How to read the Treasury’s clarification statement on the Gift Aid capPosted: April 4, 2012
Blog post by Karl Wilding, Head of Policy at NCVO
Yesterday’s (3 April) long awaited statement from Her Majesty’s Treasury (HMT) on the cap on Gift Aid Tax relief was meant to clarify the confusion that has abounded amongst charities, philanthropists and advisors.
Did it do the job?
In short, the answer appears to be yes and no. We’ve got some big picture stuff that tacitly ignores points about the public benefit nature of Gift Aid (that is, it benefits society, not an individual donor) and it flatly refuses to take gift aid out of the cap. And there is some technical stuff that we think means the situation is much worse than we feared. I use ‘we think’ because the example and the language are clearly not written by people who know how much a loaf of bread costs. Oh, and there is the promise of a consultation that informally begins soon and extends over the Summer.
Anyway, with the help of CAF’s Rhodri Davies I’ve annotated a version of the clarification document, which you can read below. Hope you like it. Our comments in red.
Cap on unlimited income tax reliefs
Description of the measure
Currently individuals can offset their entire income against income tax reliefs, and as a result pay no income tax at all. Budget 2012 announced from 6 April 2013 there will be limits to the amount of income tax relief individuals can claim.
The implementation date isn’t a clarification – we knew this – but it sort of misses the point that the announcement is already changing the behaviour of some philanthropists.
This cap will apply only to reliefs which are currently unlimited. This cap will be set at 25 per cent of income (or £50,000, whichever is greater). That means an individual with an income of £4 million will still be able to give £1 million to charity – or offset £1 million of income against their business losses – and still get full tax relief for that £1 million.
I love this bit‐ the unquestioning assumption that giving £1million to charity is no different to offsetting £1million against business losses. That really sums up HMRC’s attitude in a nutshell. More of this later…including the sting in the tail of this clarification.
Of course individuals who want to give more than 25%, or £50,000, of their income to charity will still be able to do so from their taxed income.
Of course. But that’s not the issue either. And it’s not up to Treasury or HMRC to dictate one way or another if there is no tax angle.
A consultation document on the detail of the policy, including the implications for philanthropic giving, will be published in the summer. Draft legislation will be published for consultation later in the year.
The Summer presumably could take us up until the end of September. That’s a long time for the uncertainty to continue – if the consultation is 12 weeks we could be looking at a decision in 2013. Not good.
Tax reliefs exist to support a range of policy objectives, promoting activities such as business investment and philanthropy. The Government remains committed to the principle that people investing in businesses and donating to charity should benefit from tax reliefs.
That commitment may well continue, but the consensus amongst charities, philanthropists and advisors is that this policy suggests something rather different. Rhetoric versus reality?
However, some individuals on very high incomes have used reliefs to pay little or no tax, sometimes year after year. This Government believes it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs.
One of the most disappointing aspects of this clarification is the failure to distinguish between reliefs for personal gain (on business losses) and reliefs that benefit society. One almost wonders if HMT understand the point that even with the relief, giving to charity is a net cost to the donor.
And it take it this no longer means that giving to charities based elsewhere in the EU is (as was rumoured) the reason behind the cap?
Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to Government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.
If HMT are suggesting that we adopt the US system of tax reliefs I think many people would snap their hand off! The system is totally different – simpler and far more generous than the current UK system, never mind the proposed scheme.
The idea that everyone should contribute to the cost of running government is perfectly reasonable: but this seems to forget that preventing calls on the exchequer in the first place – which many charities aim to do – is doing the same job. And this government supports early intervention. I hope HMT are not suggesting donations don’t achieve social good?
As explained in more detail below, the cap will not impact on the tax reclaimed by charities under the Gift Aid scheme.
Well, that’s a moot point. It might not affect the administration of Gift Aid and the act of reclaiming but it will undoubtedly affect the total amount given via the Gift Aid scheme.
The Government is aware that there are details to finalise about how the reliefs cap will work in practice, including how this will fit in to the Self Assessment process.
The detail in this clarification would indeed suggest that is the case…
Details of how this policy will be implemented will be finalised over the next few months. Whilst the Government has decided that unlimited income tax reliefs, including charitable reliefs, should be capped, it is committed to exploring with the philanthropy and charity sectors ways to ensure that this change does not significantly impact on charities which depend on large donations.
This bit is pretty clear: no movement on the cap, consultation on its administration. But surely all the feedback from philanthropists so far is that the existence of the cap will impact on charities that depend on large donations?
And someone in HMT really does need to understand what impact this will have on philanthropists setting up their own foundations in order to give small grants to small charities. I can’t but help think they don’t get this.
