degree of accuracy where most charitable tax reliefs are targeted or the public benefit they support.  The Government should improve the quality of its published statistics on how much tax relief individual charities receive, broken down by type of relief. While changing long-standing rules designed to protect both individual and corporate taxpayers could create unacceptable risks, there is a strong case for internal HMRC guidance to make it clearer to staff that openness which does not breach these rules is itself an imperative.  Local authorities should also publish their business rates registers as open data in a standardised format.

Greater openness from charities

Better data from government would show which charities are receiving tax reliefs but reveal little about how charities convert this support into delivering public benefit.  Charities with revenue of over £1 million per annum should publish detailed information in their annual reports about the amount of money they receive from Gift Aid, business rates relief, and where possible, VAT relief. 


Darryll K. Jones


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