It would not be an understatement to say the proposal to limit income tax relief claimed in relation to currently uncapped reliefs has caused a bit of a stir, especially in relation to charitable donations. The Government has reiterated it will be launching a formal consultation in the summer. Since then, we have also had some further clarification on what will and will not be caught by the proposed new limit on tax reliefs in the joint Treasury/HM Revenue & Customs document on the subject that I looked at in last week’s article. Remember, though, the provisions are not due to come into force until tax year 2013/14, so this debate has a way to run yet.
The planned cap has been criticised by Labour and philanthropists, as well as some senior Government figures. Number 10 said David Cameron wanted to see more charitable giving and did not want to affect donations.
Ministers, though, say they want to end the practice of wealthy people minimising their tax bills – sometimes to zero – by donating to charity. Although the donor does not personally profit in this way, it means they (rather than the elected Government) are choosing where their money is spent.
As a reminder, under the capping proposals, previously uncapped tax reliefs, including those on charitable donations, would be capped from April 6, 2013 at £50,000, or 25 per cent of a person’s income if that was higher. So, for additional-rate taxpayers with income (however it is defined for the purposes of this provision) of £1m, the maximum tax-relievable expenditure (including donations to charity) would be £250,000. This would reduce their (50 per cent) income tax liability by £125,000. Thus, although the net cost of the donation would be £125,000 the donor would still be £125,000 worse off economically than had they not made the donation.
The Exchequer Secretary to the Treasury, Mr Gauke, defended the planned cap, telling BBC Radio 4’s Today programme: “Our concern is that it’s not fair that the vast majority of people…make a contribution towards the NHS and armed forces and so on, but there are some wealthy individuals whom the tax system essentially allows to opt out.”
The Government has talked about the need to prevent people giving to “dodgy charities” to minimise their tax. Few would disagree with strong action aimed at stamping out any such strategies.
Mr Gauke said a new cap (if it operated as it was originally proposed) would bring in an additional £50m-100m a year, but acknowledged that “the vast majority of that is not what one would call abusive in terms of dodgy charities”.
But he added: “We don’t think it’s fair that people are able to get their rate down that low even when the donations are to completely legitimate charities.”
The minister said the cap would have “an impact” on charities but the Government would work closely with the sector, particularly those organisations very reliant on large donations, “to take steps to protect them”.
The BBC’s political editor, Nick Robinson, says he expects the Government to stick to plans for a tax relief limit of some kind, not least because benefits are also facing a cap and ministers must be seen to be cracking down on perceived abuse at both ends of the spectrum. There has been some talk of the possibility of being able to carry forward any unused charitable donation limit and/or raising the annual monetary limit. No doubt, all this will become clearer through the consultation. Apparently, consultation with individual charities will take place as part of the overall consultation.
Still on the subject of charitable donations, in response to the unremitting negative headlines the Treasury has released figures to defend its plans to limit the tax relief on charitable donations. The figures suggest almost a tenth of people earning more than £10m a year pay an average (effective) rate of income tax of 20 per cent or less.
The Treasury figures also show that 6 per cent of the £10m-plus earners paid less than 10 per cent in income tax in 2010/11.
Overall, more than 73 per cent of those earning more than £250,000 paid tax at a rate above 40 per cent, including 81 per cent of those earning £5m-10m and 72 per cent of those earning £10m-plus.
“We don’t think it’s entirely fair that the tax system as currently designed does mean that there are some very wealthy individuals who are essentially able to take themselves out of the income tax system, Mr Gauke told the Today programme.
The Government believes the tax system should encourage philanthropy, he said, but the balance had to be right, so that wealthy people still funded the NHS and armed services.
“We are not legislating for this today, this is something that will come in next year’s Finance Bill,” he said.
“We made it very clear from the very beginning that between now and then, we were going to be working with charities to find ways to protect charities that are particularly affected by large donations.
We shall have to see what consultation brings. It is widely thought that the Government will not relent completely but it seems increasingly inconceivable that some amelioration will not take place. One could expect the Government to be tough in relation to the application of the cap to other targeted currently uncapped reliefs though.