Tax Avoidance and Charitable Giving

It is somewhat surprising that it is a Tory government – or more accurately, the  Coalition – which is trying to clamp down on tax avoidance amongst the perceived ‘super-rich’.  Some interesting statistics have recently emerged:-

  • According to an article in last week’s City AM by Anthony Evans from London’s ESCP Europe Business School, the top 10% of UK earners contribute 58% of all UK Income Tax revenues whilst the top 1% contribute 28% .  Interestingly in the US the figure is higher, apparently 37%.   In the same article, he states that the poorest 50% of the UK population supply just 10% of the Income Tax revenues and again, in the US the figure is 2%.  His conclusion from these figures is that Income Tax system is already astonishingly progressive  (albeit not as much as in the US)   and that those criticising it  and the ‘rich’  should be aware of the facts before they do so.
  •  Robert Peston reported for the BBC on 16 April a statement by the Treasury.  Here is what they say and how he interpreted it:-
  1. “People earning £20,000 pay a higher rate of tax than some people earning £millions ” .
  2. Of the 10,000 people who in 2010/11 declared an income of £1m to £5m, around £1,000 of those paid a tax rate of less than 30%, well below the top rate of 50%, including 200 people paying a tax rate of between 10% and 20%, and 300 people paying less than 10%.
  3. For those earning between £5m and £10m, 44 people paid less than 30% and 16 of those paid a tax rate below 10%.
  4.  Of the 200 people earning more than £10m a year, 16 paid between 20% and 30%, 6 between 10% and 20% and 12 paid less than 10%.  On the other hand, George Osborne’s argument that the 50% top rate of tax was not  effective because there was massive avoidance such that the yield was trivial is apparently not borne out by the facts.

It seems that more than 73% of those earning over £250,000 were paying an average tax rate above 40% in 2010/11 and for those earning between £5m and £10m and over, the rate of tax of more than 40% was paid by 81% and 72% respectively.

So Robert’s conclusion from all of that was that whilst many people may have still reduced their income below the threshold of £150,000, a huge number of people were paying tax at more than 40% and that effectively “the highest earners have had a slightly unfair press, because the majority of them seem to have been paying their proper share”.

So where does that lead us in terms of the proposed cap of Income Tax relief on charitable donations?  The supposed clamp-down is because of the suggestion that high earners are using the tax reliefs on charitable donations to reduce their Income Tax bills to a very low proportion of their income.  But is that fair  or sensible ?  The Government   has relied increasingly on the charitable sector to provide services that should really be provided by the Welfare State.  Charities do not have an easy time of it.  Many of them suffer a vast expense in VAT that they are unable to recover and despite intense lobbying over the years, the Government has not given way on this at all.  So the use of the tax system to incentivise people to donate to charity is vital to support the work of that sector.

It is further true that a huge proportion of the monies raised by charities would be under the proposed cap of £50,000 in any event.  But the problem is that it is not those donors who fund the new art galleries, the special medical facilities, the old-age/care facilities (of which the country is desperately short).  For those we rely heavily on the donations of high net-worth individuals.  Let us take an example.  An individual earning £1m per annum decides to provide funds towards the construction of a major new facility for Cancer Research.  He has accumulated wealth and therefore is prepared to donate £4m from that wealth towards the construction.   In other words a lot more than his annual income .  Assuming the individual were to spread this over 5 years , paying £800,000 per year , and that tax rates stay the same each year (with a top tax rate of 40%)the charity will be able to recover an additional £1m  (under the Gift Aid scheme)   bringing the value of the gift up to £5m  .That recovery by the charity will not be affected by the proposed changes.  However, whereas  in that example the individual might previously have been able to obtain full tax relief on the £4m payment  and  wipe out his  entire  Income Tax liability for those 4 years, now he will only be able to write-off  (and claim higher rate tax relief on) a maximum of £250,000 (25% of his income) each year, i.e. a quarter of his donation.

To summarise this example,  in cash terms, what would have cost him, after tax relief, £3m will now cost him £3.75m for the charity to end up with the same amount of money.

I believe that to lump relief for charitable donations together with other types of relief is wrong.  With other reliefs ,  for example for payment into  pension schemes , EIS schemes , Venture Capital Trusts , or BPRA schemes  payment was made into an ‘investment’ . In other words the donor/investor retained an interest in something of value. With donations to charity  he/she retains nothing – he/she has given money away.

So, will the donor in our example reduce his donation or increase it?  Will those at the top end, and  indeed  those  lower down the income scale, think carefully again about how much they donate, i.e. will these changes affect their behaviour and, therefore, their  support for the charity sector?   Will they reduce their donations ?  The jury is out but my view is that the sector will suffer and all for the sake of  ‘scapegoating’ a tiny minority of people  whose entire motive is supposedly tax-avoidance and which is , it is asserted , costing the country a huge amount in lost tax revenues . As we have seen above these claims made by the media and by politicians are not necessarily backed up by the facts .

The whole premise of this  attack on charitable giving is misguided  and I hope the Government will see sense !

Keith Graham is Managing Partner at Westbury Accountants and Business Advisors.