§ (2) For subsection (4) (the relevant amount) substitute—
§ "(4) Subject to subsections (5) to (7) below, the relevant amount is an amount equal to—
- (a) where the disposal is a gift, the value of the net benefit to the charity at, or immediately after, the time when the disposal is made (whichever time gives the lower value);
- (b) where the disposal is at an undervalue, the amount by which—
- (i) the value described in paragraph (a) above, exceeds
- (ii) the amount or value of the consideration for the disposal,
§ (3) After subsection (8) insert—
§ "(8A) The value of the net benefit to the charity is—
- (a) the market value of the qualifying investment, unless subsection (8B) below applies;
- (b) where that subsection applies, that market value reduced by the aggregate amount of the related liabilities of the charity (see subsections (8E) to (8G)).
§ (8B) This subsection applies in any case where—
- (a) the charity is, or becomes, subject to an obligation to any person (whether or not the person making the disposal or a person connected with him), and
- (b) one or more of the conditions in subsection (8C) below is satisfied.
§ (8C) For the purposes of subsection (8B) above—
- (a) condition 1 is that, taking into account all the circumstances (including, in particular, the difference in the value of the net benefit to the charity if subsection (8B) applies and if it does not) it is reasonable to suppose that the disposal of the qualifying investment to the charity would not have been made in the absence of the obligation;
- (b) condition 2 is that the obligation (whether in whole or in part) relates to, is framed by reference to, or is conditional on the charity receiving, the qualifying investment or a related investment (see subsection (8D)).
§ (8D) In subsection (8C) "related investment" means any of the following—
- (a) any asset of the same class or description as the qualifying investment (irrespective of size, quantity or amount);
- (b) any asset derived from, or representing, the qualifying investment whether in whole or in part and whether directly or indirectly;
- (c) any asset from which the qualifying investment is derived, or which the qualifying investment represents, whether in whole or in part and whether directly or indirectly.
§ (8E) For the purposes of this section, the liabilities which are related liabilities in the case of any qualifying investment are the liabilities of the charity under each of the obligations that fall within subsection (8B) above (as read with subsection (8C) above) in relation to that investment.
§ (8F) Where an obligation is contingent and the contingency occurs, the amount to be brought into account for the purposes of this section at any time in respect of the liability, so far as contingent, under the obligation is the amount or value of the liability actually incurred in consequence of the occurrence of the contingency.
§ (8G) Where an obligation is contingent and the contingency does not occur, the amount to be brought into account for the purposes of this section at any time in respect of the liability, so far as contingent, is nil.".
(4) In subsection (9) (definitions) insert each of the following definitions at the appropriate place—
"obligation" includes a reference to each of the following—
"related liabilities" shall be construed in accordance with subsection (8E) above;";
"value of the net benefit to the charity" shall be construed in accordance with subsection (8A) above;".
§ (5) After subsection (10) (market value) insert—
§ "(10A) Section 839 (connected persons) applies for the purposes of this section.".
§ (6) The amendments made by this section have effect in relation to any disposal to a charity on or after 2nd July 2004, except where the disposal is in performance of a contract entered into before that date and not varied on or after that date.'.—[John Healey.]
§ Brought up, and read the First time.
§ The Economic Secretary to the Treasury (John Healey)
I beg to move, That the clause be read a Second time.
§ Mr. Deputy Speaker
With this it will be convenient to discuss the following:New clause 1—Gift aid and non-taxpayers—
- (1) 'Section 25 of the Finance Act 1990 (donations to charity by individuals) shall be amended in accordance with subsection (2) below.
- (2) In subsection (8)—
- (a) after "year of assessment" there shall be inserted "by more than £520"; and
- (b) at the end there shall be added "over £520".
- (3) This section shall be deemed to have effect for the year 2003–04 and subsequent years of assessment.'.
§ John Healey
New clause 11 amends legislation providing income tax relief to a donor making a gift, or disposal at under value, of shares or securities to charity. The legislation, introduced in the Finance Act 2002, which was welcomed at the time on both sides of the House, enables a donor to offset the market value of a gift of shares or securities to charity against their income for tax purposes. The market value is the value of the gift in the hands of the donor at the point of disposal to the charity. In the first two years that the relief has been available, £370 million has been donated to charity.
However, we have uncovered evidence of complex avoidance schemes that severely reduce the benefit of the gift in the hands of the charity, while leaving the market 723 value of the gift for tax purposes unchanged. The schemes operate where an individual makes a "donation" to a charity and, as a result of an obligation on the charity, the value of that donation to the charity is less than the market value of the assets donated. In that context, an obligation on the charity commonly means that the charity will undertake to sell the shares or gilts back to a third party. The effect of such schemes, which use complex arrangements of trusts and options, is to give the donor tax relief that can far outweigh the benefit to the charity and has the scope to return the whole value of the gift to the control of the donor. The charity receiving such a gift is left with very little benefit and, because the gift or an amount of nearly equivalent value returns to the control of the donor, the gift costs the donor much less than the amount of tax relief they claim.
