Charities Hope British Tax-Law Changes Will Inspire Greater Giving

By STEPHEN G. GREENE

British charities are hoping that major changes in the nation’s tax laws that have improved the incentives for charitable giving will lead to a big jump in donations.

The Charities Aid Foundation, a leading British charity that promotes and facilitates giving in Britain and abroad, estimates that giving will have grown by at least £1-billion a year (about $1.4-billion) by 2005. Currently, Britons give about £5-billion (or $7-billion) to charity each year.

In Britain, tax benefits from cash gifts accrue primarily not to donors but to charities, which must meet certain conditions to recover taxes on donations they receive. The changes in the law are primarily designed to lift restrictions that made it difficult or impossible for charities to get back money on many gifts. Among other measures, the new law:

• Abolishes the £250 ($350) minimum limit for donations to qualify for tax relief. Now, gifts of any size can qualify for the break, though charities may decide on their own that some gifts are too small to make reclaiming the tax on them cost-effective.
• Abolishes the £1,200 ($1,680) maximum limit on tax relief for giving through payroll deductions. Now, employees can choose to make gifts of any size through payroll deductions, and the entire sum can qualify for a tax break.
• Promotes payroll giving by adding a 10 percent supplemental tax break on such donations made before April 2003.
• Provides an income-tax break to donors of certain shares and securities, based on their full market value. Taxpayers who donate such shares not only pay no tax on their capital gains but are entitled to use such gifts to reduce their income tax — all the way down to zero, in theory.
• Exempts from inheritance tax any bequests made to charity.

The Charities Aid Foundation, which together with the National Council for Voluntary Organizations had lobbied for greater tax breaks for years, has now joined with the British government and other national organizations in a three-year campaign to encourage the public to take advantage of ways to make their gifts more “tax effective.” The government has committed £1-million ($1.4-million) to the promotional campaign, while charities have added £350,000 ($490,000).

The goal of the campaign is to persuade more people to donate to charity and to take advantage of the new tax provisions when they do. Only about 20 percent of all donors who could do so currently make use of such breaks, CAF says.

Not Attracting New Donors

The changes are already having an effect on giving in Britain. Before the law took effect, fewer than 1 percent of donors used Gift Aid, a tax-relief provision dating from 1990 that benefits charities. Since the £250 threshold was eliminated, however, 23 percent of charities are asking donors to use Gift Aid, and more than half of their donors are agreeing to do so.

Yet preliminary data also seem to indicate that the tax changes so far have not attracted many new donors or inspired many existing donors to make large increases in their gifts. Rather, revenue increases appear to be due to more donors making their gifts in ways that benefit charities.

Payroll Gifts

Donors who use Gift Aid must confirm that they are British taxpayers for the charity to be eligible to recover the tax. But the law also loosened that requirement; such assurances can now be given even over the phone or via the Internet, which opens up new fund-raising areas for tax-effective giving.

When someone gives £100 to charity through Gift Aid, for example, the charity can apply to recover a tax of £28.21, making the donation worth £128.21.

Higher-bracket taxpayers are entitled to claim as personal deductions, however, the difference between the basic tax bracket and the higher one. When a donor in the 40-percent tax bracket gives £1,000 to charity, for example, the charity gets an additional £282.05 while the donor sees his or her tax reduced by £230.77.

The relaxing of Gift Aid requirements alone is likely to add between £200-million and £400-million a year ($280-million to $560-million) to charity coffers, according to an estimate by CAF and the National Council for Voluntary Organizations.

By persuading donors to use the Gift Aid mechanism, charities can realize a 28 percent increase in their income at no extra cost to donors. Even if donors give no more than they did before passage of the law, charities stand to gain an additional £150-million a year by recovering taxes on gifts that previously would have been too small to qualify for the program.

In an attempt to encourage Britons to make greater use of payroll deductions, furthermore, the government until 2003 is adding an extra 10 percent to such gifts. A charity that receives £50 from a payroll-deduction plan gets an additional £5 from the government.

CAF’s payroll-deduction plan, called Give as You Earn, is the country’s largest, with some 6,000 companies and 300,000 workers enrolled, who last year gave £40-million ($56-million).

The legal changes have helped to more than double the amount of money channeled through the Give as You Earn program into CharityCard accounts last year, according to CAF. The CharityCard, also created by CAF, is a debit card that lets people deposit funds into an account, from which gifts can be made online or by phone or letter for one-time donations or regular gifts to any registered British charity.

“The amounts are increasing very substantially,” says Simon Hebditch, CAF’s policy director. “Payroll giving has always been described in this country as a blue-collar operation” aimed at the auto-plant worker who wants to donate £10 a month, rather than at the company chairman who could afford to donate thousands of pounds. “It was a workers’ scheme,” he says. “That was its ideological background.”

CAF officials note that hundreds of people are exceeding the previous £1,200 ceiling on donations made through payroll deductions — sometimes by substantial sums. One person gave £64,000 (nearly $90,000) in that way.

Value-Added Tax

In at least one remaining area, CAF and other nonprofit leaders see room for further improvement.

The value-added tax, imposed throughout Europe at the point of sale of many goods and services, still applies to many transactions involving charities. The British government contends that it has no authority to modify VAT provisions because they are a creation of the European Union.

But the new tax structure opens up tax-effective giving possibilities at both ends of the income scale. For all its potential benefits, however, it remains to be seen how the British public and the country’s 185,000 charities will respond.

Says Mr. Hebditch: “The shackles have come off.”