A taxing time for donors
First the granny tax and now the cap on higher-rate reliefs. The £50,000 cap on higher-rate reliefs – announced as a measure to reduce tax avoidance – is proving contentious because it applies to charitable giving (as well as loan relief and loss relief).
Aside from the merits or otherwise of pre-announcing caps (if you are serious about limiting tax avoidance then why give people plenty of time to re-organise their affairs?) another credibility issue is whether charitable donations really constitute a major vehicle for tax avoidance – unless this is closing a potential loophole to limit the damage from closing other loopholes.
The issue that is causing real concern however is how much damage the cap will do to major donations – exactly at a time when other Government departments are looking to philanthropists to make up the shortfall from funding cuts in areas such as arts and education.
This crucial question is almost impossible to answer – at least outside HM Revenue and Customs – because it requires knowing not only how much people donate, but also how much their income is and how much they use the other reliefs. HMRC have estimated a projected total saving of £870 m in 2014 – 15. Since this is nearly twice the current level of all higher-rate reliefs for charitable donations (Gift Aid, payroll giving and gifts of shares and land), the presumption must be that the adjustment will in large part be to the other capped activities. However, it would be helpful to have more detailed estimates that broke down the revenue savings across the different types of relief – and only HMRC is well-placed to make this kind of calculation.
HMRC also provided a lower projected saving (£490 m in 2014 – 15) that takes into account behavioural responses – i.e. the fact that people can respond by smoothing their donations over time. This behavioural adjustment could potentially reduce the total loss of income to the sector. But, not everyone is able to respond in this way.
Analysis of data from the Charities Aid Foundation (CAF) – who provide charity accounts to a number of major donors – reveals a sizeable number of donors who regularly give away amounts that would make them likely to be hit by the cap in a single year. Over a six-year period from 2005/6 to 2010/11, 124 CAF account holders gave away more than £200,000 in any single year. Moreover each of them gave this amount an average of 2.5 times over the six years. However, this understates the consistency of their giving since not all of them were in all six periods. In fact only two – out of the 124 donors – did not give more than £200,000 in each and every period in which they were observed in the data.
Of course we don’t know what these donors’ incomes are and we don’t know what other reliefs they are claiming. But if they give large amounts regularly and can’t smooth their giving, the donations they make in excess of the cap – totaling more than £43 million in 2010-11 (£50 million if the cap applied to donations of £100,000 or more) could be at risk.
Although many of these donors are part of the “million pound donor club” making large, single gifts, much of their giving is less visible consisting of smaller donations spread over a wide range of different charities – more than 1,000 different organisations in 2010-11, including the arts and education as well as medical charities, overseas charities and small, local organsations. The impact of the cap on the sector could be widespread.