A consultation document will be published in the summer. Before that point, Treasury and HMRC will be making contact with representatives from the sector to gather evidence and views that will inform the development of that consultation.
This sounds like it is going to be a very long consultation spreading over Spring and the Summer…
Reliefs included and excluded
The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. There will also be a number of smaller reliefs which are currently uncapped that will be affected.
The following will not be affected: Structural credits that acknowledge double taxation such as foreign and dividend tax credits and notional tax on life insurance gains; Reliefs that are already capped such as pension tax relief, front-end Enterprise and Seed Enterprise Investment Scheme income tax relief, Venture Capital Trusts and the Cultural Gift Scheme; Computational reliefs which determine only how income from a particular source is calculated.
Nor is the new business investment incentive for resident non-domiciled individuals affected, as this does not apply as a relief against total income but rather relieves income that would not otherwise be brought to the UK and so would not be taxable in the UK anyway.
How the cap will actually work
Income tax reliefs enable individuals to reduce the amount of income they pay tax on, and therefore the amount of tax they pay. Reliefs are usually in place to incentivise or support certain activities such as philanthropy and business investment. In most cases the reliefs work by subtracting the value of the relief from total income before tax is calculated, thereby “offsetting income”.
Tax reliefs do indeed incentivise philanthropy – but at the risk of sounding like a stuck record, they don’t leave the donor better off: they multiply the impact of the gift. So it’s not the same as offsetting losses on business investments…
The new cap on reliefs will set a limit on how much of an individual’s income can be offset using reliefs which are given against the individual’s total income and which do not have internal caps. It will be set at 25% of income or £50,000, whichever is greater. In other words, for someone with income of below £200,000, £50,000 will be the larger figure. For someone with income above this, 25% of their income will be larger.
I found this confusing, but CAF’s Rhodri Davies is pretty clear: this clarification is the sting in the tail. I – and I think others – had assumed that 25% of income was the maximum amount of relief per se that could be reclaimed.. It basically means that they view the “tax relief” available through Gift Aid as being the value of the gift itself. Rhodri’s explanation is here.
To ensure that there is a level playing field regardless of, e.g. how pension contributions are made, there will be a new definition of income for the purposes of calculating the reliefs individuals are able to claim. And as some reliefs (such as Gift Aid) reduce tax liability in a different way the self assessment return will calculate the amount of relief to make it equivalent to those reliefs that offset income.
OK, I admit I am confused by ‘a new definition of income’. I think we need a, er, clarification.
The cap will not impact on the tax reclaimed by charities under the Gift Aid scheme. However, the grossed up donation (that is the donation made by the donor plus the tax reclaimed by charities) will be taken into account when assessing whether an individual donor has reached the cap. If the cap has been reached the donor will receive no tax relief on the grossed up donation above the cap and, as now, the donor will need to have paid enough tax to cover the tax repaid to the charity.
This has addressed the rumour that charities that reclaim the basic rate would get snared up in the administration of the cap. Good.
But HMT have taken the worst possible option for calculating what is included in the cap by including the amount claimed by charities. And their interpretation of what is meant by tax relief is also much worse than we thought. It’s therefore easier to hit the cap. Bad. In fact, very bad.
Other avenues of relief, such as carrying losses forwards or back against profits of the same trade are not affected.
For an example of how the cap will work, consider an individual who has a total income of £250,000 under the new definition, who claims qualifying loan interest relief of £40,000 and relief for a donation of shares, valued at £25,000, to charity, and has invested £50,000 under the Enterprise Investment Scheme (EIS). As the total uncapped relief claim exceeds £50,000, a cap of 25% of income will apply. This means the total allowable uncapped relief will be £62,500. The investment of £50,000 under the EIS will be unaffected1.
I wonder why they didn’t come up with an example purely about the gift of cash to a charity? Rhodri’s examples here are more pertinent.
Further enquiries should be directed:
By email to: public.enquiries(at)hm-treasury.gov.uk
By post to:
The Correspondence & Enquiry Unit HM Treasury 1 Horse Guards Road London SW1A 2HQ
Does this mean the consultation has started?
So, we’ve got some big picture stuff that tacitly ignores points about the public benefit nature of Gift Aid and flatly refuses to take gift aid out of the cap. And some technical stuff that means the situation is much worse than we feared (and no, this isn’t scaremongering). Oh, and promise of a consultation that informally begins soon and extends over the Summer.
David Cameron has today at the launch of Big Society Capital cited the importance of philanthropy. I really hope that No 10 has a look at this issue so that they understand just what damage the cap is doing to the culure our Prime Minister wants to see more of.
Karl Wilding, Head of Policy at NCVO
Thanks to CAF’s Rhodri Davies for his help on this one…