§ There is one further matter concerning charities which it is convenient to deal with at this point. It arises as a result of the new system of unified income tax.
§ Under the new system, charities which receive income under covenants for a net sum—that is a covenant which expresses the amount to be paid as a fixed sum after deduction of tax—will receive a smaller repayment of tax because the new basic rate tax of 30 per cent. is less than the old standard rate tax of 38.75 per cent.
§ This is, of course, a problem which has arisen whenever the standard rate of income tax has been cut. Nevertheless, I have received many representations that the resulting cut in the income of charities will create considerable difficulties for them, because they are committed in the coming years to expenditure which they had expected to be financed out of covenants made before the 30 per cent. basic rate was announced in 1971. New covenants need of course cause no problem, because they can take account of the change. I believe that the charities have a convincing case.
§ There will therefore be a scheme of transitional relief for charities which should relieve them of their difficulties. Under this relief, charities making tax repayment claims in respect of charitable covenants will be able to claim a supplementary payment for the four years from 1973–74 to 1976–77. This payment will be based on the tax repaid to them in respect of net covenants for the year 1971–72. For 1973–74 it will be the difference between that amount and what would have been repaid had the standard rate been 30 per cent. in 1971–72: for 274 1974–75 it will be 75 per cent. of that difference: for 1975–76 50 per cent. and for 1976–77 25 per cent. These payments—which will be borne on a special subhead of the Inland Revenue Vote—are estimated to cost about £3 million in 1973–74 and some £7½ million in all.
§ I should perhaps add that there is no case for continuing payments of this sort indefinitely. The reason is that most covenants are for seven years, and that by 1977–78 almost all payments will be under covenants made in the knowledge of the new system, which those entering into covenants will have been able to take into account.
§ The House may know that the National Council of Social Service has circulated a report which assesses the effect of the various changes in taxation which I made in last year's Finance Act. The Council selected a sample of 95 charities, but they did not all respond. However, 52 provided information which, in the view of the Council, was sufficient for the survey. Of those 52 charities, 42 were charities engaged in the relief of the distressed. While I must, in fairness, say that I do not accept some of the assumptions on which the report is based, the House should know that even on the assumptions and conclusions of the National Council itself, with the changes which I have just announced, those 42 charities will, overall, gain next year.
§ The concessions to charities which I have made last year and this year are substantial. It has sometimes been suggested that charities should not be expected to bear VAT at all. But it has never been accepted by any Government that charities should be relieved of all indirect taxation, and they have always borne purchase tax on the goods they have purchased.
§ Taking into account the estate duty and capital gains tax concessions I made in last year's Budget and the concessions which I have just announced, there can be no doubt that the net benefit to charities as a whole substantially outweighs the cost of the changeover to VAT. Taking full account of the changeover to VAT, the cost to the Exchequer of the concessions to charities which I have made in these last two Budgets is estimated to be of the order of £20 million in 1973–74.