Clause 41 - Gift aid: increase of limits on total value of benefits associated with gifts

Finance (No. 3) Bill – in a Public Bill Committee at 3:00 pm on 24th May 2011.

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

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury) 3:15 pm, 24th May 2011

Clause 41 introduces the first of the gift aid measures that were announced in the Budget, which was presented by the Chancellor as

“a big help for the big society”—[Official Report, 23 March 2011; Vol. 525, c. 962.]

to use his words. It increases the limit on gift aid benefit from £500 to £2,500. As we all know, the Government are placing special emphasis on the role of charities as part of their big society agenda, with the voluntary sector expected to fill the void left by the Government’s cuts. That will not be an easy task, not least because charities themselves are being so drastically affected by the cuts, particularly with the loss of local authority grant funding. That loss is difficult to quantify, because the information has to be collated from all the local authorities across the country and the impact must be assessed on charities large and small.

The Association of Chief Executives of Voluntary Organisations has estimated that charities will lose £900 million in public sector cuts this year and £2.85 billion a year by 2014-15. The association established a commission on the big society and published a report, “Powerful People, Responsible Society”, which warned:

“If the big society is to be a success, the Government will need to ensure that it protects and promotes this sector—and does not allow over-rapid and poorly-managed public spending cuts to damage it disproportionately and irrevocably.”

In addition, Sue Ryder, among other organisations, is leading a campaign against irrecoverable VAT, which we shall discuss when we debate new clause 2. The Charity Tax Group has estimated that the new 20% rate will cost the charity sector an additional £150 million a year in irrecoverable VAT. This year, charities have lost the transitional relief for gift aid, which provided an additional 3p per pound to help them adjust to the reduction in the basic rate of income tax. That loss is estimated to cost them approximately £100 million. Moreover, many charities and groups, such as the National Council for Voluntary Organisations, have called for an extension to the transitional relief fund, arguing that the £100 million was not sufficient to help them adapt to the big society agenda and that it is dwarfed by the additional £250 million that the Government will receive from charities.

Meanwhile, the National Council for Voluntary Organisations reports that charitable giving remains at £700 million below pre-recession levels. In total, taking into account the consequences of all the tax and spending changes, plus the decline in charitable donations, ACEVO has identified a £4.5 billion funding gap. Clearly, that gap will make the charitable sector even more dependent on private donations. Presumably that is why the Government are so anxious to promote charitable giving.

Announcing the change that is proposed in clause 41, the Chancellor stated that the Government would

“encourage wealthy people in our society to give more.”

It is worth noting that recently published Cabinet Office figures show that the poorest 10% of society gives 3.2% of its income to charity, whereas the richest 10% gives only 0.8%, although the amounts that are given by the richest 10% are obviously higher. They could, however, be encouraged to give, as a proportion, a fair bit more.

Will the Minister elaborate on why she thinks that the measures in the clause will encourage people to give more? What estimate has she made of the impact? Will she clarify why the Government have chosen to introduce this measure first, which prioritises wealthy donors, while the new gift aid scheme to enable charities to claim gift aid on small donations more easily is being delayed until 2013? The focus on small donations might be more relevant to small local charities, which rely on lots of people in their community donating small amounts. That would have fitted well with the Government’s big society agenda. So often, the local small charities are hardest hit by cuts to the voluntary sector grant funding, because they are less likely to attract the substantial donations from the big donors.

The ACEVO commission on the big society concluded that the Government lacked “a credible plan” to make the big society a success in deprived areas, finding that nearly 60% of the public did not think it would work in  the most deprived areas. I would appreciate the Minister’s comments. Is there a concern that the big society agenda, with what seems to be a focus—if the clause is an example—on wealthy donors, to the exclusion of smaller but more generous donors, will act to the detriment of communities to which the big society could be of the greatest benefit?

A research study by the South West Foundation into issues currently affecting small voluntary and community organisations, “Crisis and contradiction”, warned:

“The future for community groups is looking very uncertain. 56% of the small community groups who took part in this research have less than 6 months’ running costs in reserves, 49% are experiencing difficulties in raising funds for this year, 78% are having difficulties in raising funds for next year.”

In the light of such reports, does the Minister not think that the Government ought to have gone further to help small community groups, rather than introducing provisions such as clause 41?

The gift aid scheme for small donations is projected to cost the Treasury £50 million in its first year and £85 million in 2014-15, while the changes to inheritance tax to promote philanthropy are estimated to cost £25 million in 2012-13. It is unclear, however, how much clause 41 is estimated to cost the Treasury. Can the Minister tell us the estimated gain for charities’ incomes and how much it will cost the Treasury in gift aid if the measure works as a greater incentive to donate?

Undoubtedly, any additional donations or gift aid will be gratefully received by charities, but they do not seem sufficient to offset the increased bills this year, let alone the funding cuts. As ACEVO said in response to the Budget:

“We will also be making clear that in addition to the positive measures in the Budget, we need action now from the Government to get a grip on local cuts to the voluntary sector.”

