Going cap in hand to the charities

How to change the tax relief cap to help charities and the government get value for money.

The Chancellor’s budget decision to cap income tax relief has caused a hullabaloo. Wealthy donors and their beneficiaries are in open revolt, saying that charities will be hit hard by the measure. And a lobbying alliance of the wealthy and the charity sector is not something that politicians are likely to defy.

That there will be some cap seems certain. But in the face of this firestorm the government has been curiously reticent in defending its plan. Pointing to the need to curb the minor problem of fraudulent charity giving understandably angered many. There are good arguments for capping donations tax relief, which tend to get less of a hearing. A look at the evidence also points to some ways in which the Chancellor could appease the charity sector while keeping most of his savings.

So what possible justification could there be for cutting tax breaks on giving?

First it’s worth asking the question of how much charities actually benefit from tax relief on donations. This depends how donors respond. If they aim to give a fixed amount of their post-tax income, regardless of government policy, then the charity can expect to get the full value of any tax break that applies.

But what if donors want the charity to get a fixed amount – say a round million pounds? In this case, the availability of a tax top-up might cause them to cut their net donation from what it would otherwise have been. Here the donor benefits but the charity does not. Cutting relief in the first case would hit the charity, but in the second, the total received would be unchanged.

Which of these effects dominates is an empirical question. Several studies suggest that charities get significantly less than £1 for every £1 of tax relief paid out, because people reduce the amount they give in response to the top-up. The evidence isn’t conclusive but a reasonable approximation would be that perhaps two-thirds of tax relief gets to the charity. The residual ends up in the pockets of donors.

So since charities get less than the government spends on tax relief, the state has a dilemma. The cap is expected to save the Treasury up to £100m per year from charity donors. So should it spend that extra £100m on schools or the NHS, services that the electorate as a whole (not just wealthy donors) want to see provided? Or should it reverse its policy and spend that money on tax relief for only £66m to go to privately favoured charities, ranging from famine relief to donkey sanctuaries? The case for doing the latter is perhaps weaker at a time when public services being cut to the bone and ministers lose sleep about the government’s creditworthiness.

Nevertheless, the growing clamour now looks very likely to force some kind of concession from the Treasury. And here the evidence has interesting things to say about how the Chancellor could recast his cap to make sure that government saves some cash and charities maximise giving.

Recent research shows that how tax relief is offered really matters to maximising donations. Where the charity directly claims the tax rebate on behalf of the donor, as with Gift Aid, the scheme looks more like a matching proposition. You give £1 and the government will match it with a further 25p. Under Gift Aid for higher rate taxpayers, the basic rate half of their tax break goes straight to the charity in this way. But they reclaim their rebate on the other 20% - the gap between basic and higher rate income tax - through self assessment.

Field experiments indicate (pdf) that the matching design can wring up to three times as much in donations for every pound spent on the match as the tax rebate version. And this is in spite of the fact that economic theory would suggest that how the tax relief is delivered should have no impact on donor behaviour.

Yet under the government’s current proposal both parts of the donors’ tax relief will be subject to the cap. This makes little sense. The smart move for Mr Osborne would be to un-cap the tax relief that boosts giving while screwing down the cap on the rebate. Both the Big Society and the broke state would be the winners.

Please sir, if you give me 10 per cent more the government will top it up by another 2.5 points while returning between 20 and 30 percent of the increase back to you. Credit: Getty

Ian Mulheirn is the director of the Social Market Foundation.

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Low fat, full fat: why the diet industry keeps changing its mind

A new report illustrates just how disillusioned the diet industry has become, at the expense of everyone else.

Another year, another wave of dietary fads. Most seem to surface in the summer, when new nutritional advice claims to provide the panacea to everyone’s health woes: “Eat clean get lean!” “The simple secret of intermittent fasting!” “The paleo way is the only way!” “Six weeks to a super you!”

However, despite the barrage of diet books, the expansion of nutrition research and the growth of education about healthy living, global obesity has more than doubled since 1980.

It may be that this is due to the conflicting information constantly issued from the diet industry. “Eat lots of protein – it’ll speed up your metabolism!” “Too much protein will damage your kidneys – reduce your protein intake!” “Superfoods are a vital source of antioxidants!” “Superfoods aren’t so super at all!” “Don’t snack it will make you pile on the pounds!” “You should snack – it’ll stop you from binge eating!” It’s no wonder people aren’t sure what to eat.

The UK launched its first dietary guidelines in 1994, which have since been continuously revised to form the guide now known as “The Eatwell Plate”. The dietary guidelines recommend plentiful carbohydrates “such as rice, bread, pasta and potatoes”, at least five portions of fruits and vegetables, some protein, some milk, some dairy and minimal saturated fat.

