By Noshua Watson
The UK government has proposed a cap on tax relief on personal donations to charity. The policy places a £50,000 or twenty-five percent of income limit, whichever is higher, on the amount by which donors could reduce their tax liability with an equivalent charitable contribution. At the moment, people can offset their entire tax liability and pay no income tax. The government aims to decrease tax avoidance by high income individuals who drastically reduce their marginal tax rates despite being in a fifty percent income tax bracket. Opponents of the policy are alarmed at the possible disincentives the cap gives to potential donors and the additional stress it will place on struggling charities as the funds they receive from the State decline. But in the rush to prevent a shock to next year’s donations, charity executives are losing sight of more important long term trends in the future of nonprofits.
There needs to be a cap of some sort. UK charity executives say that the policy will strip funding from charities while the government anticipates an increase in tax revenues of £50-100 million from placing a cap on tax relief for donations. But under current policy, the government is effectively subsidising donations to specific causes, rather than taking tax funds into general government coffers that benefit everyone. In essence, the government is taking money from the many and directing it to the few, although those few would be charities. In comparison, the United States limits tax relief for charitable donations to fifty percent of income in most cases and sometimes only twenty or thirty percent, depending on the circumstances.
It’s not the Victorian age any more. Charities need to be less dependent on donations. Non-profits need to diversify their revenue streams and have been doing so for a long time. Whether they are schools, hospitals or arts organisations, plenty of charities make ends meet by making money. There’s nothing dirty about it. Subsisting from year to year on donations is strategically unwise.
Finally, when it comes to the need to be more transparent and accountable, charities are next. The UK government is currently targeting the lack of transparency in accounting and tax liability for private individuals and companies. But charities will need to account better for how they spend their money if they want to continue to receive public funds or the public’s benefit of the doubt. As Warren Buffett once said, “It’s only when the tide goes out that you learn who’s been swimming naked.” That goes for the UK’s 162,000 charities too.