Gift aid: limits

Question proposed, That the clause stand part of the Bill.

I welcome you to the Chair this morning, Mr. Illsley. Last year, we discussed in some detail the application of gift aid to museums and properties that give to their supporters free or discounted access to their facilities. This year, we find ourselves discussing the application of gift aid to charities that give their donors other benefits in recognition of their support.

Gift aid was introduced by the then Chancellor John Major in his 1990 Budget to encourage gifts to charities. It has been successful. According to a recent written answer from the Secretary, Cabinet Office, the hon. Member for Doncaster, North (Edward Miliband), it is worth £750 million per annum to the approximately 300,000 charities in the United Kingdom. The clause is designed further to encourage charitable giving by allowing charities to increase the benefits that they give to their supporters while remaining in the gift aid scheme.

HMRC’s guidance on gift aid includes the following explanation:

“A benefit is: any item or service provided by the charity or a third party to the donor or a person connected with the donor in consequence of making of the donation.”

The guidance goes on to give generic examples of a theatrical charity giving its supporters a ticket discount, and a medical charity giving its supporters a magazine, a pen and even a dinner for two. In essence, those charities wish to give to their supporters incentives to continue their support. Under clause 59(1)(a), the allowed fringe benefit to the donor as a result of his gift to charity will increase from 2.5 per cent. to 5 per cent. of the value of the donation. That will mean that someone who gives £10,000 will be able to receive a £500 incentive, instead of the original £250, without jeopardising gift aid status.

In its reaction to the Budget, the law firm Harbottle and Lewis explained:

“It is often difficult to quantify a benefit received by a donor from a charity so the increased limit will give charities more room for manoeuvre without jeopardising the availability of Gift Aid.”

Clearly, we welcome that. The Chartered Institute of Taxation has also welcomed the changes. According to its evaluation, they might be of particular help to amateur sports clubs. It has a query about thresholds, however, which I should like to raise with the Economic Secretary. The institute has highlighted the fact that although the upper limit has been extended, that extension applies only to those who donate £1,000 or more a year. For donations below £1,000, the limit remains at 2.5 per cent. As the CIOT has pointed out:

“It seems strange that only some of the limits, originally set in 1990, have been altered, and that smaller donors are still subject to 1990 values. The effect of the proposed change will be to allow a donor who makes a donation of £1,001 to receive a benefit of £50.05 yet a donor who makes a donation of £1,000 may only receive a benefit of £25.”

That seems strange indeed. That bias against small donors seems to echo the bias against small companies in the Budget. I should therefore be interested to hear the Economic Secretary’s rationale for the decision to raise the higher bracket but leave the basic threshold unchanged.

There is also a practical point on the operation of gift aid. The Royal Aeronautical Society has written to me with a suggestion. The letter came from its chief executive, Keith Mans. As I am sure you will recall, Mr. Illsley, he is also a former Member of this place. His letter highlights the problem of gift aid donations as they relate to second-hand goods and charity shops. To summarise the problem succinctly, if an individual donates a gift to a charity shop, the charity can claim gift aid on the article only after it has been sold and after it has subsequently contacted the donor to ask if the donor is happy for gift aid to apply.

Mr. Mans comments:

“In practice, of course, it is almost impossible to do this as it would mean that when any article is sold the donor has to be contacted.”

His suggested solution is quite straightforward. He says:

“My suggestion is this rule is modified so that there is a presumption at the time the goods are donated (provided that at that point the donor signs a gift aid form) that when the goods are sold the donor wishes the proceeds of the sale to remain with the charity and not to be returned to the donor.

This would mean in practice that, provided an inventory is kept by the Charity Shop of the names of the donors and the goods they have donated, it would be a simple matter when articles are sold, for gift aid to be claimed back.

In my view, this does not constitute a change in the law but is simply a re-interpretation of the rules, to ensure that the original intention of the Treasury to allow the recovery of gift aid, on articles donated to Charities, can be done in a practical way.”

I look forward to hearing the Minister’s response to that suggestion in his winding-up remarks.

