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Budget 2012: tax relief restrictions affecting charities


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Summary: We have seen considerable Press comment over the inconsistency of the proposed restrictions running counter as they do to the Big Society vision, particularly when economic circumstances make the voluntary sector’s contribution very much more compelling. What I wish to do is focus on what I regard as a few of the more salient issues.
    • The restrictions are basically aimed at the higher rate taxpayer, but insofar as he “benefits”  from the relief this is not at 50%. Typically, under the Gift Aid arrangements, he will obtain relief on the grossed up amount of what he gives away to charity, and the effective rate of relief works out at around 30%. The balance of the relief (the basic rate) is claimed by, and paid to, the charity.
    • The only circumstances in which the higher rate taxpayer obtains the full 50% relief is on a gift of quoted shares (or other qualifying securities) or property, when it is the full gross value which is claimed at the top marginal rate. Although the charity cannot then reclaim any basic rate, it still benefits from the full 100% capital value of the gift. Unfortunately, however it is the experience of most charities that the Gift of Shares relief is only infrequently taken advantage of.
    • The alleged benefit arising for the taxpayer is misconceived; he is in fact giving away to charity the full net sum.
    • The idea that tax relief needs to be restricted in order to counter abuse sounds very much like ex post facto rationalisation of a misconceived political decision. The cases of abuse are (fortunately) fairly uncommon, and there is adequate machinery in place to counter such abuse, namely (a) existing tax provisions governing the availability of charity tax exemption, (b) the Charities Acts, and (c) the enforcement powers vested in the Charity Commission.
    • In particular, it is suggested that tax relief facilitates gifts which are purportedly made to charities misusing the funds abroad. This rarely happens, and controls already exist. Firstly, it is incumbent on UK charity trustees to “take all reasonable steps to ensure that funds applied abroad will in fact be applied for charitable purposes only”, and any wilful failure to do so may lead (at the very least) to personal liability to repay and removal from office as a charity trustee. Secondly, the general principle is that a gift will not qualify for charity tax relief if it is established abroad and not subject to the jurisdiction of the English courts. Although the income tax definition of “charitable” has now been extended to include bodies constituted for charitable purposes outside the UK (and in particular the EU), this does not alter the essential pre-condition that the activities of any such overseas body must in fact be “charitable” as defined by English charity law.
    • It is arguably a legitimate matter for public debate whether all charities should qualify for exactly the same tax advantages, irrespective of their social impact. For my part I would be sceptical about this, since it opens the door to all kinds of social censorship or political correctness. Furthermore, the latest definition of charity includes its own “public benefit” criterion. But, if one accepts that it is a proper subject for debate this should be set in motion through a process of consultation, not a Budget pronouncement.
    • Finally, the Budget ignores the very simple fact that it is very few philanthropists who “avoid” income tax by taking full advantage of the charity tax reliefs. Those who do so, for example, by giving away 100% of their income, are still giving away their money to charity, and if the whole of their income has been exhausted they are therefore spending down on their capital. Furthermore, you will find that a good number of these rare philanthropists are also creating the income in order to maximise the benefit of what they have chosen to give to charity. Take for example a philanthropic UK resident discretionary beneficiary of an overseas trust: if no trust distribution is made, the UK Treasury will not benefit so long as the funds continue to accumulate abroad and the beneficiary receives nothing. Why should the Treasury seek to inhibit a trust distribution, if tax neutral to the beneficiary as a result of Gift Aid, which will at the very least be applied for public charitable purposes within the UK?


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