The document proposes an alternative approach to the UK government's proposed cap on tax relief for charitable donations by higher rate taxpayers. It suggests donors have a choice to either receive tax relief up to the cap, or opt out of tax relief allowing the charity to claim the full amount of tax paid. An example shows that under the alternative, a donor could provide £1.25 million total to charity by donating £687,500 while forgoing tax relief, compared to £1.25 million under current rules and £1.062 million under the government's proposed cap. Research is cited suggesting charities benefit more when donors opt to increase donations rather than claim tax relief personally.

1. An Alternative –
Higher Rate Tax
Donor Choice and Charity Benefit 30 Apr 2012

2. Government Announcement
• Budget 2012 – George Osborne
announces a cap on tax relief on
charitable donations for higher rate
tax payers of 25% or £50,000
(whichever is higher)
• The cap is expected by the sector
to impact on major philanthropic
gifts to charities in the UK

3. Current situation
What happens to a £100 donation
Donor on basic tax Donor on 40% tax Donor on 50% tax
rate of 20% rate rate
Gift Aid = £25 Gift Aid = £25 Gift Aid = £25
Tax Relief = £0 Tax Relief = £25 Tax Relief = £37.50
Charity receives £125 with the addition of Gift Aid
The donation cost a The donation cost The donation cost
basic tax payer £100 the donor £75 after the donor £62.50
the tax relief after the tax relief

4. Sector Concern
• Figure widely quoted in sector
press is of up to £1.3bn worth of
donations at stake as a result of
proposed cap
• “Give it back George” campaign
led by NCVO and CAF urges
government to return to status
quo before cap
• BRC agrees with aims of
campaign, but proposes an
alternative for discussion

5. British Red Cross Proposal
- An Alternative
The donor has two choices.
Either:
Option One Option Two
• The donor sacrifices all tax relief in • The donor opts in to tax relief
the interest of public benefit • Tax relief cap applies as set out by
• Donor pays full tax on income for Or current government proposal
donation
• Charity receives full amount of tax
• No cap applies

6. Current System
• Under the current system, higher rate tax payers can claim
tax relief on charitable donations.
• Donors gain no personal benefit from donations as relief is
linked to donation
• Tax relief ensures that donors are not disadvantaged by
charitable giving through having to pay tax on foregone
income
• Charities receives Gift Aid on basic rate paid by the donor,
which is removed from tax relief before donor claims it
• Thus, donations are made partly from a donor’s gross
income and partly from their net income

7. Current System – Example*
• A recently retired wishes to make a significant donation to one charity this year. While their income is
£300,000 in the current tax year, their income in previous years was higher, enabling them to be
fortunate enough to donate £1,000,000 this year to a charity of their choice
• In this example the donation is being made under Gift Aid, excludes any other reliefs and the donor is
taxed at a uniform rate of income tax at 45%.
Donation: £1,000,000
Charity claims £250,000 Donor claims £312,500
Gift Aid Tax Relief
Total cost to donor:
Total to charity: £1,250,000
£687,500
• Under the current system, donors have been – until April 2012 – able to donate their tax refund through
their annual tax return.
• In the above example, the £312,500 relief could have been donated to the charity therefore bringing the
total to £1,562,500.
* All calculations are explained in full in the Appendix

8. Government Proposal – Example*
• Using the same illustrative example as before, a recently retired donor, currently at £300,000 annual
taxable income, donates £1,000,000 to a charity.
• The donation is being made under Gift Aid, excludes any other reliefs and the donor is being taxed at a
uniform rate of income tax at 45%. As the donor wishes to receive tax relief, this reaches the
government cap of 25% of annual income, or £75,000
Donation: £1,000,000
Charity claims £250,000 Gift Donor claims £75,000 Tax
Aid Relief
Total to charity: £1,250,000 Total cost to donor: £925,000
* All calculations are explained in full in the Appendix

9. Government Proposal - potential
implications
• Charities believe that all areas of charitable giving will be affected:
monetary donations, Gift Aid, gifts of lands and shares
• The proposal adds further layers of complexity which is likely to deter
donors
• Anecdotal feedback from donors is that until there is clarity, they are likely
to hold off making decisions about additional gifts to charity, creating
inertia
• 2012 may see a hike in giving pre-cap followed by a sharp drop in giving
in 2013.
• British Red Cross does not believe that the need to prevent tax avoidance
schemes by some presents enough of a issue to raise such a threat to
charitable giving

10. British Red Cross Proposal - Example
• The same recently retired donor from previous examples wishes to give a
net donation of £1,250,000 to charity.
• The donor has an annual taxable income of £300,000
• The donation is being made under Gift Aid, excludes any other reliefs and
is being taxed at a uniform rate of income tax at 45%.
• While the donor would be eligible for tax relief, in order for the charity to
receive the greatest possible benefit, they have forgone this, allowing the
charity to claim the entire amount of tax paid

11. British Red Cross Proposal – Example*
Donation: £687,500
Charity claims £171,875 Gift Donor claims no Tax
Aid Relief
Charity receives remaining
£390,625 tax paid
Total to charity: £1,250,000 Total cost to donor: £687,500
• A donor wishing to receive tax relief would remain subject to the
cap, enabling HMRC to prevent potential fraud and abuse
* All calculations are explained in full in the Appendix

12. Comparison – Cost of Giving
Cost to donor of a net £1,250,000 gift
under all three scenarios:
Current System Government Proposal BRC Proposal
• Donates £1m • Donates £1m • Donates £687,000
• Receives tax relief of • Receives tax relief of • Receives no tax relief
£312,500 £75,000 • Cost of donation:
• Cost of donation: • Cost of donation: £687,500
£687,500 £925,000

