The Chancellor’s attack on gift aid could hit charities, not just would-be philanthropists

Which Chancellor said he would encourage wealthy people in our society to give more to charity?

Which Chancellor said: “Do the right thing for a charity and the government will do the right thing by you”?

The answer is George Osborne in his 2011 Budget and the same Chancellor who in his 2012 Budget announced restrictions on the application of Gift Aid for charity giving and, probably worse, created confusion and uncertainty regarding the extent of the tax relief available to those big earners who are philanthropically inclined.

Incentives for giving to charity were a welcome theme of the Chancellor’s speech in 2011 – in particular he announced that a lower rate of inheritance tax would apply where people leave a charitable legacy of 10 per cent or more of their estate when they die. The consultation paper on that incentive said the coalition government is committed to encouraging charitable giving and building a more socially conscious society as part of its vision for the “Big Society”.

The coalition government also highlighted that it wanted to encourage giving by donors at all stages of life, from the largest to those who give money through charity bucket donations.

One of the most effective incentives for charity giving is gift aid. Under the gift aid scheme, charities can reclaim basic rate tax (20 per cent) from HMRC on a donation’s gross equivalent. The effect is that £100 donated to a charity under the gift aid scheme is consequently worth £125 to the charity.

For higher-rate taxpayers gift aid has the quality of mercy – it is twice blessed, blessing those that give and those that receive. So the higher-rate taxpayer is able to claim tax relief on the gross amount of the donation. The only limit on that amount of tax relief is the amount of income subject to higher-rate tax.

In this year’s Budget, the Chancellor announced restrictions on the unlimited use of income tax reliefs. He acknowledged that it was right that we have tax reliefs that promote investment, support charitable giving and reflect genuine business loss. But he emphasised that, from April 2013, anyone seeking to claim more than £50,000 of these reliefs in any one year will have a cap set at 25 per cent of their income. The Budgets in 2011 and 2012 are completely contradictory and send out very mixed messages. But why should there be any cap on the tax relief offered to wealthy individuals who wish to make charitable donations?

The coalition government has said that it will explore with philanthropists ways to ensure this new limit of uncapped relief will not have a significant impact on charities that depend on large donations. The simple way to avoid such an impact is to leave uncapped the relief which applies to gifts to charity.

These large charitable donations by a relatively small number of philanthropic individuals regularly make the difference between success and failure for fund-raising campaigns.

Tax avoidance is regarded by the Chancellor as morally repugnant, but our message to the Chancellor is simple – incentives for giving to charity are a moral imperative.

• Douglas Connell is joint senior partner at Turcan Connell