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An alternative  to the charity tax cap for higher rate tax payers deck
 

An alternative to the charity tax cap for higher rate tax payers deck

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The British Red Cross ideas for charity tax relief see the relief going to the charity not the individaul as it does for standard rate tax payers. It is not perfect but takles the fairness issue head ...

The British Red Cross ideas for charity tax relief see the relief going to the charity not the individaul as it does for standard rate tax payers. It is not perfect but takles the fairness issue head on. It could see millions of £'s going to charity and no need for a cap.

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    An alternative  to the charity tax cap for higher rate tax payers deck An alternative to the charity tax cap for higher rate tax payers deck Presentation Transcript

    • An Alternative –Higher Rate TaxDonor Choice and Charity Benefit 30 Apr 2012
    • Government Announcement• Budget 2012 – George Osborne announces a cap on tax relief on charitable donations for higher rate tax payers of 25% or £50,000 (whichever is higher)• The cap is expected by the sector to impact on major philanthropic gifts to charities in the UK
    • Current situation What happens to a £100 donation Donor on basic tax Donor on 40% tax Donor on 50% tax rate of 20% rate rate Gift Aid = £25 Gift Aid = £25 Gift Aid = £25 Tax Relief = £0 Tax Relief = £25 Tax Relief = £37.50 Charity receives £125 with the addition of Gift AidThe donation cost a The donation cost The donation costbasic tax payer £100 the donor £75 after the donor £62.50 the tax relief after the tax relief
    • Sector Concern• Figure widely quoted in sector press is of up to £1.3bn worth of donations at stake as a result of proposed cap• “Give it back George” campaign led by NCVO and CAF urges government to return to status quo before cap• BRC agrees with aims of campaign, but proposes an alternative for discussion
    • British Red Cross Proposal - An AlternativeThe donor has two choices.Either: Option One Option Two• The donor sacrifices all tax relief in • The donor opts in to tax relief the interest of public benefit • Tax relief cap applies as set out by• Donor pays full tax on income for Or current government proposal donation• Charity receives full amount of tax• No cap applies
    • Current System• Under the current system, higher rate tax payers can claim tax relief on charitable donations.• Donors gain no personal benefit from donations as relief is linked to donation• Tax relief ensures that donors are not disadvantaged by charitable giving through having to pay tax on foregone income• Charities receives Gift Aid on basic rate paid by the donor, which is removed from tax relief before donor claims it• Thus, donations are made partly from a donor’s gross income and partly from their net income
    • Current System – Example*• A recently retired wishes to make a significant donation to one charity this year. While their income is £300,000 in the current tax year, their income in previous years was higher, enabling them to be fortunate enough to donate £1,000,000 this year to a charity of their choice• In this example the donation is being made under Gift Aid, excludes any other reliefs and the donor is taxed at a uniform rate of income tax at 45%. Donation: £1,000,000 Charity claims £250,000 Donor claims £312,500 Gift Aid Tax Relief Total cost to donor: Total to charity: £1,250,000 £687,500 • Under the current system, donors have been – until April 2012 – able to donate their tax refund through their annual tax return. • In the above example, the £312,500 relief could have been donated to the charity therefore bringing the total to £1,562,500. * All calculations are explained in full in the Appendix
    • Government Proposal – Example*• Using the same illustrative example as before, a recently retired donor, currently at £300,000 annual taxable income, donates £1,000,000 to a charity.• The donation is being made under Gift Aid, excludes any other reliefs and the donor is being taxed at a uniform rate of income tax at 45%. As the donor wishes to receive tax relief, this reaches the government cap of 25% of annual income, or £75,000 Donation: £1,000,000 Charity claims £250,000 Gift Donor claims £75,000 Tax Aid Relief Total to charity: £1,250,000 Total cost to donor: £925,000 * All calculations are explained in full in the Appendix
    • Government Proposal - potential implications• Charities believe that all areas of charitable giving will be affected: monetary donations, Gift Aid, gifts of lands and shares• The proposal adds further layers of complexity which is likely to deter donors• Anecdotal feedback from donors is that until there is clarity, they are likely to hold off making decisions about additional gifts to charity, creating inertia• 2012 may see a hike in giving pre-cap followed by a sharp drop in giving in 2013.• British Red Cross does not believe that the need to prevent tax avoidance schemes by some presents enough of a issue to raise such a threat to charitable giving
    • British Red Cross Proposal - Example• The same recently retired donor from previous examples wishes to give a net donation of £1,250,000 to charity.• The donor has an annual taxable income of £300,000• The donation is being made under Gift Aid, excludes any other reliefs and is being taxed at a uniform rate of income tax at 45%.• While the donor would be eligible for tax relief, in order for the charity to receive the greatest possible benefit, they have forgone this, allowing the charity to claim the entire amount of tax paid
    • British Red Cross Proposal – Example* Donation: £687,500 Charity claims £171,875 Gift Donor claims no Tax Aid Relief Charity receives remaining £390,625 tax paid Total to charity: £1,250,000 Total cost to donor: £687,500 • A donor wishing to receive tax relief would remain subject to the cap, enabling HMRC to prevent potential fraud and abuse* All calculations are explained in full in the Appendix
