Charity tax cap is the right idea

By Barry Frankfurt, April 19, 2012
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Gift Aid is one of the easiest and most lucrative ways for many charities to supplement their voluntary income. As the blurb on charity websites typically says: "Just tick this box and your donation could be worth 25 per cent more at no extra cost to yourself."

Except, this is not strictly true. Gift Aid, like any form of tax relief, is a redistribution of income tax. Instead of the government deciding how to spend your earnings, individuals get to prioritise their favourite causes at the expense of the national purse. Put simply, if you choose to support donkeys (as so many do each year) it could be less money for schools and hospitals.

In the past 12 months, a staggering £3.63 billion of tax relief has gone to charities and their donors. With figures so high, it is not hard to see why George Osborne decided that limits needed to be introduced. In raising the issue in last month's budget, the Chancellor was condemned for driving the final nail in the coffin of the Big Society.

The charity sector has turned on the government; ministers have distanced themselves from the policy and, earlier this week, a full, formal enquiry into the proposals was announced. It is likely that the measures will be drastically revised and while many organisations will hope they are abolished altogether, some voices are emerging that are urging for them to stay. Taking his legislative sledgehammer to crack the nut that is tax avoidance, Osborne has inadvertently started a debate that is long overdue.

Osborne has started a debate that is overdue

The argument to implement a relief cap is both rational and fair. There are more than 160,000 charities in the UK. Some need and deserve the additional income generated through Gift Aid (worth £25 for every £100 given by a basic rate tax payer). Some, but not all.

Consider this. A wealthy patron gives £1m to "Cats Protection" (the UK's leading cat welfare charity, with an annual income of £33 million and cash reserves approaching £10 million).

That donation costs the patron £600,000 and in making the donation, £400,000 is diverted from the public purse. Money that should be spent in areas that really need extra support right now has instead gone to a charity that exists for the wellbeing of cats. That's a lot of happy cats.

A fairer model would be to split charitable organisations into two categories: Those that exist to alleviate poverty and hardship and close social gaps, and those that provide and promote a wider good. The first group should continue to have unlimited tax relief. The second group almost definitely should not. This is not about making a value judgment regarding a charity's importance, but about establishing its relevance to the UK taxpayer.

Where this will hit the Jewish community hardest is in overseas aid, particularly in relation to Israel. For tax relief to be justified, it needs to be monitored for effective usage. To implement this successfully, there needs to be far tighter regulation and governance from the Charity Commission.

Many international causes are desperate for the funds and use them diligently. As was witnessed recently with Israeli anti-poverty charity Hazon Yeshaya, this is not always the case. Thankfully, the trustees pulled the plug, but not before hundreds of thousands of pounds of Gift Aid had been reclaimed. This situation is untenable. Selfishly, I would love all our Israel charities to benefit from unlimited relief. But can anyone honestly say that it is more important for UK taxpayer's money to go to an Israeli university when so many struggle with tuition fees here in the UK?

Finally, tax relief should be limited to donations made for core charitable purposes. The idea of donors covering, for example, legal fees through Gift Aided donations is not what the system was introduced for.

The impact this will have on the Jewish community cannot be overestimated. But it should lead to an improved quality of charitable organisation with even better governance, effectiveness and transparency. Working harder for our donations but more importantly, working harder with them.

Barry Frankfurt is managing director of Creative & Commercial and an adviser to the not-for-profit sector

Last updated: 4:42pm, April 19 2012