Tax breaks for charitable giving – what’s the public benefit?

When George Osborne proposed in the March 2012 Budget that a cap should be introduced to restrict the level of tax reliefs that could be claimed by any one taxpayer, including the tax reliefs that could be claimed for their charitable giving, he can hardly have foreseen the national debate it would provoke. 

To some extent, this was part of the increasingly high-profile debate on taxation generally and the perceived ability of some to be able to avoid paying their ‘fair share’. But the concentration of the focus on the proposed restriction of charitable tax reliefs showed that six years after the introduction of the new public benefit test in the Charities Act 2006, there is still plenty of room for debate on the very nature of charity – the question as to why governments give charities a tax break inevitably prompts the question ‘what is charity and what is it there for’?

At the time of the 2006 Act, the focus of this debate often appeared to turn on the question of why privileged institutions such as independent schools should continue to benefit from charitable status, and therefore for subsidy from the taxpayer.  The approach from the Left at the time was that this should be regulated by the introduction of a statutory public benefit test in the Act itself, although in the end a typically English compromise ended up passing the buck to the Charity Commission who were saddled with a statutory duty to provide guidance on the meaning of public benefit. This has proved to be something of a poisoned chalice. The Commission has worked very hard in producing many hundreds of pages of guidance, and helpfully distilled a number of key principles, but the boundaries of what is for the public benefit remain unclear and the Charity Tribunal case in October 2011 relating to the public benefit requirement for independent schools, showed the difficulty involved in pinning this down.

Intriguingly, the Coalition Government’s Budget in March 2012 took a different approach but one that also implied that the current system might not fully deliver what it ‘ought’ to do. Not only did the Treasury suggest that there continued to be widespread abuse of charity tax reliefs through aggressive exploitation of the reliefs available, but the debate that ensued hinted that some charities might not be addressing public need in the most direct way.

Inevitably, the UK’s straitened economic circumstances mean that there is a particular focus at present on the most efficient use of resources.  The charge being levelled by some in the Spring was that some charities are more ‘charitable’ than others, and that, for example, there is a greater claim on the collective moral conscience for bringing about the prevention and relief of poverty than, say, the financing of the work of one of London’s art galleries. Yet the recognition of the promotion of education, including art and culture, is a time-honoured tradition in English charity law.  The case made by some seemed to indicate that wealthier charitable donors (who benefit most from uncapped charity tax reliefs) are more likely to patronise charities for the advancement of arts and culture, and where a tax break such as Gift Aid is available, they necessarily have a disproportionate role in allocating public funds.

For now, the question has been averted – the Government backed down on their proposals and tax reliefs on charitable donations remain uncapped but the underlying issues will not go away, impinging as they do directly on the allocation of public resources.  The recent furore surrounding the tax affairs of a UK charity run from an offshore jurisdiction shows that this debate is far from over. Should the legal definition of charity be reviewed yet further? Food for thought.

David Goepel, Head of Charities & Non-profit

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