Wealthy individuals are avoiding tax by giving to charities that do little charitable work, the Prime Minister’s spokesman said yesterday.
He was speaking in defence of a Budget decision that, from April 2013, tax relief will be given only on donations that, including Gift Aid, are under £50,000 or 25 per cent of a person’s income, whichever is higher.
The Prime Minister's spokesman said that some individuals were exploiting the reliefs to reduce their tax burden.
"In certain instances, individuals may be giving money to charities and those charities don’t in all cases do a great amount of charitable work," he said.
"The system as it stands can be and is being abused. We cannot be in a situation where very wealthy individuals are able to wipe out their tax bills by using these reliefs."
He said that large donations to foreign charities might be a particular problem, saying the tax relief "does not just apply to charitable organisations that operate here".
HM Revenue & Customs has been concerned that donations to charities elsewhere in the EU could lead to widespread fraud. Following an announcement in the 2010 Budget, the government announced that UK donors could receive tax relief on donations to charities anywhere in the EU.
That decision was taken after a European Court of Justice ruling the previous year, known as the Persche case, made similar rules mandatory in all EU countries.
HMRC has previously told charity tax experts that it estimated tax fraud involving donations to UK charities to be worth tens of millions a year, and has said that tax fraud involving donations to European charities could be £150m a year by 2019.
The Chancellor, George Osborne, said in an interview with The Daily Telegraph on Monday that he was "shocked" to discover that many wealthy people paid little income tax because of legal loopholes, including gifts to charity, and that he did not think this was right.
Both Osborne and the Prime Minister, David Cameron, have said the government will take measures to protect philanthropy from the tax relief cap, but have not announced what those measures will be.
John Low, chief executive of the Charities Aid Foundation, said in a statement that it was wrong to equate donation to charity with tax avoidance.
"Philanthropists who make large donations give away far, far more than they could ever claim in tax relief," he said.
"If there are specific problems with the current system, we would naturally be delighted to work with the Chancellor to ensure tax reliefs are used for the purpose intended. But imposing a blanket cap on tax relief will cost charities millions of pounds by making it more difficult for philanthropists to make major donations.
"We should recognise and celebrate today’s great philanthropists, not brand them as wealthy tax dodgers."
Several high-ranking charity figures, including Sir Nicholas Hytner, director of the National Theatre, also criticised the tax relief cap over the weekend.
Hytner told The Observer newspaper that the cap was bizarre and said it ran directly contrary to everything else the government had previously said.
"They specifically asked us to get our act together in our appeal to the very wealthy in order to cover the gap in our funding that had been created by the spending cuts," he told the newspaper.