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Consultation to be held on ‘tycoon tax’

Following public criticism, the Government has made plans to hold a consultation to review the cap on tax relief for donations this summer.

In the past few weeks there has been much opposition to the planned cap from politicians, charities and third-sector experts alike. Chancellor George Osborne, who called the plans a ‘tycoon tax’, has revealed that he is considering a number of measures to limit the damage the plans could cause to charities.

Earlier this week, Deputy Prime Minister Nick Clegg told BBC Radio 4’s the Today show that the Government plans to examine the plans in detail and said, “we’ll do so with an open mind and very sympathetically because we don’t want to damage charities and we don’t want to inhibit philanthropy”.

There are two issues arising from the current debate, which relate to the Government’s plans to deal with the financial crisis. These are the need to prevent tax avoidance and the need to encourage philanthropy, especially among the rich who may have greater disposable income.

Preventing tax avoidance

Under the previous rules it was possible to offset an entire income against tax reliefs and pay no income tax. The Government’s proposal for 2013 would cap charitable donations at 25% of an individual’s income, or £50,000 whichever was the higher. In theory this won’t prevent donations as more can be donated from the individual’s taxed pay but charities fear the measures will put high-earners off.

The plans to cap charitable giving are one part of the Government crackdown on tax avoidance and have been presented as a way to make taxation fairer. A treasury spokeswoman told The Telegraph "There are currently millionaires paying a lower tax rate than ordinary taxpayers.”

Guardian columnist Polly Toynbee highlighted another ‘eccentricity’ of the system, “if a basic-rate tax payer – i.e. 87% of the population – gives £1, the state adds another 25p in gift aid to the charity, but the donor gets no tax relief. Only 40% or 50% tax rate donors can claim a personal benefit and get their tax bills cut. Since those in the bottom 10% give a higher proportion of their income than those in the top 10%, that seems unfair.”

Defending charitable giving

Although it is possible to avoid paying tax by giving a large percentage of your income to charity, the current Government PAYE giving scheme raises over £115 million for charities each year.

Despite their claim the cap will help reduce tax avoidance, the Financial Times reported that figures released by the treasury seem to contradict their argument and reveal that 72% of high earners paid full tax in the last tax-year with only a small percentage avoiding income tax payments altogether (It is of course possible that people had avoided tax by shifting earnings into the previous year).

The move laid out in this budget contrasts with the Government’s white paper on giving which followed the 2011 budget. Based on an earlier Government consultation on the state of the third-sector, the document features a quote from law firm Maurice Turnor Gardner, “No one gives to save tax. However, tax incentives can motivate the desire to give larger sums once individuals have decided to give.”

Ex-Prime Minister Tony Blair who spoke to the Global Philanthropy Forum this week, felt that the rich are being victimized and aren’t giving in order to avoid paying taxes.

He told the BBC that he felt the issue of tax avoidance should be separated from the issue of giving, “most people give to charity because they want to give to a good cause, not to avoid tax.”

Over the Easter recess the Charities Aid Foundation (CAF) surveyed 71 coalition MPs, and revealed that the majority felt that proposals to cap tax relief should be reviewed.

In a statement John Low, Chief Executive of the CAF, highlighted the views of many charities, “capping tax relief and charitable donations will raise relatively small amount of tax but risks inflicting far greater damage on causes for the public good.”

Limiting Damage

In what seems like a sudden turn-around the Government is now planning to review the suggested cap. The Financial Times reported that George Osborne is now considering two measures that could limit the damage of the cap. One would be to have a separate limit of charitable donations to 50% of a person’s income and the other is to allow the reliefs to be rolled over from one tax year to the next.

The Government is currently in talks with philanthropists and charities and will hold a consultation that is likely to last 12 weeks, the results of which will be published in the summer.

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Published on 27/04/2012 © Listentotaxman.