Better late than never
Melora Jezierska looks forward to some overdue progress on simplifying and improving the tax regime for charities.
The government’s commitment to improve the way tax policy is formulated is an important opportunity which holds significance for the charity sector as well as the business community. In, Tax Policy Making: a new approach1, a supplementary document released with the Emergency Budget, the government acknowledges that it is not only the content of policy, but the way in which tax law is made that determines the effectiveness of the system. In light of this, the document proposes a number of reforms to the process to foster predictability, stability and simplicity.
In making the case for change, the document identifies a lack of clear strategy such as late consultation; length and complexity of the tax code; uncertainty stemming from the volume and timings of tax changes and inadequate parliamentary scrutiny, as concerns with the current system. It might come as a surprise to some that charities are affected by the majority of tax decisions.
Therefore, there are a number of changes to the tax policy making process which will have important implications for charities.
Consultation – at last
Perhaps the most important detail outlined in the document is the government’s pledge to engage in effective consultation. This will ensure that legislation is correctly targeted and crucially, is correct first time. Charities are relative outsiders in the policy making process. Consultation with the sector is often an afterthought of policy makers. The decision last year to withdraw the VAT exemption available on the acquisition or construction of a new building if used for 90 per cent charitable purposes, for example, was made without any prior warning or consultation with affected parties.2 This year, the controversial fit and proper person test, was pushed through without open and transparent consultation.3 Both changes created headaches for charities, and in situations like these sector bodies have to work with HMRC to mitigate the impact at a later and less efficient stage.
Tax Policy Making proposes logical improvements to the current consultation process, including a commitment to consult at each stage and to set out clearly the underlying rationale, objectives and assumptions for each policy change. However these will only be effective if the sector is included in the process. To this end, making it a requirement of the proposed Tax Impact Assessment (TIA), that the policy maker must calculate a proposal’s impact on the charity sector would go some way. Adopting this within the TIA is a simple but effective step and will lead to a better understanding of the potential outcomes of the legislation.
Complexity
Another key concern for the sector, is the way in which the policy making process adds to the complexity of the tax system. Frequent and piecemeal changes have caused the tax code to double over the past decade (it currently stands at over 11,000 pages4), making it difficult for charities to navigate. Of significance to the sector is the government’s focus on simplifying reliefs and exemptions. Charities benefit from a package of generous reliefs (over £1bn was repaid to charities on donations through Gift Aid in 2009-105), however the difficulty of administering these often restricts take-up, especially amongst smaller organisations. A recent survey, conducted by CFDG and others, found that 43 per cent of charities do not maximise their potential income through Gift Aid6, for example. To reduce this complexity, Tax Policy Making advocates creating a more robust system to ensure reliefs are justified (a review is to be undertaken by the newly created Office of Tax Simplification). In the current economic climate charities face difficult times, but there is a general understanding that the public purse cannot stretch to provide more reliefs.Engaging with the sector to simplify existing reliefs will reduce complexity as well as allowing increased take up. This will be particularly valuable to charities.
Anti-avoidance measures
Another notable proposal to reduce complexity is the government’s commitment to take a more strategic approach to tax avoidance. Anti-avoidance measures have in the past hit charities hard. The substantial donor rules were intended to prevent the wealthy from using charity donations to avoid tax but proved a hindrance to charities.7 Many struggled to understand how the legislation worked in practise, and faced a huge administrative burden (an estimated £100,000 was spent across the sector on additional admin costs). Some even turned away large donations as compliance proved impossible. HMRC eventually committed to changing the rules after conceding they were flawed, but by then charities had poured resources into managing and challenging the legislation. Taking a more measured approach is essential if anti-avoidance legislation is to target the few perpetrators rather than penalising the many.
A better tax environment
Tax Policy Making is a promising step towards creating a better tax environment for all. However it is essential that the government recognise that charities (as well as individuals and businesses) are stakeholders in the policy making process. CFDG will be submitting a representative response to the document, highlighting the significance of the proposals to charities.
1. www.hm-treasury.gov.uk/junebudget_tax_ policy_making.htm
2. www.charitiesdirect.com/caritas- magazine/ return-to-vendor-496.html
3. See ‘Spectre of Persche’ by Simon Weil in Caritas, issue 32, July 2010, page 24
4. www.hm-treasury.gov.uk/ press_29_ 10.htm
5. www.hmrc.gov.uk/stats/charities/ table10-1.pdf
6. www.cfdg.org.uk/cfdg/files/policy/Policy_ cfdg_GiftAid_Simplification_Survey_ Results.pdf
7.See ‘Sledgehammers and nuts’ by Andrew Robinson in Caritas, issue 12, December 2008, page 13
Author: Melora Jezierska
Melora Jezierska joined CFDG’s policy team in June 2010.
After graduating from the University of Bristol with a master’s degree in international security, she worked as a parliamentary researcher for an MP.
She has also previously worked in a number of banking roles, most recently at Merrill Lynch.
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