ARE CHARITABLE DONATIONS EQUIVALENT TO TAX AVOIDANCE?

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ARE CHARITABLE DONATIONS EQUIVALENT TO TAX AVOIDANCE?

I wrote an article for Economia recently criticising Action-Aid’s proposals to combat tax avoidance.  In it I suggested that the tax reliefs for charities could be described as much as tax avoidance as the government’s relief for financing costs in calculating Diverted Profits Tax, which Action-Aid had labelled tax avoidance.

A correspondent took issue with my suggestion that reliefs for charities can be looked on in the same way as tax avoidance.  So I thought I’d justify myself. 

HMRC statistics show that last year gift-aid repayments to charities cost the taxpayer £1,040million.  Adding in the tax foregone via charitable donations by companies, IHT relief for gifts to charities and VAT charity reliefs probably brings the total tax foregone to                

£2-3billion.

Last year HMRC estimated that the country lost £3.1bn in tax avoidance.  In other words the total tax foregone in charitable reliefs is roughly the same as the total tax legally avoided by all taxpayers put together.

The government constantly tells us that those who avoid tax are cheating on society because tax avoided means less money is available to build schools and hospitals or to fund the running of the NHS.  Logically exactly the same must apply to tax “lost” to charities.

If I give £1,000 to a charity, this is treated as a gross amount of £1,250.  The government will donate £250 to the charity and will reduce my tax bill by a further £250.  That is money that in the absence of gift-aid could have been used by the government to fund education, welfare, the NHS, or other socially desirable things that it is the business of government to provide.

I have not been democratically elected by my fellow citizens, yet the government allows me and people like me to divert around £3billion a year from education, welfare and health and decide that it is better spent on erecting statues, homes for donkeys, supporting other people’s religions and a myriad of other things that small groups of individuals perceive to be for the public good.  Why should I be in a better position than George Osborne to decide that the public interest in spending £250 on, say, refurbishing a war memorial is greater than the public interest in paying that £250 to a single mother struggling to bring up three kids?  Yet by allowing me gift-aid relief, George Osborne is delegating to me the decision on how to spend the £250.

I see from the Charity Commission website that 67,972 registered charities have an annual income of under £10,000 and a further 55,207 have under £100,000.  These are 75% of all registered charities, so there are 133,000 causes to which funds have been diverted from health, education or welfare.  I do not know what those causes are, but I doubt that many can achieve very much with such small sums.

I would stress that I have nothing against charities.  I make a lot of charitable donations and tick the box to allow some of them to claim gift-aid.  (I don’t do that for donations to my church because it seems to me morally wrong to ask people of other religious persuasions or of none to allow me to divert part of their taxes to support my church, but I suspect that my moral view is a minority one).

However that is beside the point.  The intellectual question is not whether charities are a good thing.  I personally think that some are and others are not.  I would not be surprised if most people have a similar view, although their categorisation would obviously be different to mine.  It is whether it is fair to the general body of taxpayers for me to be able to earmark the proceeds of part of the taxes that the law requires me to pay to be used by my pet causes.  I think it far more logical for the elected government to decide how taxes should be spent.

The only rational reason for the relief (as a tax relief) is if it encourages charitable donations.  I have seen no evidence that it does so.  Most people make charitable donations in response to an appeal by the charity.  When deciding whether or not to respond to an appeal, I do not give any thought to tax relief; I either want to help the cause or I don’t.  I would be surprised if I am unusual in this respect.  I also note that most charity advertising does not focus on tax relief; it focusses on why the charity wants the money.  If the charity felt tax relief was what motivates a donor, I would expect it to give that greater prominence. 

ROBERT MAAS