FINANCIAL NEWS: Tax credit to end with big losses

Mathew Little

The charity sector will have lost £404 million by the end of 2004 because of the abolition of Advanced Corporation Tax Credit, new research has revealed.

Figures to be published in the WM Company's Charity Fund Annual Review later this month show that charity investors have so far lost £201 million since Gordon Brown withdrew the tax credit on share dividends in 1999.

They will lose a further £92 million in 2002/3 and £110 million in 2003/4, when the transitional relief the Chancellor Gordon Brown introduced to ease the impact on the sector expires in April 2004.

Nick Kavanagh, chairman of the Charities Tax Reform Group, said: "Since these provisions came in, we have been saying that they are another big burden on the sector. One of our members - the Wellcome Trust - has lost £81 million.

"In our budget submission, we called on the Chancellor to extend the transitional relief at the current level of 8 per cent for another five years, and we are disappointed that this didn't happen."

The tax-free nature of charity investments was first undermined by Conservative Chancellor Norman Lamont who reduced the tax credit from 25 per cent to 20 per cent of UK equity dividends.

However, the situation was transformed by the incoming Labour government which abolished Advanced Corporation Tax and the associated tax credit.

In order to prevent a sudden and dramatic drop in charity income, Brown introduced "tax credit transitional relief" which was set at 21 per cent of dividends, dropping by around 4 per cent a year until it is phased out in April 2004.

The Chancellor defended the change, arguing that the loss to charities would be more than compensated by rising share values.

But the bull market of 1999 has slumped into the longest bear market since the second world war. Charities have been hit by a "double whammy" of plummeting investments and the gradual loss of the tax credit.

Total charity assets have dropped from £28.7 billion in 1999 to £17.5 billion last year, according to WM. UK equity holdings have more than halved from £26 billion in 1999 to £12.6 billion in 2002.

WM has also calculated the effect of the loss of ACT credit on the "average charity" measured in their total charity universe. It has lost £204,000, which will grow to £412,000 by 2004.

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