Charity Tax Commission report: reforming charity taxation

In the autumn of 2017, the National Council for Voluntary Organisations (NCVO) commissioned a review of the tax reliefs available to charities. The brainchild of this review was published on 17 July 2019 in the form of the Charity Tax Commission report.

The report analyses whether the current charity tax reliefs (i.e. Gift Aid, business rates relief, and value-added tax (VAT)) are fit for purpose by considering whether each relief achieves the following three principles:

• Supports functional activity – towards a particular social good or public benefit;
• Supports individual donations to, participation in, and support of charitable activity; and
• Supports charities to increase efficiency and effectiveness, and to innovate and collaborate.

We have summarised the main recommendations of the report below:

Gift Aid

• The value of higher-rate and additional-rate relief should be redirected to charities on top of the basic-rate relief they already receive, with an opt-out from this if donors specifically request it.
  
  
• A Universal Gift Aid Declaration Database (UGADD) should be created. This would allow donors to complete a single, enduring universal declaration covering all their subsequent gifts to charities, and would allow charities to ascertain whether a given donation has a Gift Aid declaration against it.
  
  
• Awareness and understanding of Gift Aid, including the benefits and eligibility criteria, should be increased.
  
  
• HMRC should consult with voluntary sector organisations and phone companies on the practicalities of text donations and Gift Aid declarations, with a view to providing guidance on the processes that need to be in place for a sufficient audit trail.
  
  
• A review of Corporate Gift Aid should be conducted to assess whether the previous changes have been successful, and examine how to maximise the amount of money charities receive through tax incentives or corporate entities.
  
  
• Further consideration should be given to geographically differentiated rates of Gift Aid. This may help to prevent the distribution of Gift Aid favouring certain types of charities in certain areas and working on certain topics.
  
  

Business rates relief

• A consultation on whether to roll out rate relief to all wholly-owned charity subsidiaries. This would prevent the charity from losing out on mandatory and/or discretionary charity relief because their trading subsidiary is separately assessed for business rates.
  
  
• To help charities plan their finances with confidence, criteria for discretionary rate relief should be published and easily accessible on all local authority websites. The Government should also issue guidance to billing authorities, clarifying that mandatory relief is available to smaller unregistered charities, not just those registered with the Charity Commission.
  
  
• A review of business rates relief for charities to ascertain the extent to which the relief is generating public benefit. Currently, business rates relief disproportionately supports certain types and sizes of charities.

VAT

• The VAT rules for charities using shared resources should be reviewed. The aim would be to ensure that the VAT rules do not create irrecoverable VAT for charities and restrict collaborative working and cost-saving efficiencies between charities and partners.
  
  
• Public bodies should be required to provide the VAT status of any funding received by a charity, and HMRC should work with the voluntary sector to develop clear guidance on how to decide when income from a funding offer or tender is or is not subject to VAT. This would reduce the money and resources spent by charities in trying to determine whether funding is within the scope of VAT.
  
  
• Fees for writing charitable wills should be exempt from VAT. This could result in far more charities receiving legacy income, enabling them to increase the public benefit they deliver across the country.
  
  
• Depending on the outcome of Brexit, a full review of the way that VAT operates for charities. The review should bring charities and tax authorities together to explore the challenge that irrecoverable VAT presents to the sector and how administration can be made simpler and more efficient for charities.

Incentivising giving

• The offer of a Payroll Giving scheme to employees to be mandatory. The hope is that this would increase the take-up of Payroll Giving which is an effective way of giving for donors, as donations are taken out of pre-tax income which enables tax liabilities to be reduced by the amount donated.

Improved data and openness

• An improvement to the quality of its published statistics on how much tax relief individual charities receive, broken down by type of relief. This would lead to a greater understanding of how far tax reliefs influence public and charity behaviour and deliver their intended social or economic objectives.
  
  
• Charities with a revenue of over £1 million per annum should publish detailed information in their annual reports about the amount of money they receive from Gift Aid, business rates, and where possible, VAT relief. This would create greater clarity on how charities convert the benefits received from tax reliefs into a greater delivery of public benefit.

Sir Nicholas Montagu, the Chair of the Charity Tax Commission, has commented that “there is no real excuse” for the Government not to pursue the recommendations set out in the report, although only time will tell whether they do so or not.

The full report can be found here.

For more information

For more information on this briefing, please contact Natalie Barbosa.