The National Council for Voluntary Organisations (NCVO) is the largest representative body for charities and voluntary organisations in England. NCVO has over 15,000 members ranging from large ‘household name’ charities to small community organisations. NCVO is also the national body for volunteering in England.
This submission sets out several proposals made by the Independent Charity Tax Commission that would help maximise the voluntary sector’s role in supporting the government’s ‘levelling up’ agenda and post-Covid-19 recovery efforts. It accompanies a joint response submitted alongside Charity Tax Group, Charity Finance Group and the Chartered Institute of Fundraising, which focuses on the general rationale for the tax treatment of charities and the importance of protecting the income that the charity sector receives from the current suite of tax reliefs.
Tax reliefs support the work of charities and allow them to amplify the public benefit they provide. Charities and community groups are a vital component of a healthy social infrastructure, by providing advice, services and support networks in such areas as healthcare, education and training, childcare centres, social care and youth services. These social resources help people lead better lives and participate meaningfully in society and the economy.
A healthy social infrastructure will be crucial to the success of the government’s ‘levelling up’ agenda and post-Covid-19 recovery efforts. The pandemic has exacerbated many pre-existing social inequalities such as poverty, lack of access to high quality public services, safe housing and health and social care services. Charities can help the government ensure that opportunity is more evenly distributed across society, ultimately enabling more people to contribute to, and benefit from economic growth and future prosperity.
Supporting social infrastructure should be a key focus of any post-pandemic tax framework. The pandemic has reduced the charity sector’s capacity to provide support to those most in need. Throughout the crisis, charities have seen an increase in demand for services coupled with a significant decrease in income. A recent survey carried out by NCVO in partnership with the Chartered Institute of Fundraising and Charity Finance Group shows that during lockdown (between 23 March – 12 May 2020) on average, respondents received 29 percent less income than budgeted, while 24 percent reported a significant increase in demand for their services. Looking forward, a survey conducted by Pro Bono Economics has found that over four-in-five charities (85 percent) expect a negative impact on their income this financial year, with roughly one-in-five (18 percent) expecting an income drop of more than half. Alongside this, two-in-three (68 percent) expect demand to increase due to Covid-19. These findings support previous research conducted by Pro Bono Economics which found that UK charities are facing a £10.1bn funding gap over the next six months with incomes expected to drop by £6.7bn while demand for support rises by the equivalent of £3.4bn.
Charities stand ready to support the government and communities in the same way they have done throughout the pandemic. But without more targeted policy interventions by government, the charity sector that emerges from this crisis will be considerably reduced in size and scope, to the detriment of communities across the country. By boosting charity income and private philanthropy, the proposals set out below would represent a significant investment in the country’s social infrastructure as we seek to rebuild the economy, with minimal cost to the taxpayer.
The proposals below are guided by the ‘three pillars’ of charitable tax reliefs set out by the Independent Charity Tax Commission.
Government should consult on the Charity Tax Commission’s recommendation that higher-rate and additional-rate relief should go directly to the charity as the default, with an option for donors to opt out.
As it currently stands, donors paying additional and higher-rate tax can reclaim the difference between the basic-rate tax (already claimed by the charity) and their higher-rate as a rebate. If the value of higher-rate and additional-rate relief went directly to the charity as the default (with an opt-out if donors specifically requested it), on top of the basic-rate relief they already receive, charities would receive more income, enabling them to increase the public benefit they generate. While the present system theoretically allows higher-rate donors to achieve the same outcome by simply increasing their donation to allow for the relief, in practice many do not do this or even reclaim their rebate.
Research indicates that to increase overall donations, match-style tax incentives (such as the Gift Aid top-up that charities receive) are likely to be more effective than rebate-style incentives (such as the tax-deductible portion of Gift Aid that donors themselves receive). The Chartered Institute of Fundraising also notes that the ability to claim tax back through a taxable deduction is more of an incentive for higher-rate taxpayers at the wealthier end of the scale (where individuals often have wealth managers and advisers). Redirecting higher and additional rate relief to charities could therefore incentivise individual donations to, participation in and support of charitable activity. It would also be clearer to the public that the intention of Gift Aid is to help charities, not the individuals giving donations.
We recognise that further exploration into the behavioural impact of redirecting higher rate Gift Aid to charities would be needed before changes in the tax system should be implemented. We also note there are practical challenges associated with redirecting higher-rate relief to charities. Preliminary research should therefore be conducted to determine the impact on donor behaviour and how practical administrative obstacles – such as determining the unknown marginal tax rates of donors before the end of the tax year – could be overcome.
Government should consult on the feasibility of a Universal Gift Aid Declaration Database (UGADD) to avoid the administrative burden of a Gift Aid declaration being made for every donation, as recommended by the Charity Tax Commission.
A Universal Gift Aid Declaration Database (UGADD) would allow donors to complete a single, enduring universal declaration covering all their subsequent gifts to charities. This would simplify the administrative requirements for Gift Aid and help address HMRC’s concerns about the tax gap and ineligible Gift Aid claims.
Such a system would require donors to complete a single declaration and submit this to a separate database, rather than making the declaration for every donation. Charities could then access the database in order to see whether a given donation has a Gift Aid declaration against it, possibly using a unique identifier, such as a national insurance number, or a ‘Gift Aid card’ to show a donor has signed up to the database. This would provide a better customer experience for donors and a more efficient and simpler claims process for charities, thereby increasing take-up of Gift Aid.
Investment in digital infrastructure such as a UGADD would also help HMRC eradicate incorrectly claimed Gift Aid, as it would enable the automatic cross-checking of income tax records with donations to determine whether sufficient tax has been paid to cover a Gift Aid claim. It could also help shed more light on the distribution of Gift Aid claims.
