Charities could lose ‘hundreds of millions of pounds’ in Gift Aid, Chancellor warned

The Civil Society Group urges the government to implement an automatic transition mechanism for charities if the basic rate of income tax is reduced

The government must protect voluntary sector income if it makes changes to income and inheritance tax (IHT) in the next Budget, a group of almost 100 charity representatives have warned. 

The Civil Society Group, a coalition of nearly 90 charity umbrella bodies, has pushed for the government to “streamline and review the charity tax and compliance systems”, in a letter to Jeremy Hunt, the Chancellor of the Exchequer.

The group says that if the Spring Budget in March includes a reduction to the basic rate of income tax, an automatic transitional relief mechanism, of at least three years, for Gift Aid should be implemented to protect voluntary sector income.

“If such a measure is not introduced, it would mean hundreds of millions of pounds of income for the sector would be lost,” the letter warns. 

It also points out that such a measure was put in place on both of the last two occasions when the government announced a reduction in the basic rate of income tax. 

“Introducing an automatic measure will provide much needed clarity for charities and the people and communities they serve,” the letter says. 

“Ensuring that such a mechanism is automatic will also remove any potential additional administrative burden that could be present.”

The letter also urges the Chancellor to commit to preserving financial incentives for legacy donations, which, under the current inheritance tax framework, are tax-free. The tax rate also reduces from 40 per cent to 36 per cent if a person leaves 10 per cent or more of their estate to charity. 

“In the event that HM Treasury does decide to review or reform IHT, we strongly urge officials to consider the risk to charitable legacy income and to consult with the sector for their views on the impact of proposed changes, and any suitable alternative fiscal incentives to protect this vital income stream,” the letter says.

The letter also pushes for the government to introduce a new charity VAT rate on purchases made by charities, which would ideally be set at zero per cent.

Other requests made include the introduction of an “essentials guarantee” to ensure that Universal Credit protects people from going without necessary basics, which the group says would reduce the growing demand for services provided by charities.

The letter also urges the government to uplift local authority grants and contracts to meet the true costs of delivering public services, echoing calls made last year by NCVO’s Cost of Giving Crisis campaign.

The group has urged Hunt to take action on these calls before the Spring Budget to “alleviate this challenging financial environment in which the voluntary sector continues to operate”, adding that there has been “little or no improvement” since last year’s Autumn Statement.

Richard Sagar, head of policy at the Charity Finance Group, said: “Charitable and voluntary sector organisations continue to work harder than ever to support their communities, particularly those that remain hardest hit by ongoing economic pressures. At the same time, we have seen very few real improvements in the sector’s operating environment.

“Many organisations that are doing important and often vital work are now facing existential threat. The Civil Society Group is calling upon the government to do more to ensure the most vulnerable and disadvantaged people are better protected, and that charities can continue to provide their critical services.

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