However, a recent report serves to highlight the confusion consumers face when it comes to food: it claims that the official advice on low-fat diets is outright wrong, even damaging.

Led by the National Obesity Forum and the Public Health Collaboration, the report (not peer-reviewed, it’s worth noting) attacked a host of official health proposals. It claims that “eating fat does not make you fat”, and criticises Eatwell Plate’s small fat allowance. The report also stated that saturated fats have been unfairly demonised, as there is allegedly little evidence to suggest that they cause heart disease. Meanwhile sugar consumption should be dialled down to zero, apparently, and calories shouldn’t be counted, as an abundance of them won’t cause obesity. Also, forget about the exercise - apparently a bad diet can’t be outrun, according to the report.

Professor David Haslam, chairman of the National Obesity Forum, said: “As a clinician, treating patients all day every day, I quickly realised that guidelines from on high, suggesting high-carbohydrate, low-fat diets were the universal panacea, were deeply flawed. Current efforts have failed – the proof being that obesity levels are higher than they have ever been, and show no chance of reducing despite the best efforts of government and scientists.”

Dr Aseem Malhotra, consultant cardiologist and founding member of the Public Health Collaboration reinforced this by saying the guidelines were “perhaps the biggest mistake in modern medical history, resulting in devastating consequences for public health.” Under current dietary guidelines, obesity levels have indeed increased in the UK, with nearly two-thirds of men and women overweight or obese, costing the economy more than £3bn per year.

In the face of such starkly opposed sides - both backed by seemingly reputable experts who claim all their research is based on empirical evidence - what are consumers meant to do?

The vilification of fat

In 1983, it was recommended that overall dietary fat consumption should make up only 30 per cent of total daily energy intake – 10 per cent of which, at most, should come from saturated fat.

The recommendations came from a number of research papers published at the time, which suggested a link between saturated fat intake and increased levels of LDL cholesterol – the cholesterol which has been connected to increased risk of heart disease, stroke and atherosclerosis.

An even simpler reason for the suggestions boiled down to this: fat has more calories per gram than carbohydrates – nine calories per gram versus four, to be exact. This shape to future official guidelines, and gave birth to the low-fat high-carbohydrate mantra. Fat was cemented as public enemy number one.

As a result, the fat eliminated from people’s diets was to be supplemented with an increased intake of carbohydrates. Tipping the scales in favour of carbohydrates were promises of weight loss as a result of higher fibre content, elevated levels of serotonin to aid sleep and boosts in mood from feeling fuller.

But obesity levels continued to soar, and health experts shifted their focus to the next culprit: carbs.

The low-carb era

An analysis by The American Journal of Clinical Nutrition combined the results of 21 studies and found that “saturated fat was not associated with an increased risk of coronary heart disease”. Other studies demonstrated the positive effect on testosterone levels in men from increased saturated fat intake, and have noted increased levels of triglycerides (the stuff that makes you fat) from lower fat diets.

As a result, dieticians developed a deep suspicion of carbs, and sugar in particular, and diets like the Atkins regime became more and more popular.

In part, the report by the National Obesity Forum and Public Health Collaboration uses the research that propped up these low-carb high-fat diets as a means by which to attack the general consensus surrounding healthy eating. Dr Malhotra, who led the latest report, previously worked in a pressure group called Action on Sugar – a group that has tried to get the food industry to reduce the amount of sugar added to food.

The reasoning goes something like this: guidelines encouraging greater carbohydrate consumption are oblivious to the fact that sugars constitute a vast amount of refined carbohydrates. By cranking up the sugar intake we ratchet up the risk of type 2 diabetes; this in turn could spark further health problems including obesity.

The logic seems sound, and yet obesity levels have continued to soar in the face of this research. The notion that all sugar should be avoided also ignores the fact that our brains require a significant amount of glucose for optimal functioning.

Everything in moderation

In the face of an industry that can’t make up its mind about how people should eat, it’s no wonder obesity levels have grown to epidemic proportions. So what can be done?

Professor Susan Jebb, the government’s obesity adviser, believes that the current debate needs to expand beyond the battle between carbohydrates and fat. She said: “We’re eating too many calories – if we want to tackle obesity people do need to eat fewer calories and that means less fat and less sugar.” And she’s right. If decades of research have pointed to anything assertively, it’s that calories count, and paying attention to portion sizes could take us a long way.

Both fat and carbohydrates are necessary for our bodies to function. The solution? Enjoy everything in moderation. Eat fruits without fearing fructose, don’t throw away the egg yolk, get a decent amount of protein and yes, you should have your slice of cake too.