Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

The schedule introduces a provision for HMRC to make payments to charities in respect of donations that they receive that are subject to the gift aid scheme. It is to be called the gift aid supplement. The measure is intended to address the consequences of the reduction in the basic rate of income tax from 22p to 20p. An essential part of the symmetry of the arrangements of reliefs and allowances against income tax is that, when the income tax rate goes down, the value of the relief goes down. For my part, I certainly regard it as an important principle that tax reliefs are given against income tax, so when the rate reduces, the value of the relief will reduce.

Increasingly, however, we are debating the effect of reliefs, such as the impact on pension savings when the value of the tax relief is reduced. I am sure that other hon. Members who have a pension provision that they fund themselves will have had the same experience as me, and have received a letter from their pension provider telling them that because the income tax rate has gone down, their contribution will have to increase to maintain the benefit level.

Although the difficulties for charities were identified when the reduction in the basic rate of income tax was announced in the 2007 Budget, they are particularly vulnerable to the loss of income arising from the reduction. When that reduction was announced, it was also announced that there would be a thorough review of the take-up of gift aid. The implication—what was probably in the mind of the Government at that time—was a recognition that charities would face a loss of income. In a rational world, income tax-paying donors would give a little more, because they were being taxed a little less, and thus would compensate for the loss of the gift aid tax relief. In the real world, however, people do not make those fine-tuned adjustments. Certainly, when people are under pressure financially in other areas they are unlikely to make that adjustment. The thorough review of take-up was perhaps seen as a way of squaring the circle. If more effective use could be made of the gift aid scheme so that more of the money donated to charities was channelled through it, perhaps there was a way to increase the amount of income on which gift aid relief was claimed and thus compensate charities for the cut in the basic rate of income tax.

A consultation paper was published last summer and the view of the charitable sector is that there was not a great deal of meat in it. The sector responded by making various proposals, some of which were quite radical, about how the gift aid scheme might operate. None of those proposals, unless the Minister tells us differently today, has been taken up by the Government, who have no stated intention of doing so. The proposals included, for example, introducing some form of automatic refund gift aid contributions using an averaging process.

The announcement in the 2008 Budget of the measures in schedule 19 reflects the failure of the process that was kicked off in the 2007 Budget, to try  to find another way of compensating charities by improving the uptake of gift aid. It would be useful if the Financial Secretary made it clear to the Committee whether it is still the Government’s objective in the long term to improve the take-up of gift aid in charitable giving, and whether what we have before us is, in fact, the Government’s medium-term solution. The schedule introduces a transitional relief, whereby charities will be compensated directly from HMRC for the reduced gift aid rebate and thus they will be kept whole, as it were, for a period of three years. That prompts the question, what happens after three years? Is that relief simply intended as a stop-gap measure? One or two cynics have remarked that three years gets us safely to the other side of the next general election. Is the period of three years related in a logical and explainable way to a longer-term strategy to address the underlying problem that has been created? Members of the Committee probably all agree that the best way to do that is to increase the take-up of gift aid so that charities no longer have to rely on the supplementary rebate that compensates for the missing income. Some indication from the Minister on the long-term thinking would be greatly appreciated.

The proposal in the Bill was welcomed by the charitable sector. If you were told, Mr. Hood, that you would be deprived of X per cent. of your income, you might worry about it for a year, but if you were then told that somebody would give it back to you for three years, your initial reaction would be one of gratitude. Perhaps only after two years would you start to think about what would happen after the three years. To some extent, this announcement has taken the pressure off the search for a longer-term solution to improve the take-up of gift aid or find another way of mending the hole in the fundraising of charitable organisations. We should try collectively to ensure that we do not allow this measure to distract attention from the underlying issue.

I have a specific but important question on schedule 19. Paragraph 1(5) will introduce condition D. There are four conditions on the receipt of gift aid supplement. Condition D is that the claim by the charity is allowed, which strikes the Opposition and most people in the charitable sector as rather an odd condition. It implies a degree of discretion by HMRC on whether to allow a claim by a charity. It is not a usual provision for an entitlement written into law that the claim to the entitlement is to be “allowed”, as if by some discretionary process.

I have not tabled an amendment to delete condition D because I would like to hear from the Minister how it is to be interpreted. Perhaps there is a technical reason for its inclusion, and the Minister can put on the record an assurance that properly made claims for gift aid supplement by charities will automatically be allowed, and that this is a mere piece of bureaucratic gobbledegook, not a real test implying that charities have to satisfy some additional conditionality that HMRC may introduce at an official level. That is the key issue that I wish to raise with regard to the schedule. If the Minister addresses it and the more general question about the medium-term solution, I should be very grateful.

