Thursday, April 12, 2012

Lots of rich hot air

Of course, while I was away, the government and it's well-healed friends were getting their knickers in knots over who was better at avoiding tax. The Budget - which appears to have had more booby traps in it than an Afghan highway - wants to limit the amount the rich can write off against tax. The whole thing has blown up in the face of the Big Society government with donors cancelling future giving hand over fist because they won't be able to write it off against tax.

Now, I'm a basic rate tax payer and I give to charity. When I do so, I sign a gift aid declaration so that the charity gets a little extra as a result of the tax I've paid on the donation (averaged out at 25%) being given to the charity. How come some people are able to write their donations off against the tax they pay? Apparently, according to David Cameron no less, some very rich people only pay 10% income on their earnings. How does that happen? Well, one reason of course is that our tax system is labyrinthine, a chartered accountants wet dream. Another appears to be that some people put their income into charities that, in the words of a Downing Street spokesman, don't seem to offer much by way of public benefit.

Clearly, some people are taking the mick and need to be stopped. But the slapdash way that it was announced in the budget has spooked the very charities that the big society is meant to be supporting. Of course, the charity that I'm involved with doesn't face this problem directly because we don't have anyone making huge personal donations.

The thing is that if the government is really serious about tax avoidance, it would go after the deals that are fairly commonly enjoyed by senior bankers (and other 'captains of industry'), where their tax bill is picked up by their employers in the interests of equalisation between tax regimes. Pull the other one!

The latest to have a fuss made about it is Bob Diamond of Barclays (you can read about it here). The bank is picking up his tax liability of £5.7m (for last year), so he doesn't have to (memo to the church...can you please employ me via my Lichtenstein shell company and pay my tax bill in the interests of equalisation?). He'll be doing it again in the current tax year and the one after that. No one's worth what he's costing us.

If the government nails this kind of shenanigans, then we'll know it's serious about tax avoidance. Until then it's just so much hot air


Rob Bond said...

Surely the benefit to the better off comes from the fact that even if you are a higher rate tax payer the charity still only gets the rebate of 25% of the gift. The balance of the tax paid is effectively returned to the taxpayer. As they have transferred their income to another 'person' they can no longer be charged the tax. This means (if my figures are right) that where someone paying 50% tax gives £500 to a charity the £500 tax originally deducted is split £125 to the charity and £375 is 'refunded'. Essentially a gift of £625 costs them only £125. Accepting your point that some are using the rules to manipulate the system it is also true that honest, no strings attached gifts to charities will cost rich people more - so they might decide to scale back their giving. This will be true even if the loopholes are removed (as they should be).

simon said...

But isn't the solution to give gift aid on donations at the rate of tax paid to the charity? So gifts by 50% tax payers attract gift aid of 50% paid to the charity not the donor. I thought the idea of giving to charity is that the charity benefits not the giver.

Rob Bond said...

I think my excitment with the maths has left my attention to the english a little bit lacking. I was trying to incorporate two points: 1)In response to your comment of'How come some people are able to write their donations off against the tax they pay?' I was pointing out that they do this is the same way any higher rate tax payer who makes a gift aided donation gets a tax reduction. That will include, for example, any church goers who pay tax at 40% (and part of the government's strategy appears to be to cover the reduction of the highest rate tax by drawing more people into the 40% bracket). Although it was not your intention,I was a little concerned that such folk should not been swept up with the denouncing of people who think that not paying (much)tax is a birthright.
2) Although your proposal seems to be right and just it would mean that where a 50% tax payer gives £125 the charity would get £250. Under the current system a (net) gift of £125 means the charity would get £625. The system is warped (undeniably) but it can benefit the charity and encourage the genuinely philanthropic high-tax giver. Is the better solution to eliminate the 'bogus' charities from the system?