Tax reliefs offered to UK charities urgently need an overhaul, according to a new report from the National Council for Voluntary Organisations’ (NCVO’s) charity tax commission.
The report suggests a range of measures which could increase charities’ income and reduce spend on unnecessary admin, including several changes to help increase uptake of Gift Aid by donors, which it says could increase the amount donated to charities each year by hundreds of millions of pounds.
It says that while top earners can use their self-assessment forms to claim back the additional income tax they have paid on money they give, many choose not to, while others opt not to pass it on to their chosen cause.
To improve this, one of the commission’s proposals is to enable higher rate tax payers to pass their tax relief onto their chosen charities more easily, potentially raising at least £250m more for good causes every year.
The report also proposes a central database like the NHS Organ Donor Card which would enable people to complete a single, enduring universal declaration covering all their subsequent gifts to charities.
The report sets out a number of recommendations which the commission wants the government to consider, including:
- Reform Gift Aid – unless donors opt out, the value of additional and higher-rate tax reliefs (which reflect the 45% and 40% tax bands) should be directed to charities. This would be on top of the current 25% basic rate relief. Even if donations stayed stable, charities could receive at least an extra £250m per year.
- Launch a Universal Gift Aid Declaration Database (UGADD) – this would provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities.
- Make offering ‘Payroll Giving’ schemes mandatory – this option for working people, also known as Workplace Giving or Give As You Earn (GAYE), enables them to donate out of their pre-tax income. The government should insist on employers offering this to staff, much as they have done with pension auto-enrolment.
- Consult on extending business rates relief to wholly-owned trading subsidiaries – charities get 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.
- Charities with annual revenue of over £1m should publish detailed information in their annual reports about the money they receive from tax reliefs, in order to build public trust.
- Remove VAT from wills that include a charitable donation. This would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. It estimates that if all professional advisers referred to the potential of legacy giving, this could generate a further 15,000 charitable legacies a year.
- Simplify VAT rules on facilities, equipment and buildings shared with other organisations, which currently mean many charities pay out money they cannot recover.
Additionally, HMRC should provide guidance to public bodies so they can inform charities of the VAT status of any grants and contracts they give to them. This would save many charities significant resources trying to do this for themselves.
In the longer-term, the proposals include:
- A comprehensive review of VAT for charities to address systemic anomalies, improve efficiency and increase charitable activity.
- Reconsidering business rates relief, which currently benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate.
- Conducting more research into Gift Aid, which also currently 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.
Sir Nicholas Montagu, chairman of the independent Charity Tax Commission and former chairman of the Inland Revenue (later HMRC), said:
“It’s been 20 years since charity tax reliefs were last reviewed, and many of the rules were written for an analogue era. With people giving by text message and contactless payment, and with many donors themselves increasingly mobile, we need a system fit for the digital age if we are not to see the UK’s natural generosity held back.
“The Charity Tax Commission’s recommendations could help bring the tax treatment for charitable giving into the 21st Century and result in a huge increase in the amount of money available for good causes.
“Yet none of these proposals should involve significant extra public spending or lost revenue. It’s the right time to get on with this.”
The NCVO established the independent charity tax commission in October 2017 to undertake a full review of the impact of the tax system on charities.
The commission’s final report can be found at www.ncvo.org.uk/tax