13. Highly attractive to personal foundations
Especially for those endowing personal foundations, a
£1m donation would be transformed into £1.81m of grant
making opportunities.
Donation: £1,000,000
Charity claims £250,000 Gift
Aid
Donor claims no Tax
Relief
Charity receiving remaining
£562,500 tax paid
Total to charity: £1,818,181 Total cost to donor: £1,000,000

14. Research
• HMRC research 2009 shows strong evidence in favour of the principles
in the BRC proposal:
“… the majority of donors reported that they would not change their
donations out of net-of-tax income if faced with changes to Gift
Aid. In practice this means that if the amount of tax relief going to
charities increases, charities benefit by the full amount; while if
the amount of tax relief going to the individual donor increases,
charities see little benefit”
(p 9: Gift Aid donor research: Exploring options for reforming higher-rate tax relief, a report for
HMRC & HMT. Kimberley Scharf, Warwick University and Sarah Smith, University of Bristol)

15. BRC proposal
What happens to a £100 donation
Donor on basic tax Donor on 45% tax
rate of 20% rate
Gift Aid = £25
Tax Relief = £0
Donation costs the donor £100
Charity receives Charity receives additional
additional tax paid = £0 tax paid = £57
Charity receives £125 Charity receives £182

16. Conclusion
• Evidence suggests that a match is more likely
to motivate philanthropic gifts than relief
• BRC proposal offers the greatest possible
income for the charity, at the lowest possible
cost for the donor
• HMRC is still empowered to prevent potential
abuse and fraud
• Applies consistent rule to all donors,
regardless of tax rate

17. Appendix A
• This appendix contains the explanations and calculations for the
examples contained within this paper.
• For the purposes of all three examples, a recently retired donor has
taxable income of £300,000 in the current tax year and excluding
any reliefs, is taxed at a uniform rate of 45%.
• In practice, there are a number of variables that could impact the
value of the tax relief and income tax percentage, thus affecting the
cap and Gift Aid values available. These examples do not take into
account donations of shares and assume a cash donation.
• The calculations used in this paper are correct to the best of our
endeavours, however we recognise this is a complex subject area
with multiple variables that could impact calculations.

18. Example 1 – Current System
Donation £1,000,000 Gift from the donor.
= £1m gift x 20/80. Gift Aid calculations are based on the basic rate
tax on gross income, whereas the donation represents net
Charity claims income. As such, it is necessary to multiply by 20/80 to
£250,000
Gift Aid calculate the basic rate tax paid on gross income. In this
example, the gross income for basic tax rate would be
£1,250,000 and thus £250,000 Gift Aid for the charity.
£1,250,000 x 25% (the 25% calculated by taking 45% tax rate
minus 20% already claimed by the charity). This represents
the amount the charity received (gross income) times the tax
Tax relief to
£312,500 rate of the donor (45%) minus the basic rate the charity
donor
already reclaimed (20%). As this is from gross income, the
actual tax rates are used, rather than having re-calculate a
gross income as was done with the Gift Aid calculation.
Net cost to
£687,500 The £1m donation minus the tax relief (£312,000) received.
donor
Total income to
£1,250,000 The £1m donation plus £250,000 Gift Aid.
charity

19. Example 2 – Government Proposal
Donation £1,000,000 Gift from the donor
= £1m gift x 20/80. Gift Aid calculations are based on the basic rate
tax on gross income, whereas the donation represents net income. As
Charity claims
£250,000 such, it is necessary to multiply by 20/80 to calculate the basic rate tax
Gift Aid
paid on gross income. In this example, the gross income for basic tax
rate would be £1,250,000 and thus £250,000 Gift Aid for the charity.
- The donor is eligible for tax relief of 25% of annual income or
£50,000, whichever is greater. In this example, the donor’s annual
taxable income is £300,000, thus eligible to claim tax relief up to
£75,000, 25% of their income.
-To calculate the total possible tax relief on this donation = £1,250,000
x 25% (the 25% calculated by taking 45% tax rate minus 20% already
Tax relief to
£75,000 claimed by the charity). This represents the amount the charity
donor
received (gross income) times the tax rate of the donor (45%) minus
the basic rate the charity already reclaimed (20%). As this is from
gross income, the actual tax rates are used, rather than having re-
calculate a gross income as was done with the Gift Aid calculation.
- While the relief could potentially be £312,500, due to the retired
donor’s current income level, he/she is capped at £75,000.
Net cost to donor £ 925,000 The £1m donation minus the £75,000 tax relief.
Total income to
£1,250,000 The £1m donation plus £250,000 Gift Aid.
charity

20. Example 3 – BRC Proposal
Donation £687,500 Gift from the donor
= £687,500 gift x 20/80. Gift Aid calculations are based on
the basic rate tax on gross income, whereas the donation
Charity claims
£171,875 represents net income. As such, it is necessary to multiply
Gift Aid
by 20/80 to calculate the basic rate tax paid on gross
income.
= £687,500 x 45/55 - Gift Aid value. As with the Gift Aid
calculation, the £687,500 is a net value and therefore a gross
value needs to be calculated to capture the total tax paid on
Charity claims their donation in the current and previous years. By taking
£390,625
tax paid £687,500 x 45/55, the total tax paid is £562,500. As the
charity has already claimed £171,875 through Gift Aid, thus
there is £562,500 minus £171,875 = £390,625 remaining for
the charity to claim.
Tax relief to Not applicable as the donor has decided to opt-out of
£-
donor receiving tax relief
Net cost to The donor is not receiving tax relief and therefore the net
£687,500
donor cost is the value of the donation
Total income £687,500 donation plus £171,875 Gift Aid plus £390,625
£1,250,000
to charity remaining tax received by the charity.