A Question of Tax Reliefs

So George Osborne is shocked that some of the highest earners in our country organise their tax affairs to minimise the amount of income tax they pay in order, presumably, to live off capital and, perhaps, dividends. To be fair to the chancellor, it is the scale of the issue which has shocked him. Nonetheless, Twitter has been awash with witty rejoinders, my favourite of which was:

Much has been made of the various reliefs and schemes which are being used (and abused) to achieve very low rates of tax for the best paid. The government is absolutely right to target those that use schemes which are designed for the good of society to minimise what they contribute to the state.

And the government should go further and target those companies which package products - within, say, the EIS and VCT rules - but which major on the benefits to the investor and invest in relatively safe sectors. EIS relief, for example, on the basis that such investment is risky, hard for companies to raise elsewhere and essential for the economy. Should we really be granting relief to those investing through structures where the risk is spread and the capital is reasonably secure?

But a lot has also been made of tax reliefs on gifts to Charity and this is the point at which I fear we may be in danger of throwing the baby out with the bathwater. Providing tax relief on charitable giving is a genuine social good, a real example of the Big Society. It also provides donors large and small with the reassurance that the state appreciates that there are some things it's not appropriate to fund from taxed income. The Charities Aid Foundation has responded robustly along these lines.

There was a suggestion from a No.10 spokesman that some of the gifting in question is "to charities and those charities don't, in all cases, do a great deal of charitable work." If this is the case, then such organisations need to be referred to the Charity Commission (or equivalent in Northern Ireland and Scotland).

There may, of course, be alternative approaches to this issue. Perhaps we should seek to encourage the wealthiest to share it through charitable giving from their accumulated capital, rather than income? I've given this a little thought and put together a modest list of proposals:

1. Open Gift Aid to everyone - including non-taxpayers. Rather than donors declaring that they are a UK Taxpayer who has paid tax at least equivalent to that reclaimed, a simple "I am a UK citizen and/or I am a UK Income Tax Payer. With the raising of the personal allowance and hundreds of thousands being moved out of paying tax - we should not be disincentivising those people from giving.

2. Limit Tax Relief on donations through the gift aid system to the level of threshold for Higher Rate Tax (£42,475 gross in 2012/13 - equivalent to a net gift of £33,980). This should provide incentives for sizable gifts from those on incomes in the hundred's of thousands of pounds whilst limiting the extent to which charitable giving can be used to minimise income tax.

3. Provide compensation for the limit of Income Tax relief by introducing the ability to offset capital gains made on gifts to charities against gains made elsewhere. This could be done through a scheme I've christened "Charitable Assignment".

It could work this way: A donor decides he wishes to donate invested assets to charity. Rather than encash their assets, make the gift and complete their tax return accordingly (paying Capital Gains Tax (CGT) on the gain whilst claiming Income Tax Relief on the full gift) they complete a Charitable Assignment form. The provider then cashes the investment, pays the proceeds direct to the nominated charity and issues the HMRC and the Investor with a certificate detailing the gains made. The donor can then offset this against other gains and reduce their Capital Gains Tax bill.

Of course, I have no knowledge of the cost implications/revenue potential of these suggestions or of any legal implications - but I do think that in addressing the issue of abuse of income tax reliefs, we should seek to negate the effect of the rule of unintended consequences.

Andrew