Denise Van Outen holds a cheque for Great Ormond Street Hospital. But can she claim back the tax? Credit: Getty
Show Hide image

How charitable tax deductions work

We've heard Osborne's plans to crack down on tax dodgers/ philanthropists (delete as appropriate), but what about higher rate payers and their charitable deductions?

The Financial Times is reporting that George Osborne is set to back down over proposals to limit the tax-deductability of charitable donations. The chancellor's planned cap on tax relief limited deductibles to the higher of 25 per cent of annual income or £50,000 per person, but the inclusion of relief given due to charitable donations in that cap sparked condemnation from all three parties and many charities.

As a result, Osborne is considering two new possibilities:

One plan is to have a separate limit on charitable donations of 50 per cent of a person’s income, allowing charities to claim tens of millions of pounds more in reliefs than under the current plan. Another is to let donors roll over any unused tax reliefs into future years if they are used for donations.

Treasury officials are locked in talks with representatives from the voluntary sector, and expect to make final decisions on how best to mitigate the effects of the planned cap in a few months. But they estimate raising the ceiling for charitable donations to 50 per cent would cost £40m, taking the overall savings from capping charities tax relief down to just £20m.

It is worth clarifying what the proposed changes are. Most of us are only aware of the most basic level of interaction between the tax system and charitable donations: gift-aid.

If a basic-rate taxpayer makes a donation, then a charity can claim back the tax paid on the money donated, boosting the value of the donation by 25 per cent (if the donor gives 80p, then the charity gets £1, which is the amount the donor had to earn to receive 80p post-tax income). There are no current plans to change that, and it has been an invaluable source of revenue for many charities.

If the donor is a higher- or top-rate taxpayer, however, tax relief kicks in for them as well as the charity. In addition to the 20 per cent gift aid, the donor can claim back the 20 or 30 per cent they paid on top of that, and count it against taxable income at the end of the year. So that 80p donation still earns the charity £1, but when the time comes to fill in their tax return, the donor won't have to pay more than basic rate tax on the money donated – they get 20 or 30p back. For a top rate taxpayer, that means that they are out-of-pocket by 50p, while the charity gets £1.

It is important to note that no-one makes money by donating to charity in this way. If the charity is a real one - and this whole affair was sparked because some people are apparently donating to bogus charities, which really is tax dodging - then the donor will always lose at least 50p in every pound the charity receives. It will indeed reduce the total tax they pay, but that reduction will necessarily be less than the amount they donate.

Despite that, there will be people using donations to avoid tax. It won't be rational, and it won't make them richer, but sometimes dodgers go to ludicrous lengths to not pay tax. Willard Foxton reported people "dodging VAT on cars by having them flown in at more cost than the tax". It is certainly believable that those who think like that would donate £2m to avoid paying £1m in tax; but it isn't going to be many.

Even for those who aren't donating out of blind desire to reduce their tax take, the cap will hit hard. Combined with other tax deductions, charitable donations may be enough to push the total tax-rate of a wealthy individual to less than 25 per cent. That is what is concerning charities. Under the proposed rules, the cost of donations to philanthropists with an already low tax rate will rise by 37.5 per cent. If donors react to that rise by donating less, then charities will be sorely hit.

The core issue at stake is whether or not charitable giving abdicates one's responsibility to pay for the machinery of state. On the one hand is the belief exemplified by Clement Atlee:

If a rich man wants to help the poor, he should pay his taxes gladly, not dole out money at a whim.

On the other hand is the belief that by donating to charity, one has fulfilled their responsibility to pay a "fair share".

In the real world the argument hasn't touched upon this morality much, if at all. Instead, the matter is presented in far starker terms; either a focus on "total tax rate" to the exclusion of the reasons why that rate might be low, or a focus on the total income of charities, to the exclusion of the source of that money.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Getty
Show Hide image

The dog at the end of the lead may be small, but in fact what I’m walking is a hound of love

There is a new, hairy face in the Hovel.

There is a new, hairy face in the Hovel. I seem to have become a temporary co-owner of an enthusiastic Chorkie. A Chorkie, in case you’re not quite up to speed with your canine crossbreeds, is a mixture of a chihuahua and a Yorkshire Terrier, and while my friend K— busies herself elsewhere I am looking after this hound.

This falls squarely into the category of Things I Never Thought I’d Do. I’m a cat person, taking my cue from their idleness, cruelty and beauty. Dogs, with their loyalty, their enthusiasm and their barking, are all a little too much for me, even after the first drink of the day. But the dog is here, and I am in loco parentis, and it is up to me to make sure that she is looked after and entertained, and that there is no repetition of the unfortunate accident that occurred outside my housemate’s room, and which needed several tissues and a little poo baggie to make good.

As it is, the dog thinks I am the bee’s knees. To give you an idea of how beeskneesian it finds me, it is licking my feet as I write. “All right,” I feel like saying to her, “you don’t have to go that far.”

But it’s quite nice to be worshipped like this, I have decided. She has also fallen in love with the Hovel, and literally writhes with delight at the stinky cushions on the sofa. Named after Trude Fleischmann, the lesbian erotic photographer of the Twenties, Thirties and Forties, she has decided, with admirable open-mindedness, that I am the Leader of the Pack. When I take the lead, K— gets a little vexed.

“She’s walking on a loose lead, with you,” K— says. “She never does that when I’m walking her.” I don’t even know what that means, until I have a think and work it out.

“She’s also walking to heel with you,” K— adds, and once again I have to join a couple of mental dots before the mists part. It would appear that when it comes to dogs, I have a natural competence and authority, qualities I had never, not even in my most deranged flights of self-love, considered myself to possess in any measurable quantity at all.

And golly, does having a dog change the relationship the British urban flâneur has with the rest of society. The British, especially those living south of Watford, and above all those in London, do not recognise other people’s existence unless they want to buy something off them or stop them standing on the left of the sodding escalator, you idiot. This all changes when you have a dog with you. You are now fair game for any dog-fancier to come up to you and ask the most personal questions about the dog’s history and genealogy. They don’t even have to have a dog of their own; but if you do, you are obliged by law to stop and exchange dog facts.

My knowledge of dog facts is scant, extending not much further beyond them having a leg at each corner and chasing squirrels, so I leave the talking to K—, who, being a friendly sort who could probably talk dog all day long if pressed, is quite happy to do that. I look meanwhile in a kind of blank wonder at whichever brand of dog we’ve just encountered, and marvel not only at the incredible diversity of dog that abounds in the world, but at a realisation that had hitherto escaped me: almost half of London seems to have one.

And here’s the really interesting thing. When I have the leash, the city looks at me another way. And, specifically, the young women of the city. Having reached the age when one ceases to be visible to any member of the opposite sex under 30, I find, all of a sudden, that I exist again. Women of improbable beauty look at Trude, who looks far more Yorkie than chihuahua, apart from when she does that thing with the ears, and then look at me, and smile unguardedly and unironically, signalling to me that they have decided I am a Good Thing and would, were their schedules not preventing them, like to chat and get to know me and the dog a bit better.

I wonder at first if I am imagining this. I mention it to K—.

“Oh yes,” she says, “it’s a thing. My friend P-J regularly borrows her when he wants to get laid. He reckons he’s had about 12 shags thanks to her in the last six months. The problems only arise when they come back again and notice the dog isn’t there.”

I do the maths. Twelve in six months! That’s one a fortnight. An idea begins to form in my mind. I suppose you don’t have to be a rocket scientist to work out what it is. But no. I couldn’t. Could I?

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 28 April 2016 issue of the New Statesman, The new fascism