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Posts Tagged ‘Tax relief’

“The rich are different…“

April 18, 2012 3 comments

Sarah Smith

The furore over the cap on tax relief on charitable giving refuses to go away. As one back bencher put it the other day – it is hard to see why you would want to pick such a fight for such small estimated financial savings.

And if you do, it would be good to be armed with some good arguments and some hard evidence – the current Government appears to have neither.

The bad arguments are that wealthy philanthropists are dodging tax to give to dodgy charities. The overwhelming majority of philanthropists most likely are not – and anyway, a tax cap is the wrong tool to address the problem.

A better argument would focus on the effect of tax incentives on donations. If you cut tax incentives, donors are likely to reduce their giving (i.e. the charity sector will lose) but they aren’t likely to stop giving altogether. The critical issue for the Government is whether the loss in donations is more or less than the gain in tax revenue. It is the combination of the two – total donations and total tax revenues – that will determine the overall level of “public services” (in the broad sense) that can be provided.

What matters is the responsiveness of charitable donations to changes in the “price of giving”. The critical level of the price elasticity is one (in absolute value). If the price elasticity is less than one in absolute value then the fall in money from donations will be less than the increase in Exchequer revenue – the charity sector will lose but this will more than offset by an increase in tax revenue out of which to fund public services (or to compensate charities). If the price elasticity is greater than one in absolute value, however, then the fall in donations will be greater than the increase in tax revenue.

What does the evidence say? The Government has said very little on the likely behavioural response. But just over two years ago, we did some research for HMRC and HM Treasury on donor responsiveness to changes in Gift Aid tax relief. This looked at both the rebate relief (how much higher-rate donors can claim back – which is the bit that is going to be capped) and also the basic-rate relief that charities can claim on all taxpayer donations. This second element is a bit like a match – I give £1 to charity out of my net-of-tax income and then the Government matches it with 25 pence worth of basic rate relief. Our main finding for higher-rate taxpayers as a whole was that contributions were significantly more responsive to changes in the match element (elasticity greater than one) than they were to changes in the rebate (elasticity less than one) – this result is shown in the first row of the table below.

In principle, this would provide a plausible rationale for cutting back on rebates. An elasticity less than one in absolute value means that rebates are not a cost-effective way of increasing money going to the sector – it would be more cost-effective for the Government to increase the match element, or to allocate the funding to charities itself through grants.

Yet, as F Scott Fitzgerald once said, “the rich are different to you and me” and in this case, the more people give, the more responsive they are to changes in tax relief – not surprisingly since the stakes are higher. This is clear from the other results in the table below. In the report, we estimated the elasticity separately for donors who had given £10,000 a year or more – and found that they were more responsive than other higher-rate donors, although the rebate elasticity was still below its critical level.

But, we can do further analysis on the data to get closer to the group that is actually going to be affected by the cap. The table reports new results for donors who reported that they gave £25,000 and £50,000. The sample sizes are small for this final group, but the estimated rebate elasticity is -1.19. This is greater than the critical level, implying that the loss in donations following a cut in the rebate would be greater than any increase in tax revenue.

Of course, there are caveats to this finding  – donors were responding to hypothetical changes, there are only a few really big donors in the sample, a cap on relief is not the same as a change in the value of the rebate. Yet, it is pretty much the only available evidence on how these donors would respond and it suggests a sizeable response among the group that is going to be hit by the cap – bigger than any increase in tax revenues.

Estimated elasticities – changes to the rebate and match elements of Gift Aid.

Donations

Rebate elasticity

Match elasticity

p-value

N

All higher rate donors

-0.33

-1.16

0.000

850

Donations >=£10,000

-0.64

-1.19

0.000

83

Donations >= £25,000

-0.72

-1.28

0.018

30

Donations >=£50,000

-1.19

-1.93

0.045

12

p-value is for test of equality of rebate and match elasticiites. Source: Analysis of online survey responses – Justgiving donors and CAF account holders.

The impact on the level of funding, therefore, is potentially negative. There may be a different argument to be made about the allocation of funding – the services funded through private donations will be different to publicly-funded services. In some quarters, this has been characterized as a choice between the NHS and the Royal Opera House, although this is a gross simplification – wealthy donors give to a range of different charities; and charities may be better at delivering public services in many cases. Indeed, one reason why the cap on tax relief is hard for many to swallow is that up until now, this Government has been clearly signaling that it favours private funding  and private delivery (“Big Society, not Big Government”). Behind the debate over the tax cap lie some fairly fundamental issues about how – and by whom – public services should be funded and provided.

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Charitable Giving and the budget: A sledgehammer to crack an egg?

April 11, 2012 1 comment

Michael Sanders

The Chancellor announced on Tuesday[1] that he was “shocked”, by the extent of tax avoidance occurring, completely legally, through wealthy individuals giving large portions of their income to charity, or claimed through other tax reliefs.

This comes as part of an ongoing row between third sector organisations and the government over the plans announced in the Budget to cap the amount on which tax reliefs can be claimed at £50,000, or 25% of an individual’s income, whichever is greater. The effect of this, estimated by the government as a saving of £890million in 2014-15 if individuals do not change their behaviour, remains, as Sarah Smith said in this blog[2] previously “almost impossible to answer” by a third party, as HMRC do not make available the data used in their analysis – which is itself not broken down by sources of reliefs.

This morning’s declaration by Number 10 that “wealthy people are donating to charities which do not do a great deal of charitable work”[3], is another salvo in this argument.

It does, however, highlight a more serious issue with the way in which charities are regulated in this country. The organisations to which these donations are going must be bona fide charities, registered with the charities commission, in order for these reliefs to be claimed. The Charities Aid Foundation, among the vociferous opponents of the change to the tax relief system, would presumably not oppose the prevention of tax avoidance through these charities.

If, as the government is presumably arguing, these charities exist purely for the purpose of tax avoidance, why are they afforded charitable status at all? Why does the government feel that it is acceptable for people to avoid tax to the tune of 25% of their income through these faux-charities, but no more? Although some have long argued that there are too many charities in the UK[4] (over 180,000)[5], it is understandably hard to make a clear judgement as to which should be disposed of. Nonetheless, the government’s statement this morning implies that they are able to identify a number of them. Given that these charities are the recipients of huge donations, cutting back on avoidance through them by stripping them of their charitable status and making more rigorous the accreditation and auditing process for charities would appear to be more efficient than the imposition of a cap, and would avoid the collateral damage to legitimate philanthropists and the charities they support.

A taxing time for donors

April 2, 2012 1 comment

Sarah Smith

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.