Merging income tax and national insurance would provide huge Gift Aid boost, tax experts claim

Office of Tax Simplification recommends merging national insurance into the basic rate of income tax, but sector is doubtful such proposals would go ahead

Pesh Framjee, head of not-for-profit, Crowe Clark Whitehill
Pesh Framjee, head of not-for-profit, Crowe Clark Whitehill

Changes to the tax code proposed by the Office of Tax Simplification could increase the value of Gift Aid by hundreds of millions of pounds, charity tax experts have said.

The OTS, launched by the Chancellor, George Osborne, in July last year to provide an independent review of UK tax reliefs, recommended merging income tax and national insurance in its final report, published last week.

If the proposals went ahead, charities could claim Gift Aid on national insurance payments, as well as on income tax.

From the end of this month, Gift Aid will be worth 25 pence on each £1 donated. This would increase to about 47 pence under the proposed rules.

"If they merged national insurance into the basic rate of income tax, it would mean a huge windfall for charities," said Pesh Framjee, head of not-for-profit at the accountancy firm Crowe Clark Whitehill. "It would be brilliant for the sector, but I don't believe they would allow that to happen. The government would institute rules to prevent it."

Trevor James, a partner at the accountancy firm Sheen Stickland, said that if the two taxes merged it would be more likely that the government would retain the current level of Gift Aid, but reclassify it as government expenditure rather than tax relief.

"I would not expect the Treasury to welcome an increase in Gift Aid with open arms," he said. "They've been very clear that they don't want to spend any more money on it."

The report also recommended that the OTS kept all the charity tax reliefs it examined, and said there was potential for charity VAT reliefs to be "revised and clarified" to simplify the administrative burden.

However, it recommended abolishing community interest tax relief – a relief for community development finance institutions – which has an exemption from EU state aid rules that expires in 2012. The government is currently considering whether to apply for an extension.

"The aim of CITR was to encourage the growth of CDFIs," the report says. "The policy is still valid, but consideration should be given to whether the incentive could be provided in another way.

"We recommend that this relief be abolished, as there is very low take-up, negligible savings and certain complexities."

Bernie Morgan, chief executive of the Community Development Finance Association, which represents CDFIs, the main lenders using CITR, last week called for the exemption to be extended.

The government has not committed itself to following any OTS recommendations.

When the OTS launched in July, David Gauke, Exchequer Secretary to the Treasury and the minister charged with setting up the OTS, said anything put forward would receive serious consideration.

"Questions will certainly be asked if the OTS puts forward recommendations and ministers simply ignore them," he said.

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