In the UK, charities get different treatments by the tax authorities than say a private business. They are exempt from taxes on much of their income, and pay less in business rates. They can also claim part of the tax that would be paid by their donors for themselves (Gift Aid) and individuals making donations at the higher rate of tax can get tax reliefs on their donations.
But while the system may seem generous, we have to make sure that this use of precious tax revenues is configured in a way that achieves the maximum impact and the strongest possible civil society. That’s why, since 2017, we at NPC have been calling for a review of charity tax breaks.
Partly as a response to this call, an independent Commission was set up with a secretariat provided by NCVO and with ex-HMRC boss Nick Montagu in the chair. I was asked to be a member of this Charity Tax Commission. As a charity wonk and an ex Treasury person, how could I refuse! Our report was published a couple of weeks ago. It’s well worth a look—especially by the incoming Exchequer Secretary to the Treasury, Simon Clarke, who is responsible for charity tax.
I won’t repeat all of its content here but some of the ‘quick win’ proposals, such as making the default be that top rate tax relief goes to the charity not back to the individual, would be very important moves both for the revenue of the sector and also for public belief in the system. In addition, the principles the report suggests for judging the case for charity tax breaks in the future, and the longer-term agenda it sketches out, are I think very significant.
The report is of course a consensus report. Left to my own devices I would probably have been more radical, especially on the geographical distribution of tax breaks, and some of those bolder ideas have been kept alive by putting them into the longer-term agenda part of the report.
While we were producing the report, I noticed some common issues or tropes which I feel we as a sector, rather than legislators, are going to have to overcome if we want to have a charity tax system that really promotes impact.
I have drawn four of these out below:
We found the social sector was very defensive of the current system. This was despite the fact that a number of us on the commission felt that the current system of charity tax breaks was born inand does not address the needs of our times, or the changing nature of the non-profit world. It is also a bit of a surprise since many did not hold back in telling us how problematic they found a lot of the charity tax system.
I feel this conservatism was partly from a fear of if there was to be major change and partly a worry that saying anything critical of the system would lead to tax breaks being cut back. After all, even where criticism comes alongside new, positive ideas, there is no guarantee that the new ideas will be embraced—which could leave the sector out of pocket.
But I think it also reflected a failure of imagination. Of course, we got plenty of pleas for more tax breaks (despite asking for revenue neutral proposals) but our hope that some in and around the sector (including academics and policy types) would come up with bold new and better ways of supporting civil society turned out to be naïve.
Second, it is remarkable how nervous some were even of us exposing the data about where the tax breaks currently go. At one roundtable we held, someone literally argued we should not be publishing any data. The all too common fear of transparency in our sector was manifesting itself again—not a tendency I have much sympathy with.
But, in addition to this reflexive fear, there was a feeling that to start to point out where tax breaks go; to what sort of size of charity; in what sub–sector; in what region, was to invite policy makers to push back on this distribution as being not what the taxpayer intended. So best to not publish.
I am pleased to say that we resisted this impulse and in my view the data report published alongside the main report is some of the most crucial reading—with the formal NPC twitter response to the report picking out some of the striking things the data showed about where the tax breaks go.
Personally, I would have some geographical variation on tax breaks—or special ‘giving zones’—but even if one is against that, and believe that tax breaks like Gift Aid are the best approach, surely we should be brave enough to defend that. Don’t just hope that nobody notices!
Data and evidence
Third, there is a real dearth of data and evidence on the impact of charity tax both in the UK and other countries. Sure, there is some good academic work on the elasticity of giving (i.e. how much a tax break increases giving above the cost of the tax break itself), but very little on how the tax breaks (like VAT and business rates) influence the way charities organise themselves, the inefficiency they may bring and so on. We need academics to dig into this area if we are to use resource well.
Lastly, charity tax simply has not kept up with the modern word. Not just digital, but the growth of charities trying to get government contracts, being half social enterprises, mixing grants and contracts, having social investment, wanting to collaborate on research etc. For the future it would be good to have more of a rolling programme on charity tax reform to keep it up to date.
We have new ministers now, with much on their mind. But let’s hope our report has sowed a few seeds in their minds—and also in the minds of the sector and sector leaders, so that we move forward to a system that is better framed to help build a strong civil society.