    • Comparison – Cost of Giving Cost to donor of a net £1,250,000 gift under all three scenarios: Current System Government Proposal BRC Proposal• Donates £1m • Donates £1m • Donates £687,000• Receives tax relief of • Receives tax relief of • Receives no tax relief £312,500 £75,000 • Cost of donation:• Cost of donation: • Cost of donation: £687,500 £687,500 £925,000
    • Highly attractive to personal foundations Especially for those endowing personal foundations, a£1m donation would be transformed into £1.81m of grant making opportunities. Donation: £1,000,000Charity claims £250,000 Gift Aid Donor claims no Tax ReliefCharity receiving remaining £562,500 tax paid Total to charity: £1,818,181 Total cost to donor: £1,000,000
    • Research• HMRC research 2009 shows strong evidence in favour of the principles in the BRC proposal: “… the majority of donors reported that they would not change their donations out of net-of-tax income if faced with changes to Gift Aid. In practice this means that if the amount of tax relief going to charities increases, charities benefit by the full amount; while if the amount of tax relief going to the individual donor increases, charities see little benefit” (p 9: Gift Aid donor research: Exploring options for reforming higher-rate tax relief, a report for HMRC & HMT. Kimberley Scharf, Warwick University and Sarah Smith, University of Bristol)
    • BRC proposal What happens to a £100 donation Donor on basic tax Donor on 45% tax rate of 20% rate Gift Aid = £25 Tax Relief = £0 Donation costs the donor £100 Charity receives Charity receives additionaladditional tax paid = £0 tax paid = £57Charity receives £125 Charity receives £182
    • Conclusion• Evidence suggests that a match is more likely to motivate philanthropic gifts than relief• BRC proposal offers the greatest possible income for the charity, at the lowest possible cost for the donor• HMRC is still empowered to prevent potential abuse and fraud• Applies consistent rule to all donors, regardless of tax rate
    • Appendix A• This appendix contains the explanations and calculations for the examples contained within this paper.• For the purposes of all three examples, a recently retired donor has taxable income of £300,000 in the current tax year and excluding any reliefs, is taxed at a uniform rate of 45%.• In practice, there are a number of variables that could impact the value of the tax relief and income tax percentage, thus affecting the cap and Gift Aid values available. These examples do not take into account donations of shares and assume a cash donation.• The calculations used in this paper are correct to the best of our endeavours, however we recognise this is a complex subject area with multiple variables that could impact calculations.
    • Example 1 – Current SystemDonation £1,000,000 Gift from the donor. = £1m gift x 20/80. Gift Aid calculations are based on the basic rate tax on gross income, whereas the donation represents net Charity claims income. As such, it is necessary to multiply by 20/80 to £250,000 Gift Aid calculate the basic rate tax paid on gross income. In this example, the gross income for basic tax rate would be £1,250,000 and thus £250,000 Gift Aid for the charity. £1,250,000 x 25% (the 25% calculated by taking 45% tax rate minus 20% already claimed by the charity). This represents the amount the charity received (gross income) times the taxTax relief to £312,500 rate of the donor (45%) minus the basic rate the charitydonor already reclaimed (20%). As this is from gross income, the actual tax rates are used, rather than having re-calculate a gross income as was done with the Gift Aid calculation.Net cost to £687,500 The £1m donation minus the tax relief (£312,000) received. donorTotal income to £1,250,000 The £1m donation plus £250,000 Gift Aid. charity
    • Example 2 – Government ProposalDonation £1,000,000 Gift from the donor = £1m gift x 20/80. Gift Aid calculations are based on the basic rate tax on gross income, whereas the donation represents net income. AsCharity claims £250,000 such, it is necessary to multiply by 20/80 to calculate the basic rate taxGift Aid paid on gross income. In this example, the gross income for basic tax rate would be £1,250,000 and thus £250,000 Gift Aid for the charity. - The donor is eligible for tax relief of 25% of annual income or £50,000, whichever is greater. In this example, the donor’s annual taxable income is £300,000, thus eligible to claim tax relief up to £75,000, 25% of their income. -To calculate the total possible tax relief on this donation = £1,250,000 x 25% (the 25% calculated by taking 45% tax rate minus 20% alreadyTax relief to £75,000 claimed by the charity). This represents the amount the charitydonor received (gross income) times the tax rate of the donor (45%) minus the basic rate the charity already reclaimed (20%). As this is from gross income, the actual tax rates are used, rather than having re- calculate a gross income as was done with the Gift Aid calculation. - While the relief could potentially be £312,500, due to the retired donor’s current income level, he/she is capped at £75,000.Net cost to donor £ 925,000 The £1m donation minus the £75,000 tax relief.Total income to £1,250,000 The £1m donation plus £250,000 Gift Aid.charity
    • Example 3 – BRC ProposalDonation £687,500 Gift from the donor = £687,500 gift x 20/80. Gift Aid calculations are based on the basic rate tax on gross income, whereas the donationCharity claims £171,875 represents net income. As such, it is necessary to multiplyGift Aid by 20/80 to calculate the basic rate tax paid on gross income. = £687,500 x 45/55 - Gift Aid value. As with the Gift Aid calculation, the £687,500 is a net value and therefore a gross value needs to be calculated to capture the total tax paid onCharity claims their donation in the current and previous years. By taking £390,625tax paid £687,500 x 45/55, the total tax paid is £562,500. As the charity has already claimed £171,875 through Gift Aid, thus there is £562,500 minus £171,875 = £390,625 remaining for the charity to claim.Tax relief to Not applicable as the donor has decided to opt-out of £-donor receiving tax reliefNet cost to The donor is not receiving tax relief and therefore the net £687,500donor cost is the value of the donationTotal income £687,500 donation plus £171,875 Gift Aid plus £390,625 £1,250,000to charity remaining tax received by the charity.