The Chancellor’s new cap on income tax relief will have unintended consequences in reducing charitable giving. It shows what happens when Budget tax changes are decided on the hoof
While putting deficit reduction number one, the Coalition government has embraced the idea of encouraging philanthropy, partly as a way of filling the gaps that the cuts are creating. So we have had a White Paper all about Giving, fiscal changes to promote greater lifetime giving of works of art and a reduction in the inheritance tax rate from 40% to 36% if 10% or more of an estate is given to charity.
So what on earth was George Osborne up to in his Budget last week? On that day – likely to be most remembered for the combination of the reduction of the top rate of tax, the alleged clobbering of grannies and the attack on hot pasties – the Chancellor announced, out of the blue, a new £50,000 cap on income tax reliefs.
Fine you might think – about time high net worth individuals with fancy accountants can no longer avoid paying tax. But crucially, Osborne included in this cap the reliefs available to higher-rate taxpayers on their charitable donations. This poses a great threat to a crucial stream of income into the charitable sector just as the needs it tries to serve are increasing.
That is why we at New Philanthropy Capital have joined several other organisations in the sector to sign up to the ‘Give it back George’ campaign calling on the Chancellor to reverse his decision and exempt charitable donations from the plans to cap personal tax reliefs.
Donors are not motivated to give by tax incentives alone. Later this year we at NPC will be conducting a major study into what drives donors to give in the UK and, while we doubt that tax incentives will be top of the list, it will certainly be among the considerations.
So how did this come about? None of us can be certain. The fact that Osborne did not even mention the Big Society in his speech suggests he is not enamored of this agenda as much as his boss. But since I have been in the Treasury and Downing street cauldron in the run-up to many Budgets in the past, a bit of Kremlinology might go like this.
My guess is that the decision to limit the tax reliefs came late in the day. As we know from the astonishing level of leaks (none whatsoever by the Treasury so the Chancellor told a slightly disbelieving Select Committee) there was a debate going on between the LibDems and the Tories on the price to be paid for axing the 50p top rate of tax. Deputy prime minister Nick Clegg clearly wanted some sort of mansion tax – which he got with a higher rate of stamp duty for £2m+ homes – and then talked about a tycoon tax, in some way limiting the degree to which richer folk could avoid tax.
There are several ways to do this and I would surmise that the final decision to go down the limiting tax reliefs route came quite late in the day. Then, in typical Treasury fashion, other departments, who know much more about individual issues, were only told late in the day and for some reason Downing Street apparatchiks did not spot the danger (assuming the Treasury was sharing their plans with them).
I can hear the screams from the Office of Civil Society and the Department for Culture, Media and Sport – where ministers have been doing a lot on philanthropy – when at the 11th hour they saw the proposal. ‘Take it out’ they would have said. But the Treasury Budget maths and the political balance would not have worked if they took it out.
Hence the addition of a rather pathetic and familiar sort of phrase, saying that we will ‘explore with philanthropists ways to ensure that this measure will not impact significantly on charities that depend on large donations’. Easy to say but no doubt hard to achieve. We shall wait and see the results of this exploration with interest.
Making tax policy is never easy. Doing it on the hoof often goes wrong and we need to find better ways of developing tax policy as a recent Oxford conference I participated in discussed. But there is a certain schadenfreude in seeing this government make some of the same type of mistakes that it criticised its predecessor so much for.
