Tax reliefs offered to UK charities urgently need an overhaul, according to a new report from a group led by the former chairman of the Inland Revenue (later HMRC). Taken together, its proposals would ensure giving is made easier while charities increase their income and spend less on unnecessary admin.  

Sir Nicholas Montagu, chairman of the independent Charity Tax Commission, has said that changes to the rules surrounding Gift Aid – where the taxman adds 25p to every pound given – and other reforms could incentivize giving and offer financial protection to UK charities and those who depend on them. He 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 independent commission had been convened by the National Council for Voluntary Organisations (NCVO) in 2017. One of the Commission’s most eye-catching proposals is to enable higher rate tax payers to pass their tax relief onto their chosen charities more easily, potentially raising at least £250m more for good causes every year.

Its report, Reforming charity taxation: towards a stronger civil society, also proposes a central database which would enable people to complete a single, enduring universal declaration covering all their subsequent gifts to charities. This would mean fewer forms and would make giving simpler for everybody.

“Quite rightly, the money we give to charities has been treated as being essentially tax-free since the first Income Tax Act, in 1842. Yet the current system of Gift Aid sees hundreds of millions being lost every year. That has to change,” said Sir Nicholas.

The new report sets out a number of recommendations which the Commission wants the government to consider, including:

Short-term proposals:

  • Reform Gift Aid – unless donors opt out, the value of additional and higher-rate tax reliefs (which reflect the 45% and 40% tax bands) should be directed to charities. This would be on top of the current 25% basic rate relief. Even if donations stayed stable, charities could receive at least an extra £250m per year.
  • Launch a Universal Gift Aid Declaration Database (UGADD) – this would provide a single, enduring declaration which individuals can make covering all their subsequent gifts to charities. Consulted on by the government in 2013, the commissioners believe this idea should be resuscitated.
  • Make offering ‘Payroll Giving’ schemes mandatory – this option for working people, also known as Workplace Giving or Give As You Earn (GAYE), enables them to donate out of their pre-tax income. Although uptake has been increasing, with 5,500 employers offering such schemes and 1m employees using them, still only 3% of donors give in this way. The government should insist on employers offering this to staff, much as they have done with pension auto-enrolment.
  • Simplify VAT – complicated rules surrounding VAT on facilities, equipment and buildings shared with other organisations mean many charities pay out money they cannot recover. Reviewing the rules could encourage cross-sector partnerships and help the UK increase R&D investment which could boost productivity and economic growth. 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. Many charities spend significant resources trying to do this for themselves.
  • Remove VAT from wills that include a charitable donation – This would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. It is estimated that if all professional advisers referred to the potential of legacy giving, this could generate a further 15,000 charitable legacies a year.
  • Consult 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.
  • Build 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.

Longer-term proposals:

  • Comprehensively reviewing VAT for charities – this could address systemic anomalies, improve efficiency and increase charitable activity.
  • Reconsider business rates relief – this benefits certain charities disproportionately and may not reflect the increasingly digital world in which charities operate. A review could consider the equity of distribution and the public benefit existing relief delivers.
  • More research into Gift Aid – its distribution tends to favour certain types of charities working in certain areas and working on certain topics. Additional understanding could facilitate reform, such as different ways of distributing Gift Aid.