I very much sympathise with the hon. Gentleman’s argument. Is it not the case, however, that people who make charitable donations must record those  donations in their tax returns? Consent might be given in the charity shop, but there must still be a way of informing individuals so that they can include the relevant information in their tax returns.

I take the hon. Lady’s point. It would depend on whether the individual was determined to include the information in their tax return at year end. I suspect that in most cases they would not necessarily be highly motivated to do that, but that they would be more concerned that the charity should get the gift aid. The suggestion is a practical one that comes from another source and I hope that the Minister will consider it. The hon. Lady is technically correct, but the Government might want to consider the proposal from the practical point of view.

Finally, Budget changes to the gift aid rules might have a further effect on charities that the clause will go only a little way to addressing. There has now been wide press comment that buried in the detail of the Budget is a likely knock-on effect whereby the Chancellor’s proposed changes in the basic rate of income tax will cost charities up to £70 million. There has been such concern in the charitable sector about the possible effect that eight heads of major charities wrote to The Times on 23 March to express their concern. The letter said:

“Sir, Gordon Brown’s tax cuts will mean that UK charities are likely to lose more than £70 million in income.

Under the Government’s Gift Aid scheme, charities can reclaim the tax paid on donations by UK taxpayers. With the reduction in the basic rate of tax from 22 to 20 per cent., Gift Aid income will be reduced by more than 10 per cent. We urge the Government to consider compensating charities for this significant reduction in income.”

I shall not read out all the signatures, but they included those of Professor Alex Markham, the chief executive of Cancer Research UK, Kevin Cahill, the chief executive of Comic Relief, and Keith Hickey, the chief executive of the Charities Finance Directors Group.

The challenge for charities is compounded by the pressure on lottery funding on which many charities now rely, and by the additional £675 million of lottery money that was recently reallocated by the Government to the financing of the 2012 Olympics on top of the £750 million that the lottery was already providing for that event. That money will no longer be available to charitable good causes, which will result in further intensification of the pressure on charities in the United Kingdom.

The clause is a welcome move to amend the gift aid rules to allow donors to receive greater fringe benefits from supporting charities, while still remaining in the gift aid scheme. To that extent, we support it. However, in discussing gift aid I should like to press the Minister on three points.

First, what is the Minister’s view on the Chartered Institute of Taxation’s point about thresholds and why were those for more wealthy donations increased while the others were left unchanged? Secondly, would he at least think about the practical point in relation to gift aid and charity shops and does he have any initial view on it? I say this without irony: if he wants to consider that, he can write to me about it. Thirdly, given the potential double whammy that charities will suffer  from the reallocation of lottery funding to the Olympics and from changes in the basic rate of income tax, what further measures, if any, are the Government considering to the gift aid regime to account for that?

I do not intend to repeat the arguments that the hon. Gentleman has just made. I shall simply add my welcome to the extension of the benefits to community amateur sports clubs. I can think of many examples of clubs in my constituency that will benefit hugely from that. I have only one question. Is anything being done to make sure that such sports clubs are aware of their new entitlement? The people whom I have in mind will not necessarily be paying particularly close attention to the proceedings of this Bill.

I should also like to reiterate briefly the comments that have been made about the asymmetry of treatment between larger and smaller donors. Is that an intentional change? Some comments on that would be welcome. There are also concerns more widely about gift aid and how vulnerable it is to changes in the income tax system and other changes more generally. Representatives from a museum came to me last year because they were concerned about some gift aid forms that they had produced to try to maximise their benefit. Because they had not required visitors to give their postcode, however, the forms were invalid and they could not claim gift aid. That represented a huge loss of expected income.

Gift aid is a complicated system. I am therefore concerned that, as was reflected in the exchange between my hon. Friend the Member for Romsey (Sandra Gidley) and the Secretary, Cabinet Office, the hon. Member for Doncaster, North (Edward Miliband), £70 million of income will be lost overall when the income tax changes kick in next year. That highlights how vulnerable charities are to changes on the periphery that can have a major impact on their income. Perhaps it is time for the Treasury to look again at the gift aid system to see whether it can be insulated against such changes, and whether a system can be created that is clear, well defined and not subject to the changes and uncertainty in the years ahead.

