Over the past few days, I’ve been really pleased to see the issue of tax avoidance in the news. As far as I’m concerned, tax avoidance has been the elephant in the room throughout the deficit/austerity debate. Here we are desperately cutting budgets while revenue leaks out through the back door through ‘creative accountancy’.
Tax avoidance is now on the agenda, and that’s great. It’s just a little unfortunate that it’s already been mishandled in communications terms. George Osborne said he was ‘shocked’ at how much income tax millionaires were avoiding, and skeptical eyebrows were raised. (I find it very hard to believe he was shocked. If he was, he’s probably not fit to be chancellor.) It’s also unfortunate that the first priority in tackling the issue has become charitable giving, when there are more glaring loopholes to close. Fixing the non-dom tax designation could raise £3 billion. Tax havens cost the treasury at least £4 billion. Capping charitable giving is estimated to bring in £50-100 million.
Of course, we should close all loopholes, even the small ones. If people are abusing the system, then it needs to be tightened up. But it is a slightly odd place to start.
For one thing, charitable giving is something we want more of. That’s why it’s been incentivised in the tax system in the first place. You can’t incentivise something and then brand it tax avoidance when people do it. We incentivise saving too, through tax free savings accounts, but nobody counts ISAs as tax evasion.
It’s also odd because the government has explicitly said that it wants to see more philanthropy. The whole Big Society agenda depends on it. The government withdraws from certain activities, and private sector bodies pick up the slack. That all falls apart if you gut government funding, and then gut its main alternative in quick succession.
Furthermore, minimising your tax bill is not an end in itself. Surely the aim of tax avoidance is to keep more of your wealth for yourself. After all, you could knock your tax bill to zero if you gave everything away. But then you’d have nothing left, which would make it a rather self-defeating way to avoid paying tax. So I doubt that many of the people giving away millions and passing on the tax savings to the charity are doing it with tax avoidance as the primary purpose.
That’s not to say the tax incentives for charitable giving can’t be abused. One way is to set up a bogus charity, or one that pushes your own interests. Remember Liam Fox and Adam Werrity’s charity Atlantic Bridge? It claimed it did research and education work, but was actually an exclusive networking organisation that brought together right wing groups in the UK and the US. The Charity Commission took a dim view of its activities, and it was wound up in 2011. Rooting out illegitimate charities is the job of the Charity Commission, and perhaps the HMRC needs to work more closely with them to identify and close the dubious ones. Perhaps we need tighter rules about overseas charities, so that people can’t offset their taxes to charities that we’re unable to check up on.
Another way you could abuse the system is to declare a donation and then not give it. But that would be a false claim on your tax return and illegal, so it doesn’t really count. No doubt there are plenty of other ways of claiming tax relief. There will be accountants specialising in it, and HMRC needs to keep one step ahead of them. It is action on the abuse of the system that is required, and that requires careful analysis of how and when philanthropists actually give, and how tax dodgers hide their earnings through giving. That work could still be done and should be done. If it is, I suspect the current proposals of a £50,000 cap will become another fabled U-turn.
Of course, the government is right that everyone should pay some income tax. Going after charitable giving isn’t the way to do that. In fact, the government has already come up with a better solution and just didn’t dare to implement it. That was Nick Clegg’s ‘tycoon tax’ suggestion, that there should be a floor to tax relief below which you cannot claim. Whatever you gave away or claimed in other forms of relief, you’d have to pay a minimum tax rate. It could be 20% or 25%, it could be up for discussion. That would make everyone contribute, and it would address avoidance generally, not just the abuse of charitable giving.
The Earthbound Report 
I think there is also another problem with charitable donations – they have become a simple, very effective method of putting us on the moral high ground, which for many of us just allows us to live the rest of our lives in a guilt-free, business-as-usual manner.
So I agree that philanthropy should be encouraged, but I think we can be more philanthropic by thinking thoroughly about our consumption behaviours than by giving more to charity.
(infact I’ve discussed this in detail on my blog page: http://atlasembraced.blogspot.co.uk/)
Good point, it’s a shame when people use their donations as a way of buying off their consciences and excusing their lifestyle. That’s closer to medieval indulgences than true philanthropy.
I’m not sure how that can be stopped, other than to keep reminding people that no amount of giving can get us off the hook for taking more than our fair share of the earth’s resources.