On 6 December HM Treasury published draft clauses for Finance Bill 2012, together with responses to various recent consultations, including those affecting the charity and philanthropy sector.

The clauses include provisions which formed part of what the Government has persisted in claiming were the "most radical and generous reforms to charitable giving for more than twenty years". Sadly, the Government's actions, while no doubt well-meaning, fall short of the rhetoric.

Incentive for charitable legacies - Jam tomorrow, not today?

The Government consulted over the summer on the proposal to allow a reduction in the rate of inheritance tax (IHT) on an estate from 40% to 36% where at least 10% of the net estate was given to charity. It is due to be brought in for deaths occurring on or after 6 April 2012. While not wishing to deter any incentive to charitable giving, we and many responses to the consultation cautioned against this proposal, inviting the Government to look instead to more effective and immediate incentives.

  • At most 3% of estates are liable to IHT, so this proposal is irrelevant to most of the population who might have been incentivised to give.
  • It is riddled with complexities which make the proposal difficult to "sell" to would-be testators and stand to increase the cost of administration of estates.
  • The proposal will not kick in until those who have made Wills which qualify for the IHT reduction die.

  • - This means that charities which may benefit from the proposal will not do so for years to come, whereas they need funds now.

    - It also means that many of the problems associated with it will not surface for some time yet, when, perhaps as the Government might hope, it may be something for a different Government to address.

  • The proposal risks causing those who might have given money to charity now to leave money in their Will instead, or to leave only 10% of their net estate when they might otherwise leave more. Charities already hard-pressed to raise funds will need to work harder to get across the message that funds are needed now.

Those most likely to be incentivised by the proposal are testators who were already minded to leave 4% of their net estate to charity. They can increase the legacy to 10% at no cost to the non-charity beneficiaries of their estate.

Charities may also wish to publicise the fact that the IHT reduction will apply also where an estate is varied by instrument of variation. Beneficiaries may be inclined to give away more where the gift is effectively subsidised by the Exchequer.

The draft clauses are open for consultation until 6 March 2012.

Gifts of pre-eminent objects

A further proposal announced in the 2011 Budget is also to proceed, although in this case the Government has paid some heed to the consultation responses. The idea is to encourage those with items of pre-eminent importance, such as works of art or other items of national, scientific, historical or artistic interest (which may be local, rather than national) to donate them to the nation by offering a tax reduction based on a percentage of the (agreed) value of the object. The idea is to preserve such objects for the nation.

The original proposal was for this new scheme to operate with the current Acceptance in Lieu scheme for IHT and, crucially, from the same budget of £20m, i.e. there was no new money. The Government has listened to the consultation responses and increased the combined annual budget for the two schemes to £30m. This is still small but nevertheless a welcome increase in the current climate.

The proposal was also criticised for being too mean in suggesting a tax reduction of 25% of the value of the item donated. The Government has moved slightly on this, increasing the reduction to 30% for individuals (against income tax and/or capital gains tax) which can be rolled over 5 years starting with the year in which the donation is made, but this must be specified in advance. Corporate donors will also be able to participate in the new scheme. Given the lower rates of corporation tax, corporate donors will be permitted a tax reduction of 20% of the agreed value, in the accounting period in which the donation is made.

The proposal is not immediately of benefit to charities, as donations must be made to the nation. However, charities may benefit under the scheme by having such objects ransferred to them, usually permanently subject to conditions. It does raise the risk, however, that a donor who might otherwise have given an object direct to charity, or left it in their Will, may choose instead to donate it to the nation through the new scheme.

The Government has also listened to consultation responses by removing barriers which may have deterred donations by those holding items subject to conditional exemption for IHT or deferred estate duty, where, previously, donations of such items under the new scheme might have given rise to a tax charge on the donor.

Draft guidance on how the new scheme will operate is available on the DCMS website. The draft clauses for the scheme are open for consultation until 10 February 2012.

VAT cost-sharing exemption

Article 132(1)(f) of the EU Principal VAT Directive introduced a provision to allow groups to exempt from VAT supplies made to members, subject to certain conditions. Among the organisations which could benefit from that provision are charities, universities, further education colleges and housing associations. The Government has so far failed to implement the provision into UK law, despite a campaign within the charity sector for it to do so. That is now to be put right.

The provision is designed to remove barriers to organisations which have exempt and/or non-business activities for VAT purposes joining with similar organisations to share costs, by removing the VAT costs currently associated with such practices. The Government has again listened to consultation responses and adapted its original proposal to enable a greater take-up of the proposal. However, the proposal will not be suitable for every organisation seeking to reduce costs by sharing services. In particular, the organisations seeking to share services must set up a structure which complies with all the conditions, including established a cost-sharing vehicle which is sufficiently independent for these purposes.

Overall, the proposal is to be welcomed, but more work will be needed to ensure that it is of practical use for the charity and not-for-profit sectors. The draft clauses are open for consultation until 10 February 2012.

Conclusion

Overall, the sector will no doubt welcome the fact that, even in current straitened circumstances, the Government maintains charities and philanthropy high on its agenda. It is to be hoped that the new proposals are only the foundations for new incentives still to come which may yet be both "radical" and "generous".

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