As hon. Members have said, the clause will increase the limits on the value of benefits that can be received by individuals and corporations who make qualifying donations to charity. The adjustments will increase the cap on the benefits that donors can receive in a year in response to gift aid donations from £250 to £500. In addition, the percentage limit for benefits received in return for donations over £1,000 will be increased from 2.5 per cent. to 5 per cent. Those benefit limits allow charities to build sustained relationships with donors by offering them a gesture of recognition.

The limits have been unchanged since the introduction of gift aid in 1990 and we believe that the changes in the Bill will help to encourage increased philanthropy, as appropriate levels of benefits can increase scope for institutions to build up lasting relationships with donors. As the hon. Member for Falmouth and Camborne highlighted, for the purpose of gift aid donations by individuals, community amateur sports clubs are treated as charities and so will also benefit from the increase in benefit limits.

As the hon. Member for Rayleigh said, reaction to this change has been positive. He asked me three questions. First, he asked why we were only increasing the threshold limit for larger donations. As he said, these changes have been welcomed by the Chartered Institute of Taxation and the London Society of Chartered Accountants. The benefit limits have not been increased since 1990. It was sensible to review them. For larger donations, we understand that the current limits constrain charities when making gestures of recognition to reflect the scale of donation. That therefore restricts their ability to deal with and develop relationships with large donors.

We feel that the existing limits for smaller donations are already generous. For example, if a donor makes a gift of up to £100, a charity may thank them with items or services worth up to £25, which in that case would be 25 per cent., rather than 2.5 per cent. The changes were specifically intended to increase scope for charities to recognise larger donations and develop relations with their wealthy donors. It was in that area, rather than on smaller donations, that we perceived there to be a problem. That is why we have acted in this way, but if the sector makes further representations, we can consider those in due course. The representations that were made concerned larger donations.

On the second point, the representation from the Royal Aeronautical Society and the former Member of this House, Mr. Keith Mans, I am happy to commit the Treasury to consider the matter. I cannot give the hon. Member for Rayleigh an answer today. It is not an issue on which he has tabled an amendment. On this occasion, I had no advance notice of the detailed point, so I am not in a position to respond to it outside the scope of the clause. I will, however, examine the matter. We will be happy to meet Mr. Mans—on the ground rather than in the sky—and I will happily commit the Treasury to writing to the hon. Gentleman about the matter, and to meeting Mr. Mans.

On the point that the hon. Member for Falmouth and Camborne raised in passing about awareness, we have explicitly flagged the extra benefit limits to the Community Amateur Sports Clubs forum as well as the Central Council for Physical Recreation. We will endeavour to ensure the widest awareness.

That brings me on to the third point about the impact of Budget changes. When we make changes to the tax system, they have an impact more widely. Those impacts are considered in making Budget decisions. At the same time, however, we always work with the sector to try to ensure that we increase awareness and opportunity. Although the amount of gift aid repayable to charities is affected by the change to the basic rate of tax, we believe that there is significant scope for the charitable sector to increase the proportion of donations that enjoy gift aid tax relief.

The Charities Aid Foundation has stated that an additional £700 million of gift aid tax relief could potentially be claimed. The consultation that we announced in the Budget is aimed at trying to find particular ways to raise awareness and to change the regulations so that we can increase the amount of charitable giving that benefits from the tax relief. We hope that in the coming years, the strong upward trend in donations will continue, and the upward trend in donations receiving tax relief will continue. I remind  the Committee that in 1996-97, the amount of basic rate gift aid to charities was £134 million. By 1998-99 that had risen to £306 million. By 2005-06, the amount had risen to £750 million. There has been a substantial rise in the amount of tax relief for gift aid, but this is one of those occasions on which the Treasury would like the cost to the Exchequer to go up, not down.

Question put and agreed to.

Clause 59 ordered to stand part of the Bill.