Nick Palmer (PPS (Malcolm Wicks, Minister of State), Department for Business, Enterprise & Regulatory Reform; Broxtowe, Labour)

I welcome the comments we have just heard, which were sensible and helpful. Going slightly wider, it seems that there is no  overall rationale for how we work tax relief for charities. In effect, we say that if a person is taxed at the standard rate we will refund the tax to the charity, but if they are taxed at the higher rate, we will refund it to the individual. That is something that we have got used to, and it is not an unreasonable position in principle. However, as the hon. Member for Runnymede and Weybridge said, that system leads to uncertainty when the standard rate moves down or up. I wonder if, in the longer term, we should look at decoupling this and having a standard deduction that does not necessarily alter as the standard rate moves up and down.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

Does the hon. Gentleman not accept that that would lead to the decoupling of the concept that charitable giving is something that an individual can do out of their gross income As I made clear, I attach a lot of importance to the idea that certain things, such as charitable giving and pension contributions, can be done by an individual from their gross income, before the tax man has his share.

Nick Palmer (PPS (Malcolm Wicks, Minister of State), Department for Business, Enterprise & Regulatory Reform; Broxtowe, Labour)

That is an interesting point, but there is an essential difference between pension contributions and charitable ones. Pension contributions are, in effect, deferred income. If we, as individuals, have more immediately available income because tax rates go down, it is a rational and individual choice as to how much of that we choose to put into our pension funds. Whether we do, or do not, we are profiting directly. Charitable contributions are slightly different. Topping up our charitable contributions requires a separate decision. If we do not, do so the default position is that we profit but the charity loses. In the case of pension funds, we profit either way.

Basically, I welcome the principle that we need to consider the issues more widely. I am sure that the Financial Secretary will respond more fully to the specific point made by the hon. Gentleman, but HMRC has to protect itself against the possibility that the charity is unknowingly submitting a claim that is not valid—for instance, because the person who made a contribution to the charity is not a standard rate taxpayer.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

This has been a helpful, brief discussion. All the proposals made during the consultation were considered and discussed across government. I met a number of organisations that made representations. The proposals are complex, requiring a full assessment of any risks to the current system and the funds that flow to charities through it. We are continuing to develop our thinking on gift aid, but at present our priority is to protect the status of this popular tax relief, rather than risk losing the benefits of the system.

We carried out a full and open consultation. As one might expect in such a broad area, views vary widely across the charitable sector. We responded to issues on which there was consensus: transitional relief, the provision of better guidance—and there has been a lot of effort from HMRC to offer a simpler approach, and tools to help charities drive up gift aid. In response to my hon. Friend the Member for Broxtowe, the consultation showed that opinions on higher-rate gift  aid varied widely, with some people believing that the relief should go directly to the charity, and some people believing that basic rate relief should also go to donors. There was a wide divergence of opinions.

The transitional period is a three-year breathing space to allow charities to adjust to the change in the basic rate tax without it affecting their existing expenditure plans. During that period, charities can drive up more gift aid income with support from the rest of the gift aid package announced in the Budget. In addition, we will work with donors and charities to develop an understanding of donor behaviour, using that to inform further thinking about gift aid—again, in order to continue driving up the take-up.

The hon. Member for Runnymede and Weybridge asked specifically about condition D, and posed a fair question. The transitional relief will be due to a charity where only the underlying donation and claim meet the requirement of the gift aid scheme—it is an application. Condition D in paragraph 1 ensures that transitional relief will not be payable when the underlying claim is invalid. A claim for gift aid may be invalid for a number of reasons—for example, the claim form may not contain the required information. HMRC cannot be expected to pay the aid in those circumstances and it would be unsustainable to make transitional relief payable, but not the underlying gift aid, in such circumstances

Without the provision, if donor behaviour remained as it is today, it has been estimated that losses for charities would be significant across the whole sector, running to more than £100 million next year. The amount received by charities from the supplement will be proportionate to their eligible gift aid claims. For every £1 of gift aid that is donated, charities will receive 3.2p in supplements, so the charities will continue to receive 28.2p in total for every £1 donated under gift aid.

The proposals in the Budget were widely welcomed by the sector. I acknowledge that, for some, there was a feeling of relief that they could have certainty going forward. There is continuing dialogue with the sector, which was as keen as we were to maintain the nature of gift aid. That formed the basis of much our discussions, and I am sure that there will be a continuing dialogue in the area.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

I shall respond to the Minister’s specific comments on paragraph 1(5). I understand the thinking behind it, but I ask her to consider the language. If she is seeking to say, in that provision, that the underlying claim must be valid, that is already taken care of, because condition A in paragraph 1(2) is that a

“gift aid donation is made”.

According to the definitions in paragraph 7, a gift aid donation means

“a gift which is a qualifying donation”.

If she is telling us that the gift aid claim has to be properly made, we understand that as well.

However, the word “allowed” implies a degree of discretion. The Minister, perhaps unintentionally, has not confirmed for the record that a valid claim is automatically allowed and that there is no discretion.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

I accept the hon. Gentleman’s point. If a claim is properly made by a charity within the law and within the terms of the gift aid scheme, the claim will be allowed. When a claim is allowed, the supplement will automatically be allowed.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

I think that the Minister has given the Committee the necessary reassurance.