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Reforming charitable tax reliefs

   Sir Nicholas Montagu KCB, Chair of the Charity Tax Commission.

Nick Montagu’s 30 years as a UK civil servant, after starting life as an academic philosopher, included establishing social security executive agencies, and privatising British Rail. As chairman from 1997, he led the Inland Revenue through the greatest changes in its 200-year history, spearheading the drive to make it more customer-focused. Nick is currently chairman of the Financial Ombudsman Service and has written and lectured extensively on a range of topics including: public administration and governance issues, public service reform, public finance and tax administration. He is  a nationally-recognised authority on diversity, for which he had civil service-wide responsibility.’

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The recent media coverage of shocking behaviour in a few big charities highlights important wider questions about the role of charities in society—including their governance and accountability.  The sheer number of charities, and the range and scale of their activities, is eye-watering.

Charities are woven in to the fabric of our lives. The Charity Commission found 32% of the public or their close family or friends had benefited from or used the services of a charity. Add things like galleries, museums and youth clubs, and this rises to 94%. Over fourteen million of us volunteer regularly. Indeed the Office for National Statistics estimates the value of this voluntary activity at £22.6bn a year, or 1.2% of GDP. That says a lot about our national commitment to the values of voluntarism and philanthropy.

The harder economic realities are no less striking. In 2015/16 the National Council for Voluntary Organisations (NCVO) estimated that charities contributed £15.3bn to the UK economy, around 0.8% of total GDP and equal to the GDP of Estonia.But it isn’t a one-way street: every year the tax system gives away nearly £4bn to charities in tax relief, over and above the public money they get in the form of grants or contracts.

This presents an interesting question about where and how government money does and should go to charities. Here’s a good one to start with:

‘Should any public money at all go to charities, except where they directly provide public services?’

Some people might argue the money would be better spent on the NHS or schools. After all, however criticised, central and local government administration is often superior to that of charities, and certainly more accountable.

Personally I think that the government should continue to support charities, but I do believe we need to take a hard look at them and where all that public money goes. It’s allocated pretty indiscriminately—being a charity is something of a passport—and maybe some tighter definitions are needed.

A prime candidate for a fresh look is the £3.7 billion of tax reliefs that charities receive each year. The last time they were reviewed was 20 years ago, when I was Chairman of the Inland Revenue. They can be a powerful tool in promoting socially beneficial behaviour and worthwhile causes. But 20 years on we need to ask ourselves whether the reliefs, and the big chunk of public revenue that they represent, could be more effectively channelled to help charities and their beneficiaries.

We need a clearer understanding of where this and the other public money goes and how far it is effective in getting help to charities and their beneficiaries. And are the right charities benefiting? Maybe we should challenge that indiscriminate approach and start asking the awkward questions about whether there might to be more to show for the money if we distinguished between charities. There are all kinds of possible ways: size, purpose, demonstrable impact, geographical location and a whole lot more. This is territory that shouldn’t be sacrosanct—if we don’t ask those questions, we won’t get the biggest bang for the mega-bucks that go charities’ way.

It was because I wanted to get a fresh and radical look at these thorny issues that I readily accepted the invitation to chair an independent Charity Tax Commission to undertake a full review of the charity tax system. The commission has been established by, but is entirely independent from, the National Council for Voluntary Organisations, the charities’ representative body. We’ve got a small and diverse group of talented commissioners, supported by expert advisory groups, and we’re currently seeking views from anyone who wants to have their say on how effective the current system of reliefs is, and how it could be made smarter. We’ve issued a call for evidence, and we’ll be holding some open sessions around the country to give people a chance to air their views. We want those views to range widely and be visionary.

Everyone has an interest in the health of our society, and charities are vital to it. So, we want people to make their voices heard—it could be another 20 years before they get the chance again.

NPC is hosting this blog by Sir Nicholas Montagu KCB, Chair of the Charity Tax Commission. The commission’s call for evidence on charitable tax reliefs is open and can be found here.

Our CEO, Dan Corry, sits on the commission and you can find out more on twitter at @CharityTaxComm

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