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

Photo: Getty
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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.