Thursday, 19 April 2012

UK tax policies are the least of charities’ problems

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.


Caroline Fiennes said...

Good analysis in part; bad analysis in other part.

I've been a charity CEO & philanthropy advisor for ages, and have recently published a book about effective giving, called 'It Ain't What You Give, It's the Way That You Give It'.

On your second para, the book illustrates how charitable funding (and by extension, tax payer subsidy) goes to some strange places. In the UK, donkeys get over £2k each from charities, whereas people with mental health problems get only £714. I doubt that's what HM Taxpayer has in mind.

But your third para is mistaken. Some charities do work which cannot derive fees. Serving the unborn, the environment, victims of domestic violence who are on the run, preserving buildings, policing transparency in corporations, campaigning... the very things which governments and businesses can't/won't do, because those charities are serving people who by definition can't pay - or at least can't pay the full cost of what they need. There is no revenue model attached to those. This is why they're charities. And the more successful they are (eg, the more buildings they preserve), the more donations they will need. Yours is a common view, but mistaken nonetheless.

The final para is right. But it's not just charities who need to be more transparent but donors too. For example, Shell Foundation is unique amongst foundations in publishing usable data on its own performance.
Furthermore, as the book discusses, only one of the umpteen UK foundations even has its meetings in public - HM Taxpayer can't influence it, but at least she can observe it.
That is, foundations spend billions, all of which is subsidised by HM Taxpayer, who has zero say in what happens, usually can't see it in progress, and gets zero useful data about what is achieved and learnt.

I agree: more transparency all round please.

Noshua Watson said...

Thanks for the comment. Actually, the assumption that some charities are simply incapable of generating revenue is exactly what I’d like to challenge. They may not derive revenue from the populations they serve (the poor, children, historic monuments) but they can charge other audiences. IDS, for example, is a charity that serves the poor and advocates for social justice, but we charge governments, corporations, foundations and graduate students for our teaching, consulting and policy advice. Historic preservation societies charge for tours and guidebooks. Charities that serve other populations can charge for picture books, educational trips and courses, promotional clothing, consulting and advice...the list goes on. There is no excuse for lack of strategy and lack of imagination.

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