Following its consultation on Gift Aid and Digital Giving in 2013, government should re-explore the feasibility of a UGADD, including how its operation would potentially impact on charities of all types and sizes. While the Government was not inclined to develop a database at the time, technology has advanced since the consultation. The creation of a UGADD would represent an important step towards the future-proofing of Gift Aid as donors are becoming more mobile and cash transactions increasingly digital. If alternative opportunities for streaming the declaration process emerge in the coming years – including the use of personal tax accounts – these should also be considered.
Government should consult on whether to roll out rate relief to all wholly-owned subsidiaries that raise money for a charitable purpose, as recommended by the Charity Tax Commission.
Property costs are typically the second largest item of expenditure for most charities after labour costs. Business rates relief is therefore extremely valuable for the charitable sector, representing at least a third of the value of all reliefs received.
Many charities set up trading subsidiary companies in order to comply with the charity rules on trading, such as a charity shop or a café in a museum. However, this can lead to the loss of relief when the trading subsidiary is separately assessed for business rates and deemed to be the occupier. This runs counter to the spirit of rate relief legislation and has been recognised as an unintended consequence of the charity trading subsidiary model.
However a charity decides to set up its structure, its need to raise money for its charitable purpose remains the same. Government should therefore consult on whether to roll out rate relief to all wholly-owned subsidiaries. This should be accompanied by guidance aimed at improving understanding of how charities operate, to tackle the perception that many charities enter artificial arrangements, such as short-term tenancies, to claim business rate reliefs.
Government should conduct a full review of the way that VAT operates for charities as the current contains systemic anomalies that disincentivise efficiency and impede charitable activity, as recommended by the Charity Tax Commission.
The everyday administration of VAT creates substantial challenges for many charities. VAT is one of the most complicated areas of taxation, and the rules facing charities are one of the more complex areas of VAT. As a result, charities spend valuable resources on sourcing external professional advice to help them navigate the VAT system they face, which could be more directly spent towards public benefit.
The impact of VAT on charities depends on the activities they undertake and whether they charge for their services. Those that do not do so are treated as the final consumer even when they are not. As a result, they are unable to recover VAT paid on purchases (input VAT) that support their activities. In addition, most charities that charge for their services are unable to recover input VAT because their services are exempt. The Charity Tax Group estimates that this irrecoverable VAT burden costs the sector at least £1.5 billion a year. While larger charities often have trading arms and employ accountants and tax specialists to ensure that they can use the available VAT reliefs, smaller charities are rarely in this position, despite much of their operating costs attracting irrecoverable VAT. They often use accounting systems that are unable to determine the amount of VAT they pay.
The current regime contains systemic anomalies that disincentivise efficiency and effectiveness and impede charitable activity. Government should therefore bring together charities and tax authorities to explore the challenge that irrecoverable VAT presents to the sector, drawing on the Charity Tax Group’s forthcoming research into VAT relief for charities, which will look to quantify the VAT relief that charities claim and evaluate the social benefit VAT reliefs generate.
Fees for writing charitable wills should be exempt from VAT when a legacy gift is included, as recommended by the Charity Tax Commission. This would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will.
According to NCVO’s Civil Society Almanac, voluntary income for charities – both donations and legacy giving – has remained relatively stable in recent years. Despite this, many charities believe that the UK’s potential for philanthropic giving is not being fully realised. For instance, evidence submitted to the Charity Tax Commission’s call for evidence by Philanthropy Impact indicates that among the UK’s millionaire population the median annual amount given is just £240-£500, while only 5 per cent of the UK’s 400,000 millionaires give at a level that could be considered generous.
Remember A Charity research indicates that 35 per cent of people in the UK say that they would be happy to leave a gift to charity in their will after having taken care of their friends and family, but currently only around 6 per cent do so. Removing VAT charges from the cost of writing a will when a legacy gift is included would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. It is estimated that if all professional advisers referred to the potential of legacy giving, this could generate a further 15,000 charitable legacies a year.
By making fees for writing charitable wills exempt from VAT, Remember a Charity estimates that the annual cost to the Treasury would be in the region of £375,000 for the additional gifts generated (and £750,000 in total), while a conservative estimate of these additional gifts’ value would be a further £72 million a year for good causes. This modest change could therefore result in far more charities receiving legacy income, enabling them to increase the public benefit they deliver across the country.
 NCVO established and provided secretariat duties for the Independent Charity Tax Commission. The Commission’s full report can be accessed here: https://www.ncvo.org.uk/policy-and-research/funding/tax-and-reliefs/charity-tax-commission
 UK charities received an estimated £3.79bn in tax reliefs in 2018/19.
 Black, Asian and Minority Ethnic people are twice as likely to die from COVID-19 an estimated 2.2 million people in the UK are severely food insecure
 Based on 455 responses, Pro Bono Economics Covid Charity Tracker, 3-7 August https://www.probonoeconomics.com/resources/weathering-storm-pbe-covid-charity-tracker
 Based on 425 responses, Covid Charity Tracker, 3-7 August https://www.probonoeconomics.com/resources/weathering-storm-pbe-covid-charity-tracker
 Charitable giving and tax policy: a historical and comparative perspective (2012) http://econ.lse.ac.uk/staff/clandais/cgi-bin/Articles/full_volume.pdf
 Business rates relief was worth £2.2 billion to UK charities in 2018/19.
 Philanthropy Collaborative, based on high-net-worthy survey data provided by Scorpio Partnership.