The Charity Tax

Posted on April 18, 2012

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One measure announced in the recent budget has provoked much discussion, namely that proposing to remove unlimited tax relief on donations to charity. Tax relief on charitable donations was introduced by the Thatcher government as a means of encouraging philanthropy among high-earners. If an individual donates a suitably large amount to charity, the relief means no income tax is paid.

There are those, including some in government, who hold it unfair for individuals to avoid contributing to State funds. It is argued that there are services required by all that work for the common good, and also that a duty to pay tax follows from citizenship. In fact, virtually every citizen pays tax through impositions like VAT, fuel duty and National Insurance. Only income tax can be limited or avoided via charitable tax relief.

There are certainly other methods by which income tax can be limited or avoided and the budget proposed measures to remove them. It is believed that a few individuals are giving large sums to dubious charities that act as fronts for tax avoidance. If true this cannot be widespread, and most of those claiming tax relief are giving to bona fide charities. The government seems to assume a moral obligation to pay tax regardless of individual philanthropy. It would appear, furthermore, that some in government regard the potential good achievable from its own expenditure to be greater than that of non-governmental organisations.

The Labour MP Frank Field commented at the Allen Lane Foundation Lecture:

State-driven action is a poor substitute for the nobility of a natural instinct to do good by one’s fellow creatures. But when habits have been lost, as the giving habit has to some extent, law has a role to set standards of behaviour which then themselves, hopefully, become, once again, ‘an affair of the heart’.

Charitable tax relief was intended to encourage those with large incomes to give generously. The responses of charities to the proposed changes, and the government’s own estimate of increased tax revenue consequent upon the measure, suggest relief has been successful. Some think such individuals could continue to donate large sums after paying income tax, but it is clear the inevitable effect of the budget proposal will be a reduction in the amounts given.

The ‘Big Society’ was a key theme in David Cameron’s electoral campaign. It was argued repeatedly that the State was not necessarily the best vehicle for delivery of public services and benefits, and that charities and community organisations should be considered partners in this task. Government ministers and white papers have subsequently argued for greater incentives to philanthropy. The message sent out by the proposed cap on tax relief, however, is that governmental spending can deliver public benefit better than can charities. If the ‘Big Society’ is still regarded as desirable, ministers and officials should engage in more a charitable way of thinking.



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