Small Charitable Donations Bill

Memorandum submitted by Ian Clark (SCD 04)

Ian Clark is a recently-retired management consultant (FCIMC) and fundraising director (FIF). He has held office (Chair, Secretary, Treasurer) for a variety of medium-sized national charities over several decades. During the last decade he was the only paid fundraiser for a group of 400 local charities, generating several £m of Gift Aid tax refunds every year.

He has a long-term interest in tax-effective giving, starting to promote covenants back in the 1960s. He has been actively involved in the debates about the reform of Gift Aid over the last five years. He is a member of HMRC’s Charity Tax Forum, including the working party on this particular Small Charitable Donations (SCD) scheme. He has already made several detailed personal submissions to HMRC and Ministers over the last 18 months, and recently at the Public Reading stage.

Summary

1. The Bill is complex, more than twice as long as the original Gift Aid legislation, but for only 10% of the financial benefit to charities. This is partly caused by various onerous anti-fraud measures, although HMRC has provided no evidence that Gift Aid fraud is prevalent. This red-tape will effectively prevent most small charities from benefitting from the new scheme.

2. In order to meet the government’s charity policy objectives expressed in documents like the Giving white paper, the Small Charitable Donations (SCD) Bill needs four key amendments:

a. In 1(3) – 1(6) please entirely remove the "two times normal Gift Aid" cap. Alternatively increase it to at least five times.

b. In s2(4) totally abolish the "start-up period" of 3 years. Alternatively reduce it to 1 year, or allow the initial years’ claims to be paid retrospectively after a satisfactory probation period.

c. Please entirely remove s6 – s9 on "Community Buildings". Alternatively re-write the sections in terms of "local charity branches".

d. In Schedule 1 allow the use of modern payment methods (eg cheques, web or phone-based, credit cards) as well as cash and notes.

Background

3. I estimate that there are well over 200,000 organisations that are potentially eligible for the SCD scheme. This includes not only those charities registered with the Charity Commission and its national equivalents like OSCR, but also exempt and excepted charities, community amateur sports clubs, and a variety of small local voluntary groups (eg schools, PTAs) that HMRC recognises as having charitable status for tax purposes. In the rest of this paper I shall use the generic term "charities" to cover all these organisation types.

4. According to HMRC statistics (see Commons Library paper p23, Table 10.4) only about 65,000 organisations claim Gift Aid (GA) refunds in any fiscal year. This is roughly 100 per typical parliamentary constituency. Participation by charities increased steadily for the first few years after the new form of Gift Aid was introduced in 2000, peaked in 2009, and is now nearly 5% lower.

5. According to the Chancellor’s 2011 Budget statement, a key objective for the new SCD scheme is to increase charity participation in Gift Aid by 50%, from 65,000 to 100,000 a year (ie 50 extra GA charities in a typical constituency). If most small charities have declined to take advantage of the standard GA scheme over the last two decades, I cannot see any reason why they would want to sign up for the new SCD scheme that means they have to operate the full GA scheme faultlessly for 3 years before they get any SCD grant.

6. There are three key reasons why two-thirds of charities do not register for Gift Aid in the first place:

a. By far the most frequent method of fundraising – especially for small charities – is cash collections1 where in practice it is very difficult to obtain signed Gift Aid declarations. This is the main reason the government gave for introducing the SCD scheme, which doesn’t involve declarations.

b. Most of the other fundraising methods used by smaller charities to generate income are not eligible for Gift Aid (eg raffles, coffee mornings, jumble sales, grants, legacies).

c. Gift Aid regulations are complex, with the equivalent of over 80 A4 pages of guidance on the HMRC website. Most small charities rely mainly on volunteers for administration, and they simply cannot cope with all the Gift Aid red-tape. Even well-organised bodies like local churches often have to make use of central Gift Aid processing units or third-parties like CAF or Stewardship to ensure regulatory compliance.

1 Cash is given by 47% of donors, compared to 32% using direct debits, 21% raffle tickets, 13% cheques and 3% payroll giving. Source NCVO/CAF "UK Giving 2011" pages 9-11. These figures have varied only slightly in recent years.

