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.

Photo: Getty Images
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Our treatment of today's refugees harks back to Europe's darkest hour

We mustn't forget the lessons of the Second World War in the face of today's refugee crisis, says Molly Scott Cato.

In the 1930s, thousands of persecuted people fled Europe. Our own press ignominiously reported these as "Stateless Jews pouring into this country" and various records exist from that time of public officials reassuring readers that no such thing would be allowed under their watch.

With the benefit of historical hindsight we now know what fate awaited many of those Jews who were turned away from sanctuary. Quite rightly, we now express horror about the Holocaust, an iconic example of the most shocking event of human history, and pledge ourselves to stop anything like it happening again. 

Yet as Europe faces its worst refugee crisis since the Second World War we are witnessing a deafening cacophony of xenophobic voices in response to people fleeing their own present-day horror. We must therefore reflect on whether there is an uncomfortable parallel in the language being used to describe those seeking asylum today and the language used to describe Jews seeking refuge in the 1930s.

Our response to the current refugee crisis suggests we feel fearful and threatened by the mass movement of desperate people; fearful not just of sharing what we have but also of the sense of disorganisation and chaos. Does the fact that these refugees are from Syria, Libya, Iraq and Afghanistan, and so not part of our continent, provide an excuse to allow them to be bombed at home or drowned during their desperate journey to safety?

We are not helped by the poorly informed public debate which—perhaps intentionally—conflates three quite different movements of people: free movement within the EU, irregular or unauthorised migration and the plight of the Middle Eastern refugees. While our misguided foreign policy and unwillingness to tackle change may give us a moral responsibility for those fleeing famine and conflict, our responsibility towards refugees from war zones is clear under international law.

Due to our commitments to the UN Refugee Convention, the vast majority of Syrian refugees who reach our territory are given asylum but the UK has taken fewer Syrian refugees than many other European countries. While Germany admitted around 41,000 asylum-seekers in 2014 alone, the UK has taken in fewer than 7000.

The problem is that any sense of compassion we feel conflicts with our perception of the economic constraints we face. In spite of being the fifth largest economy in the world we feel poor and austerity makes us feel insecure. However, when actually confronted with people in crisis our humanity can come to the fore. A friend who spent her holiday in Greece told me that she saw local people who are themselves facing real poverty sharing what they had with the thousands of refugees arriving from Turkey.

A straightforward response to the growing sense of global crisis would be to restore the authority of the UN in managing global conflict, a role fatally undermined by Tony Blair's decision to go to war in Iraq. Our role should be to support UN efforts in bringing about strong governments in the region, not taking the misguided ‘coalition of the willing’ route and running foreign policy based on self-interest and driven by the demands of the oil and arms industries.

We also need EU policy-makers to show leadership in terms of solidarity: to co-operate over the acceptance of refugees and finding them safe routes into asylum, something the European Greens have consistently argued for. The EU Commission and Parliament are in clear agreement about the need for fixed quotas for member states, a plan that is being jeopardised by national government’s responding to right-wing rather than compassionate forces in their own countries.

Refugees from war-torn countries of the Middle East need asylum on a temporary basis, until the countries they call home can re-establish security and guarantee freedom from oppression.

The responsibility of protecting refugees is not being shared fairly and I would appeal to the British people to recall our proud history of offering asylum. Without the benefit of mass media, the excuse of ignorance that can help to explain our failure to act in the 1930s is not available today. We must not repeat the mistakes of that time in the context of today’s crisis, mistakes which led to the deaths of so many Jews in the Nazi death camps. 

Molly Scott Cato is Green MEP for the South West of England.

Molly Scott Cato is Green MEP for the southwest of England, elected in May 2014. She has published widely, particularly on issues related to green economics. Molly was formerly Professor of Strategy and Sustainability at the University of Roehampton.