The purpose of the new clause is to counter abuse not by charities, but by individuals seeking to take advantage of the generous income tax relief available to charity donors. The new clause ensures that the amount of income tax relief claimed by the donor cannot exceed the value of the net benefit to the charity. It will not affect genuine donors or charities. But when an obligation is placed on the charity—no matter by whom—that results in the value of the gift in the hands of the charity being less than the value of the gift in the hands of the donor, the income tax relief that can be claimed by the donor is restricted to the lower amount. That provision will operate either when the obligation can be linked to the assets given, or when it is probable that the gift would not have been made without the existence of the obligation
The Government are committed to increasing donations to charity and the gifts of shares and securities legislation is an important part of that commitment. But schemes that seek to abuse charitable reliefs are unacceptable. We have shown with this new clause that when we identify such abuse, we will act quickly to prevent that abuse from continuing.
§ John Healey
I hope that the hon. Member for Arundel and South Downs (Mr. Flight) will welcome the clause as he did the last as a reasonable and fair cop.
§ Mr. Flight
As I recall, the income tax relief received when one gifts something to a charity is set against one's income for income tax purposes, so it is 40 per cent. for top-rate taxpayers. As I understand the Economic Secretary's description, it would still be worth practising the scheme because the gift to the charity might be two and a half times the effective benefit.
§ John Healey
We believe that the new clause will prevent such abuse. Our concern is that the amounts that can be donated—and therefore the tax relief that can be claimed—are virtually limitless. We are, however, keen to ensure that we do not introduce a 724 measure that discourages genuine acts of philanthropy or removes the incentive to the donor to give in the first place.
§ John Healey
As I said earlier, we uncovered evidence of the scheme relatively recently. It is not yet widespread, but it has the potential to become so. As my right hon. Friend the Paymaster General said, a responsible Government have the duty to act as soon as evidence of such schemes is uncovered, to prevent the loss of potentially very large sums. We have uncovered evidence of a potential donation of close to £100 million. If a single donation of such size were to be channelled through the sort of scheme that I have described, the extent of the abuse would be obvious, as would the potential exposure of the public purse.
The new clause has the support of the Charity Finance Directors Group and the Charities Tax Reform Group. Indeed, the latter says:We welcome this measure which defends the tax breaks designed to encourage giving to charities. Any abuse of charitable reliefs by donors rebounds on the whole charity sector by tarnishing its reputation; we support all initiatives that protect the integrity of the sector.I hope that the new clause will receive support from both sides of the House.
I turn briefly to new clause 1. Opposition Members will recall that we debated this proposal in the Finance Bill Standing Committee in 2002, when I cautioned the hon. Member for Arundel and South Downs that the consequence of such a measure would be to change the nature of gift aid. To understand our objections to new clause 1 we must return briefly to the operating principles of gift aid.
Gift aid donations are treated as having been made after the deduction of income tax at the basic rate. As charities are exempt from tax on that income, they are entitled to reclaim from the Inland Revenue an amount equal to the basic rate of tax on the donation. If the donor has not paid sufficient income or capital gains tax to cover the amount reclaimed, they are liable to be assessed for the shortfall.
If the new clause were accepted, it would allow donors to make donations using gift aid on which the amount of income tax treated as deducted from the gift can exceed the amount of income tax or capital gains tax paid by the donor in that year. It would allow an excess of up to £520 before further amounts became recoverable.
At present, where the tax reclaimed by the charity receiving a gift aid donation does not exceed the amount of income tax and capital gains tax paid by the donor, the repayment is treated as negative taxation. If the tax reclaimed by the charity exceeds the amount paid by the donor, we deal with the situation by making an assessment on the donor, as I said earlier. If, as the new clause proposes, we did not have that option, amounts repaid to charity could exceed tax paid by donors and the whole gift aid scheme would be reclassified as public expenditure. Since our debate in 2002, we have checked 725 that point with the Office for National Statistics, which confirmed that such an extension would indeed represent public expenditure.
As gift aid acts as an incentive to encourage taxpayers to give to charity, it enables the donor, in effect, to direct some or all of the income and capital gains tax they have paid to causes that they support. New clause 1 would breach the central principle of gift aid if the scheme allowed non-taxpayers to direct where the taxes of others are used. On that basis, I hope that Opposition Members will not press the new clause to a vote.
§ Mr. Richard Bacon (South Norfolk) (Con)
I shall comment briefly on new clause 11. On the face of it, the new clause causes us no great difficulty, although it was tabled rather late and we would have liked longer to consider it. I was at the Vote Office not two hours ago, yet I was unable to obtain any guidance notes on the new clause.
