Reforming charity taxation: towards a stronger civil society

Sir Nicholas Montagu is the chair of the Charity Tax Commission. As chairman from 1997, he led the Inland Revenue through the greatest changes in its 200-year history, spearheading the drive to make it more customer-focused. Nick is currently chairman of the Financial Ombudsman Service and until August 2017 was Chairman of Council at Queen Mary University of London.

Time for change

When I chaired the Inland Revenue, I saw at first-hand what a powerful tool tax reliefs could be in promoting socially beneficial behaviour and worthwhile causes. Since I left, the number and value of tax reliefs have changed, but their importance in achieving certain policy objectives remains crucial. That’s particularly true of the reliefs that support charities in their vital work.

The UK is an incredibly generous place. Every day, millions of us give money to the causes we care about, enabling charities to do amazing (and often necessary) work on our behalf, whether that be supporting local communities, furthering medical research, protecting our heritage and environment or driving social change.

I was delighted when NCVO asked me in the Autumn of 2017 to chair the Charity Tax Commission to undertake a full review of the charity tax system. The question we have been grappling with ever since is this: could the tax system be improved so that good causes get more with minimal cost to the Exchequer?

It’s 20 years since these issues were looked at properly. In that time the way we live – and the way we give – has changed completely. That’s left us with some rather clunky processes which belong in an analogue age rather than the digital times we are in now.

We have now published our report and made a series of recommendations – some to enact quite quickly and others that require concerted action in the longer-term and I know that NCVO and others will be working hard in the months and years ahead to take these forward. It’s in everyone’s interest that they do.

Our recommendations

• We think higher-rate taxpayers should be able to pass their tax relief onto their chosen charities more easily, potentially boosting funding for good causes by around £250m a year. While a universal Gift Aid donor database would simplify things for charities, helping to make inroads into the £560m of Gift Aid that goes unclaimed each year.
• Reforming business rates would prevent charities losing out on rate relief when they set up trading subsidiaries to comply with other rules, while VAT simplification would save charities further admin, encourage better partnerships working.
• In terms of incentivising giving, removing VAT from wills that include a charitable donation would give solicitors a greater incentive to raise the question of whether someone wants to leave a gift to a charity in their will. We also think it should be compulsory for employers above a certain size to offer a Payroll Scheme.
• Looking to the future, we also recommend that government conduct a root-and-branch review of VAT post—Brexit, to help address long-standing systemic anomalies, improve efficiency and increase charitable activity. Similarly, we also believe the time is right for a wholesale review of business rates, taking into consideration the increasingly digital world in which charities operate and the equity of the relief’s distribution.

Where next?

For the most part our recommendations are aimed at government, but we firmly believe charities themselves should also play their part. That’s why we propose that charities with annual revenue of over £1m should publish detailed information in their annual reports about the money they receive from tax reliefs, to help build public trust.

You can read our full set of recommendations here.

For my part, chairing the independent commission has been a great privilege and I’m grateful to all those I’ve worked with, including my fellow commissioners, our advisory groups, a whole host of stakeholders from across the voluntary sector and, last but not least, NCVO itself.

Working together, let’s hope we can create a system that better supports charities of all shapes and sizes, now and into the future.