7. Most charities will only be able to get a maximum SCD grant of £1,250 each year. For the 18,000 (larger) charities that get more than £10,000 in tax refunds annually, the new grant will be of negligible significance. For the 47,000 small charities claiming less than £10,000 a year (average 75 per constituency) it will provide a helpful boost, but limited to £1,250. And for the vast majority of charities the SCD scheme will provide no benefit at all, as the onerous red-tape means they are very unlikely to register with HMRC.

8. Further, the SCD is "public spending" (as opposed to a statutory tax relief) and so potentially subject to political and economic pressures. What guarantee is there that SCD will continue under the next government, or even survive next year’s Budget cuts?

9. The current Bill is complex, more than twice as long as the original 1990 Gift Aid legislation. But the SCD scheme will yield only about 10% of the standard Gift Aid benefit, roughly £100m pa compared to about £1,000m a year.

10. HMRC has introduced several devices into the scheme to try and limit potential fraud. But it has produced no evidence that there is much systematic fraud in the standard Gift Aid system. Indeed what little snippets of information that have been made public suggest that tax fraud among charities is much lower than among individuals or companies. These anti-fraud measures significantly increase SCD’s complexity and so lower the probability that smaller charities will want to participate. My estimate is that rather than 35,000 new GA registrations, HMRC may only see 350.

11. There are several subtle differences between what can be claimed for in SCD and what is allowed in mainstream Gift Aid. Smaller charities may find it difficult to understand some of the differences in, for example, the benefit rules or eligible types of donation. The HMRC Explanatory Notes demonstrate that the eventual official SCD guidance notes will be long and complex, on top of all the existing standard GA guidance.

12. During the recent Public Reading stage all the main voluntary sector umbrella bodies (NCVO, ACEVO, IoF, CFG, CAF, SCC etc) expressed serious reservations about 3 or 4 key provisions in the Bill from their differing perspectives. My sector colleagues and I have been making similar points to HMT and HMRC for the last 18 months as more details have become available. These have included suggesting simpler ways of administering SCD grants through HMRC – or even other distribution channels. But no-one appears to hear our very real concerns that the current Bill will fail to meet the government’s policy objective of increasing Gift Aid participation among smaller charities.

Suggested amendments to the SCD Bill

13. Can these weaknesses be reduced? I believe they can. Turning to the specific clauses in the Bill, I want to propose four areas for amendment, offering an explanatory comment each time. In the first 3 cases I also offer an alternative solution, though less favourable to small charities.

14. In 1(3) – 1(6) please entirely remove the "two times normal Gift Aid" cap. Alternatively increase it to at least five times. This cap did not appear in the 2011 Budget, and has only been included recently. Paragraph 6b above explains that for most small charities the majority of their income is not eligible for normal Gift Aid. So the proposed cap will artificially limit the benefit for some of the smallest charities – defeating a key purpose of the Bill.

15. I can see no logical reason why an SCD grant based on one income stream of small cash donations should be capped by the value of a different income stream (eg regular direct debits). What other grant funder makes the grant value dependent on the level of an unrelated stream of income?

16. So I would prefer to see this cap removed entirely. If not, I would urge that it is set at a much higher level, say at least 5 times. This would deter charities registering for the main Gift Aid scheme and only claiming for one £50 GA donation a year, simply to claim a full £1,250 SCD grant on smaller gifts.

17. In s2(4) totally abolish the "start-up period" of 3 years. Alternatively reduce it to 1 year, or allow the initial years’ claims to be paid after a satisfactory probation period. The 3 year start-up is another device to prevent potential fraud by newly HMRC-registered charities. What other grant scheme makes applicants wait 3 years to receive any income?

18. HMRC has provided no rationale for the 3 years, as opposed to any other time period. It allows newly-registered charities to claim full GA immediately after registration on unlimited donation totals. Indeed it allows retrospective GA claims for donations made up to 4 years before registration if there is a clear GA audit trail and suitable declarations. I simply cannot understand why HMRC wants to impose a 3 year waiting period for relatively small SCD grants when it does not require any probation for ordinary GA claims.

