It may seem odd in the midst of one of the most hotly contested general elections in recent memory to put in an impassioned plea for politicians to think about Gift Aid, but the relief is worth over £1bn a year for charities, so we should never stop championing it!
If you were hoping that the next government would put Gift Aid at the heart of its agenda then, like me, you would have been disappointed. None of the main manifestos outlined substantive measures to enhance charitable giving, but on the positive side this does mean that nothing that could negatively affect charitable tax reliefs has been proposed.
At least that appears to be the case on the face of the manifestos. But looking carefully at the manifestos, there is a danger that Gift Aid could be negatively affected by proposals on devolution.
Lord Smith goes to Edinburgh
During the close run Scottish Independence Referendum last year, readers probably remember the main unionist parties (Labour, Conservatives & Lib Dems) making a ‘vow’ on more powers for the Scottish Parliament. What readers probably didn’t notice was Lord Smith’s Commission which was set up to explore what powers should be transferred.
One of the powers it was agreed that would be transferred was the ability to vary the rates and bands income tax. This may not seem like a problem for charities, except that Gift Aid is a tax relief linked to income tax (for most people not in the fortunate position to pay capital gains tax). This means that for charities working in Scotland and the rest of the UK, there could be a problem in that donations would be covered by two different rates of income tax (or more depending on whether Scotland introduces more bands).
This issue has already been raised publicly by a number of organisations and discussions have begun on how we can navigate the issues that this would cause for Gift Aid.
Lord Smith comes to London?
While this would be complicated enough, it could be about to become more complicated. The Conservative Party in its manifesto has said that it wants England to have the same powers as Scotland, which would involve separate English rates of income tax (and maybe different bands). At the bottom of Page 70 in an innocuous bullet point it says the Conservatives would:
“extend the principle of English consent to financial matters such as how spending is distributed within England and to taxation – including an English rate of Income Tax – when the equivalent decisions have been devolved to Scotland.” (my italics)
This would mean at least three different rates of income tax, creating a significant amount of tension for the Gift Aid system. Once there are separate rates for England and Scotland, it is difficult to see how separate rates can be denied for Wales and Northern Ireland, leaving us with potentially four different rates of income tax in the UK.
Of course this particular change depends on a Conservative-led next government, but the ‘English Question’ is unlikely to go away regardless of the outcome on May 7th.
Although a federal system of income tax may have benefits for the economy or meet ideas of fairness, it will certainly have a significant impact on the future of tax reliefs, including Gift Aid.
So what next for Gift Aid?
The whole separation of different rates of Gift Aid for different nations in the UK could have no real impact on Gift Aid. After all, Scotland already has some tax varying powers but they haven’t been used. The problem is, however, that issues around tax are not taking into account the interests of charities and the impact that tax changes could have on long standing reliefs such as Gift Aid.
There may be an argument for building in some sort of ‘tolerance’ for Gift Aid, so that the system remains the same except if there is significant variation of tax rates.
But would this threaten Gift Aid’s status as a tax relief and turn it into a dreaded ‘tax expenditure’ which could be varied by the government at any time? If you want to see why it is so important that this doesn’t happen, you only have to look at recent events in Alberta, Canada where the provincial government recently tried to reduce the amount of charitable tax relief by half (fortunately charities fought back and won!).
Or will charities have to adapt to the changes and start to ask for donors to tick a box as to where they pay tax (Scotland, England, rest of the UK etc.)? Will this put donors off and make it harder to get donors to claim for Gift Aid?
The Government is giving time for HMRC and HM Treasury time to consult on Gift Aid and consider a future plan of action. However, this was when it was just about Scotland. Variations in England, and maybe even Wales and Northern Ireland will add additional complexity.
Whether we want to, or not, it looks like charities will need to start thinking about the future of Gift Aid, and how we want it to operate in a more ‘looser’ United Kingdom. Do we try and defend the status quo, or do we go for radical change?
Who said that this election didn’t have anything of interest for charities?