New clause 11 appears to be a targeted anti-avoidance measure designed to prevent donors from obtaining income tax relief in excess of the benefits received by the charity from the donation of shares or securities. Normally, one would expect the market value of a gift to reflect the value of the gift in the hands of the charity. There is potential for serious abuse; for example, by using offshore trusts and options to manipulate the value of gilts or other securities donated to charities so that the value of the gift in the hands of the charity could bear no, or little, relation to the market value of the underlying asset. Such manipulation could be used to write off entirely an individual's tax liability while conferring only limited benefits, if any, on the charity.
As genuine gifts of shares and other securities will continue to receive tax relief under new clause 11, we have no objection to it in principle. It appears to be a measure that will protect the Revenue while ensuring that charities continue to benefit from genuine gifts of shares and other securities. We shall, however, be keeping an eye out for unintended consequences.
The purpose of our new clause 1 is to probe the Government's thinking in the important field of gift aid relief, and the Economic Secretary gave us a hint of his thinking in his remarks earlier. The new clause would ensure that people on incomes too low to tax, who are often the most generous of givers, are able to benefit from the gift aid scheme, and it would remove the charge they unwittingly incur when they mistakenly sign a gift aid form.
The gift aid relief scheme is a great boon for charities, and it may also be convenient for those who donate to charities, if they pay tax; but for those of the poor who give generously to charity, the gift aid scheme can be a costly and significant trap. Gift aid relief can be claimed only by those who have paid enough tax in the year to cover the amount of tax on the gift, so, for example, if a person gives a gross amount of £100 in a year to a charity using the gift aid scheme, he or she will pay the charity a net sum of £78 and the charity will reclaim from the Inland Revenue basic-rate tax of £22; but the donor must have paid at least £22 tax in the year for that to work. A donor who has not paid enough tax to cover the gift, and still uses the gift aid scheme, remains legally liable to the Inland Revenue for that amount of tax. If the donor were a non-taxpayer, the Revenue would be 726 entitled to pursue them—and sometimes does—for the £22, notwithstanding the fact that the donor was not liable to pay tax for any other reason.
Non-taxpaying donors might use the gift aid scheme for all sorts of reasons. They might not appreciate the technicalities, and the charity concerned might fail to warn them. Their incomes might decline unexpectedly—for example, if they lose their job, or if interest rates fall, taking them out of tax—and they may forget that they still have a gift aid declaration in place.
The low incomes tax reform group—the LITRG—which is part of the Chartered Institute of Taxation, has been campaigning since the introduction of the gift aid scheme to enable non-taxpayers to participate in it. Those on low incomes are often among the most generous givers in proportion to their means and, as the LITRG points out, it is not clear why low-income donors should not be encouraged to give to charity in the same way as wealthier donors.
Indeed, the group had originally thought that that was the Government's intention. When the Chancellor of the Exchequer announced the introduction of "Getting Britain Giving", he said that for every pound a citizen gave, the Government would contribute a further 28p. It is worth noting that the Chancellor said "citizen" not "taxpayer". In the event, however, as the measures have unfolded, we see that higher-rate taxpayers can get relief on their giving—indeed, if they give shares to a charity the relief can approach 80 per cent. in certain circumstances—whereas a charity can get no relief on a gift from a non-taxpayer. That seems a curious inversion of the idea of a progressive tax system. The exclusion of some citizens from the gift aid scheme can hardly be said to contribute to the building of an inclusive or a civic society.
When the matter was last debated, in the Finance Bill Standing Committee to which the Economic Secretary alluded, the hon. Gentleman gave two welcome assurances. First, he said that in practice, where the Inland Revenue finds that a non-taxpayer's donation has been included in a gift aid claim from a charity, it invites the charity to make good the shortfall rather than pursuing the individual taxpayer. No doubt most charities would respond positively to such an invitation.
Secondly, the hon. Gentleman undertook to keep the matter under constant review. New clause 1 would enable non-taxpaying donors to use the gift aid scheme when donating, but it would set a limit. It provides that they will not have a legal liability to pay the Revenue any tax reclaimed by the charity, provided that tax on any gifts they make under the scheme during a tax year does not exceed £520, or £10 a week. That restriction is intended primarily to meet the possible objection that fraud might be encouraged if non-taxpayers were able to donate to charity under gift aid without limit. New clause 1 would take effect from the last tax year— 2003–04—since tax returns for that year are largely still to be made.
In the debate to which I referred a moment ago, the Economic Secretary objected—he reiterated his objection this afternoon—because the tax reclaimed by a charity in respect of a gift by a non-taxpaying donor 727 would be effectively public expenditure, not a tax relief. That raises the question of whether the gift aid scheme could be classified in two ways for public accounting purposes: as tax relief to the extent that it is used by taxpayers and as public expenditure to the extent that it might be opened up to non-taxpayers.
