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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
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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.
2.30 pm
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
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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
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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.
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