According to a recent National Council for Voluntary Organisations survey, 55% of charity chief executives plan to cut staff and 35% plan to decrease the extent of their services by June this year. I would be grateful for the Minister’s comments, and to know to what extent the Treasury thinks clause 41 will help to mitigate the impact of charities’ reduced income from the Government.

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

The clause increases the amount of benefits that charities can provide to their larger gift aid donors, increasing the cap fivefold, from £500 a year to £2,500. We are doing that because the increase in the benefit limit will help charities to build sustained relationships with their largest donors.

As the shadow Minister pointed out, if we look at the amount donated by the wealthiest people in our country and compare it to the proportion of income donated by people on more modest incomes, there is a disparity. Working with the charity sector, we have an opportunity to deliver, if we are willing to look innovatively and creatively at how we can stimulate more charitable giving and a sense of philanthropy, which we might have lost in many respects over time. Not only the tax system can deliver that—the hon. Lady talked about the Cabinet Office paper on giving, which came out earlier this week—but tax has a role to play, and the Committee can see that in the package we proposed in the Budget this year, which included a number of measures.

The hon. Lady also asked about the small bucket donations aspect of our policy, but that is a spending measure, and it takes a bit longer to bring into legislation because the law around it is slightly more complex. By contrast, this measure is a much more straightforward change, which we can introduce quickly in the Finance Bill. However, it will be of benefit, because charities will be able to mark their appreciation of donations from their largest donors with a gift or reward that is still proportionately small—no more than 5% of the donation—without disqualifying the donation from gift aid.

The background to the clause is that donations made to charities by individuals and companies are eligible for gift aid tax relief but only if any benefits that donors receive as a result of making those donations are within certain limits. For donations of more than £1,000, benefits are limited to 5% of the donation, subject to an overriding cap of £500.

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

I may be pre-empting what the Minister is about to say, but she said that what she described as the “bucket donations” clause is a spending clause and therefore it will take longer to introduce. I appreciate that on the face of it clause 41 is not a spending clause, but if the underlying aim of the clause is to encourage more charitable giving and therefore more people will qualify for gift aid, surely there will be expenditure consequences. Will she go on to say what costs there will be to the Treasury, depending on how successful the measure is?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

In our consultation with charities, many of them told HMRC that the old £500 limit had hindered their fundraising efforts at a time when increasing charitable giving was more important than ever. It also became clear that there were misconceptions about how the gift aid benefit rules operated. For example, many charities felt that they could not offer to host a gala dinner for a major donor, to thank them for their gift and to stimulate more donations from others attending the event, without the whole dinner becoming some kind of a gift. Of course, that is not the case because those kinds of events are not benefits to the donors at all; they are also part of the fundraising process.

So charities are quite properly allowed money to pay for those events. To help them, alongside this measure HMRC also published in April some revised and improved guidance, which will help charities to understand how they can thank their donors in a way that means that they can still receive gift aid on the donation that they have received.

We expect that the impact on the Exchequer will be under £5 million, in terms of extra gift aid tax relief. During the course of this Parliament, however, the package that we announced at the Budget should see about £600 million more tax relief and support for charities. However, I must stress to the hon. Member for Bristol East that this is not just about getting more tax relief to charities. It is also about trying to make some changes in the tax system that will generally foster a system of philanthropy in Britain, which we can all benefit from.

We talked about clause 27 earlier in our deliberations. It is perhaps wise at this point for me to correct the record, because I spotted in Hansard that I was reported as saying in that debate that

“most donors simply make a donation and then enter into an arrangement with the charity.”––[Official Report, Finance Public Bill Committee, 19 May 2011; c. 321.]

However, I am absolutely sure that I said “most donors simply make a donation and do not enter into an arrangement with the charity.” Having clarified those comments, perhaps I have made sure that I have absolutely got on the record what I said at the second time of trying.

In relation to this clause, charities want to express their gratitude to donors in a small way. It helps them to develop a long-term relationship that will encourage the donor to continue making donations and contribute to the charity’s income over the years. However, there is a balance to be struck, between making sure that charities follow charity law and spend their donations on charitable causes, and enabling a charity to develop that long-term relationship with a donor. When a charity wants to say “thank you” to a donor who has given, say, £1 million, £500 is obviously a very small amount of money to help to promote that relationship between the charity and its donors. We think that increasing the maximum amount of benefits that may be given over a year to £2,500 strikes that balance more effectively. Also, it should ease the administrative burden on charities and donors who currently become involved in time-consuming paperwork to keep within the £500 limit. At the same time, it will ensure that the vast majority of any large donation—at least 95% of it—will be used for charitable purposes. Representatives of charities will continue to talk to HMRC about this measure and indeed other measures during the coming months through the new charity tax forum that we have established.

Charities are at the heart of the Government’s ambition to build the big society. We want to encourage people to give more to charities. The increase in the benefit limit will allow charities to foster long-term relationships with their largest donors, by letting them give a modest but meaningful recognition of their contribution. This is one part of a much broader philanthropy package that we brought forward in the Budget. I therefore beg to move that the clause stands part of the Bill.

Question put and agreed to.

Clause 41 accordingly ordered to stand part of the Bill.