On 9 June 2003, Lord Freeman wrote on behalf of LITRG to the Financial Secretary to ask whether the ONS could consider that question at one of its review meetings, and on 19 June last year, the Economic Secretary replied to that letter, saying that he had arranged for the ONS to give definitive advice. He referred to that advice in his opening remarks, and I ask him to consider publishing it, as I am not aware of seeing it in the public domain.
It is hard to understand why a split classification should present a problem, given the proliferation of the various tax credit schemes that we have seen under the Government. Those schemes raise very much the same issues as those we are discussing and their total cost is divided between tax relief, on one hand, and public expenditure, on the other, in so far as the credits reduce tax liabilities or lead to payments to claimants.
In summary, we urge the Government to think again about extending the gift aid scheme to non-taxpayers, to give those on low incomes the opportunity to give to charity as they would wish, to prevent them from falling into what for them could be a costly and unlooked-for trap, particularly where they are ill-advised by the bodies to which they donate, and to simplify generally the administration of the scheme for charities.
§ John Healey
May I welcome the hon. Member for South Norfolk (Mr. Bacon) to the Dispatch Box? He offers distinguished service to the House on the Public Accounts Committee. I understand that he is making only a temporary appearance at the Dispatch Box, but I fear that his permanent presence cannot be far off, and I look forward to that.
The hon. Gentleman asks first about guidance. He said that he had looked for guidance published by the Inland Revenue alongside new clause 11. He will appreciate that it is important that the House considers the clause first, but the Inland Revenue will publish guidance to support the new clause. That guidance will give charities some certainty in respect of how the new clause will operate and where they stand. Let me repeat very clearly that this measure is carefully constructed not to discourage genuine philanthropy. It is designed to counter abuse not by charities, but by those individuals who seek to take advantage of what is a generous income tax relief scheme for charitable donors.
The hon. Gentleman made a number of other points. He took up the cause and case of the non-taxpayer, particularly the non-taxpayer or low taxpayer who may not fully appreciate the principles and operation of the gift aid scheme. I am sure that he will know, as do many hon. Members because many of them are strong supporters and give in this way, that any person who makes a donation under gift aid must complete a declaration to confirm that he or she has paid sufficient tax to cover the amount that the charity will reclaim. The requirement that charities must obtain such a 728 declaration from the donor reduces the risk that the donor will accidentally use gift aid when it is not appropriate.
Where it is established, however, that a donor has not paid enough tax to cover the value of the gift aid, the Inland Revenue can, as I said, assess the donor to recover that overpayment. However, as the hon. Gentleman said, I gave an undertaking during the proceedings on the Finance Bill in 2002 that, in many cases, the Inland Revenue will explain the situation first to the charity, which will then decide voluntarily to repay the amount of the tax reclaimed.
The hon. Gentleman spoke about citizenship and asked why non-taxpayers should be barred from donating to charity. Non-taxpayers can give to charity in other ways, but it is not appropriate for them to do so under gift aid. He will be aware that, even for those who pay a small amount of tax, gift aid can apply to any amount no matter how small, so long as some tax is paid, gift aid is a scheme of which the charity can take advantage.
Finally, the hon. Gentleman urged the Government to think again and referred back to the debates on the Finance Bill in 2002, where I gave an undertaking that, as with all taxes, the Government would keep gift aid under review. We will do so. We are always open to fresh argument and to the case for further reform, particularly with such issues, where we believe that any further measure may boost the amount that people can give to charity, thus encouraging charitable giving more widely. However, as I tried to explain in my opening remarks, the basic objection to new clause 1 is that it contravenes the principles that lie at the heart of the operation of gift aid and that, at present, we simply do not think that that problem has been overcome by the case made by its proponents.
§ Mr. Flight
May I ask the Economic Secretary how new clause 11 will work? He said that the income tax rebate cannot exceed the net value of the benefit to the charity. I am not sure whether or not the net value includes the tax rebate. However, if it does not include the tax rebate, for example, someone could give £100 and take back £80. The charity would get £20. The individual would get back £18 on his £100, so he would be out of pocket by only £2. In effect, that could be used to make all giving to charities tax deductible. If the net value includes the tax rebate to the charity, someone could give £100 and take back £100. The charity could still have £22, and the individual has benefited by £18. I just want to understand whether the new clause will be an effective deterrent to the abuse that the hon. Gentleman describes.
§ Mr. Deputy Speaker
Order. We are in danger of getting ourselves into disorder. I was assuming that the hon. Gentleman's remarks were by way of a long intervention, to which the Minister may reply in concluding his speech, but if he does not wish to respond that is in order.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.