19. Logically the start-up period should be removed entirely. But if HMRC can show evidence that there is significant fraud by newly GA-registered charities, I would concede that it would be prudent to allow a one year start-up, giving HMRC time to assess initial refund claims.

20. Another way of addressing the fraud issue might be to allow charities to make SCD claims from first GA-registration, but delay payments for the initial year(s) contingent on the main GA claims being satisfactory during the probation period.

21. Please entirely remove sections 6 to 9 on "community buildings". Alternatively replace them with ones based on "established local charity branches". The concept of "community buildings" (CB) is foreign to the voluntary sector, which is generally structured around people – local groups or branches – not specific buildings. The CB concept does not appear elsewhere in charity legislation.

22. These complex provisions have been introduced to try and create a level playing field between centralised charities with local groups (eg Lifeboats, NSPCC, Cancer Research, Roman Catholic dioceses, Salvation Army, National Trust), and federations of independent local charities (eg Age UK, schools, most churches, synagogues & mosques) operating under a common franchise. If SCD only allowed one grant per charity, the centralised group would benefit far less than say an umbrella charity with 100 independent local charities, each able to claim a grant of up to £1,250.

23. Charities choose the type of structure that is most appropriate for their particular operating needs and governance culture. Some want local flexibility and decision-making, with the attendant increase in admin costs and local accountability. Each local charity has its own trustees or management committee, honorary officers, plans, budgets, accounts, annual reports etc. On the other hand many charities want a single national identity and management, with all the economies of scale and central control implied

24. I can see no a priori reason why the government should want to give an extra benefit to one particular type of charity structure that does not appear in the rest of charity legislation. So fundamentally I see no reason for sections 6 to 9 "Community Buildings" being included in the Bill at all.

25. As it stands the Community Buildings provisions are likely to create as many anomalies as they cure. Why are buildings where one-to-one or small group counselling take place excluded? Why is a donation in a street collection allowed, but not one inside a shop, supermarket or pub? Why are charity groups that meet in ordinary homes or residential homes (eg nursing homes) excluded? As is evident from the Bill and HMRC’s Explanatory Notes, the CB sections already occupy a disproportionate amount of the scheme, whilst the CB device does not even directly address the underlying problem of local branches.

26. If Parliament really does want to give SCD grants to every local charity group or branch, irrespective of whether or not they are an independent charity, there are simpler ways to meet the policy objective. Sections 6 to 9 need to be totally re-written in terms of local charity branches. Centralised charities like RNLI would have to provide HMRC with written evidence of local groups doing charitable works as well as fundraising. The local SCD claims would need to be independently examined or audited in some way, and channelled through the national charity. HMRC would find it much easier to deal with large charity HQs than thousands of local branches.

27. But even this direct solution would create anomalies. RNLI branches based on lifeboat stations would qualify for grants, whereas those in city centres (with no charitable lifesaving activities) would not. Charities like NSPCC or Barnardos that run their social work projects separately from their local fundraising would be disadvantaged.

28. In Schedule 1 allow the use of modern payment methods (eg cheques, web or phone-based, credit cards) as well as cash and notes. Charities are increasingly adopting modern (often electronic) methods to collect donations. These days donors can make standard Gift Aid donations not only through cheques and direct debits, but online (eg JustGiving or VirginMoney) and using ATMs, smartphones and credit cards. Why should SCD be different?

29. By restricting payments to only cash and notes the government is significantly reducing the value of donations that are eligible for SCD. It is ironic that the recent Green and White Papers on "Giving" promote a wide variety of modern payment options. Not much evidence of joined-up Whitehall thinking here!

30. In conclusion I want to thank the government for putting forward the SCD Bill, potentially benefitting the voluntary sector by up to £100m a year. But I believe that the way the scheme has been structured fails to recognise the way in which most charities actually operate and are funded. I am afraid SCD will land up offering small benefits to a limited number of existing GA-registered local charities (say 75 per constituency), but totally miss the opportunity to encourage far more small charities to register for ordinary Gift Aid as well.

September 2012

Prepared 16th October 2012