Environmental, social, governance (ESG) Tax and VAT

Public benefit is at the core of both charities and the tax system

Some of you may have read a recent column in the Financial Times by its Money Week Editor, Merryn Somerset Webb entitled “Charity should not begin with a tax break ...

Some of you may have read a recent column in the Financial Times by its Money Week Editor, Merryn Somerset Webb entitled “Charity should not begin with a tax break (£)”. As a sector we are used to having to defend our privileged status, and we should never forget that it is a privilege, in the tax system. Most readers will remember the NCVO & CAF campaign “Give it back, George” that successfully got the last Coalition government to exclude charitable donations from a cap on personal tax reliefs. Only last year, we had to defend attempts to redefine a charity for tax purposes which could have threatened the creation of charities in the future. Our Chief Executive, Caron Bradshaw, highlighted the need for charities defend their tax reliefs recently in her Third Sector column (£). So with recent events it isn’t surprising that some have questioned the tax reliefs that charities receive. However, we should never be shy in defending the principles that underpin charitable tax reliefs. Ms Webb’s article misses the central reason for taxation: public benefit. The tax system exists to generate resources to provide public benefit through the provision of services and goods, as well as providing a disincentive for those things that may cause the public harm, for example, pollution. Charities also exist to generate public benefit. The Charity Commission will only approve a charity if it meets the so-called “public benefit requirement.” This concept has been written into law and has evolved over many years. It is for this reason that there is a long standing principle on money given to charities for the purposes of generating public benefit should be exempt from taxation. Other exemptions and reliefs are also provided to charities so that income received by charities is maximised to generate public benefit. This was a point well made by Sir Stuart Etherington, Chief Executive of NCVO, in his speech to the Attlee Foundation (doc) back in 2012. After all, it doesn’t make much sense to exempt donations to charity because they generate public benefit, if the taxman claws the tax back when the money is used to deliver their objectives. Thanks to the generosity of the British public, whether they giving £1 or £1m, our country is home to a rich variety of charities doing a whole range of activities. We all have our views on what we think a ‘good cause’ is, but the beauty is that you are not compelled to support any organisation that you don’t want to. Contrary to Ms Webb’s piece the reason that we avoid dividing the sector between those that can receive tax reliefs and those that can’t is not to help the rich, but to help the vulnerable. If decisions like this were left in the hands of politicians or some other group that could deprive charities accessing reliefs, it would not be the rich and popular causes that would lose out, but those groups that lack power and influence. It is for this reason that we must always be vigilant against those that seek to divide charities into “worthy” and “unworthy”. There is one thing that we do agree with Ms Webb about, however. Tax reliefs are very important for the sector and support the work of thousands of organisations. Without business rate relief, for example, a significant number of services and projects would have to be cut back or perhaps wound up altogether. The charity sector is not full of waste. Cutting back on tax reliefs will merely lead to less money going to delivering public benefit – in many cases, forcing the state to intervene more expensively further down the line. Far from ending charitable tax reliefs for some, the government should be working with the sector to increase their use. Charities have lost over £1.7bn in government income since the recession according to our review into the financial sustainability of the voluntary sector. Even with some increases in income elsewhere, we are looking at a £4.6bn annual shortfall in overall sector income by 2018/19, just to maintain the current level of charitable spending. If charities are going to generate the resources required to meet demand for their services, they are going to need to maximise their use of tax reliefs so that the value of donations are maximised and costs are kept down. Ms Webb also fails to reference the costs to charities from problems with the current tax system. Irrecoverable VAT costs the charity sector up to £1.5bn a year, and sucks in resources that otherwise could be spent on providing public benefit. The government has recognised this problem with some targeted reliefs for certain parts of the charity sector, but this is an issue which affects a much bigger group. All this doesn’t even touch on the national insurance contributions and other taxes that charities pay in their operations – just one of the ways that charities contribute to our economy. We should never apologies for the unique position they occupy in the tax system. Ultimately, it is society that benefits from these reliefs though the work of charities. « Back to all blog posts