6 August 2019
Tax reliefs offered to UK charities are in urgent need of an overhaul, according to a major new report.
In their recent report, Reforming charity taxation: towards a stronger civil society, the Charity Tax Commission concludes that the current system of charity tax reliefs and incentives has not kept pace with changes in technology, society and the role of the not-for-profit sector, and sets out a range of proposals for the government to consider.
Speaking ahead of the publication of the report, Sir Nicholas Montagu, chair of the Charity Tax Commission, and a former chairman of the Inland Revenue, said: “It’s been 20 years since charity tax reliefs were last reviewed, and many of the rules were written for an analogue era. With people giving by text message and contactless payment, and with many donors themselves increasingly mobile, we need a system fit for the digital age if we are not to see the UK’s natural generosity held back.”
The Charity Tax Commission was established by the National Council for Voluntary Organisations (NCVO) in 2017, as an independent commission with the remit of undertaking a full review of the impact of the tax system on charities. The report was developed following a call for evidence in 2018, and the technical merits of the commission’s proposals were commented on by an advisory group of taxation experts, and a reference group of stakeholders from across the voluntary sector.
The report includes proposals for a number of short-term reforms, which it argues if implemented would significantly increase the support directed to charities, despite being relatively modest in nature and fiscally neutral. These include:
Launching a Universal Gift Aid Declaration Database
This would provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities. The database could then be accessed by charities to ensure a donor was eligible to claim Gift Aid, using either a national insurance number or another unique number to identify the donor.
Reforming Gift Aid
So that unless donors opt out, the value of higher-rate and additional tax reliefs (at the 40% and 45% tax bands) should be directed to charities. This would be on top of the current basic rate relief.
Making it mandatory for all but the smallest businesses to offer ‘Payroll Giving’ schemes
This option, also known as Workplace Giving or Give As You Earn (GAYE), enables employees to donate out of their pre-tax income. The government should insist on employers offering this to staff, much as they have done with pension auto-enrolment.
Simplifying VAT for charities
The complicated rules surrounding VAT on facilities, equipment and buildings shared with other organisations mean many charities suffer VAT costs which they cannot recover. Additionally, HMRC should provide clear guidance to public bodies so they can provide the VAT status of any charitable funding, with grants and contracts treated differently for tax purposes but often difficult to distinguish in practice.
Consulting on extending business rates relief to wholly-owned trading subsidiaries
Charities get 80% relief on non-domestic business rates, which can be topped up by up to a further 20% by local authorities. However, charities can lose this benefit if they set up trading subsidiaries in order to comply with rules on charity trading.
Building public trust by improving openness
Charities with annual revenue of over £1m should publish detailed information in their annual reports about the money they receive from tax reliefs.
In addition, the report says that long-term reviews should be carried out into Gift Aid, business rates relief and (depending on the final terms of Brexit) VAT to address any inconsistencies or imbalances in the existing systems.
In response to the report, HMRC said that whilst it always kept charity tax reliefs under review, it had “no plans to make changes at this time.”
If you would like to discuss how your charity can make the most of the tax reliefs available to you and your donors, please contact me or your nearest UHY Charity and Not-for-Profit expert.
Alternatively, you can read more about the services we provide to charities here.
