Schedule 19
Finance Bill
9:00 am
Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and 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.