News Analysis: Is it back to the future for Gift Aid?

Business and charities disagree about the desirability of a U-turn on tax breaks. Mathew Little reports.

Back in 1999, among a plethora of incentives designed to 'Get Britain Giving' was an innocent-looking simplification of the company tax system.

Charities were to be relieved of the burden of reclaiming tax relief on corporate donations, the Treasury announced. Companies would no longer have to make allowance for tax when giving to charity. If they wanted to make a donation of £1,000, instead of giving £700 and letting the charity reclaim the difference in tax, they would donate £1,000 and then claim the tax themselves. Receiving donations would be simpler for charities, and giving would be psychologically more appealing for companies because they would receive tax relief. Donations would grow, it was assumed.

But the change, supported by charities as much as by the private sector, was fatally flawed. Two years later, research by the Charities Aid Foundation revealed that company donations had fallen by £66m because of the change, a drop of 21 per cent in corporate income to the sector.

Despite a campaign by CAF and others to explain the changes, companies invariably kept their donations at the same level, oblivious to the fact that charities could no longer claim tax relief.

"It didn't work," says Mike Wade, head of central fundraising at development charity WaterAid. "Our own experience, as well as that of our staff, gained through working at a range of large and small charities, is that few, if any, companies increased their giving as a result of their being able to claim back tax on their gifts."

Lobbying for a U-turn

Seven years after the change was introduced, pressure is growing on the Government to make a belated U-turn. The Institute of Fundraising is calling on ministers to revert to the pre-2000 Gift Aid system. It says that 87 per cent of its members agree.

With annual corporate donations to charity currently standing at about £367m, the sector could find its income boosted by approximately £80m a year if the 20 per cent drop in donations that came about after the 2000 change was reversed.

There is support for the change outside the fundraising community. "It's easy to see the logic for switching back to the old system," says Graham Leigh, director of development at the Directory of Social Change.

"The simple fact is that companies have been pocketing the tax breaks for themselves without increasing their community investment budgets accordingly. If we were to throw in a recommendation to simplify the reclamation process for charities, then it would look even more attractive to the sector."

The business community is less convinced of the need for reform, however. The Institute of Directors, the network of UK business leaders, says the issue is one of presentation and education.

"We accept that the change does seem to have had an effect," says Patricia Peter, head of corporate governance and employment at the institute. "But the remedy is probably education."

According to Wade, that approach has been tried, and it has failed. He believes that a U-turn could spark a revival in corporate giving because businesses would be convinced that their donations - worth more to charities with the tax relief added - would be more likely to achieve real change. "It's about psychology," he says. "Companies need to be inspired to believe that their donations are going to make a difference in the world. Telling them it is cheaper for them to give doesn't do that."

How to arrest the decline?

The wider question for the sector is whether a change in the corporate Gift Aid system can arrest the decline of cash giving by UK businesses - a form of giving rapidly being eclipsed by gifts in kind and of staff time. "In the short-term, charities would get more," says research consultant Cathy Pharoah. "But there is no reason to think this would lead to more giving in the long-term, which is what we really should be campaigning for."

Leigh says that the demand for a return to the original corporate Gift Aid system, though entirely justified, must be weighed alongside other hopes for the Gift Aid review.

"Whether or not this is the right or best battle to fight at this stage is a different question," he says. "It depends on the total suite of requests that are put before HM Revenue & Customs and the Treasury. If we're not careful, they might grant this concession at the cost of something potentially more beneficial to the sector."

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