A healthy charity sector is a crucial part of a good society, writes Dan Corry. He draws on the Charity Tax Commission’s latest report to explain why the sector deserves more study by academics, researchers, and policymakers.
Civil society is a very important part of what makes a good society and underpins a strong economy. Yet I am constantly amazed at how the policy community rarely tries to get under the skin of what is happening in the UK around this crucial part of our body politic.
I wrote about this a few years ago after four years on the ESRC Research Committee where I tried to get social scientists interested in wanting to understand what makes a strong civil society; how charities are evolving and what issues they face; what makes them successful; what hinders them; where they are located and what that means for communities. I’m not sure this made much headway: the money certainly never flowed towards these topics.
My latest confrontation with this lack of research on charities and civil society has come from spending some time as a member of the Charity Tax Commission. Charities receive various tax breaks as a consequence of their charitable status. They are exempt from taxes on much of their income and pay less in business rates. They can also claim part of the tax that would be paid by their donors for themselves (Gift Aid) and individuals making donations at the higher rate of tax can get tax reliefs on their donations. But there are also many rules around trying to prevent unfair competition with the private sector that make the system – especially on VAT – fiendishly complex. This is a nightmare, especially for small charities and community groups.
This set of tax breaks gives the charity sector a very valuable £5bn according to government statistics and we need to make sure that this use of precious tax revenues is configured in a way that achieves the maximum impact and the strongest possible civil society. That’s why I had been calling for a review of charity tax breaks for some time and eventually an independent Commission was established with Nick Montagu, a former head of the HMRC, as the chair and I was asked to be a member of it. The Commission’s report was published in July 2019.
Embedded in it are some proposals that could be enacted pretty fast – we have enough evidence to know they make sense. Key amongst these is the idea of making the top rate tax relief go to the charity, not back to the individual, unless the top rate payer specifically opts out. In addition, the report sets out some principles for judging the case for charity tax breaks in the future, which I hope will help debates in this area. They try to get to the very heart of why we might give charities tax breaks at all. In addition, the report sketches out some longer term directions for change, around VAT, business rates, and Gift Aid that could be very significant if the ideas do not get lost in the long grass.
But the experience overall was a bit depressing. First, there was complete lack of interesting thinking about how you might want to construct a structure for charity taxation that led to more social good, more equally spread. This chimed badly with the feeling that a number of Commission members felt – that the current system of charity tax breaks was born in another era and does not address the needs and nature of the non-profit world. We held valuable sessions with a number of economists and policy types but there had been little thinking about these wider issues. Fair enough that where the system seems flawed – in terms of who gets what – economists would argue that the first best solution is to use grants to ameliorate them rather than to tweak or change tax breaks, but this seemed to me to not go far enough and was unlikely to happen in the real world. Our hope that some in and around the sector, including academics, would come up with bold new and better ways of supporting civil society that we could engage with, turned out to be naïve.
Second, there is a real dearth of data and evidence on the impact of charity tax both in the UK and other countries. Sure, there is some good academic work on the elasticity of giving (i.e. how much a tax break increases giving above the cost of the tax break itself), but very little on how the tax breaks (like VAT and business rates) influence the way charities organise themselves, the inefficiencies they may give rise to and so on. We need academics to dig into this area if we are to use resources well. Some of the problems here were to do with availability of data – and the HMRC’s reluctance to let people at it too much – and the Commission had some quite tough things to say about this. The radical proposals were stymied because we felt we did not have the evidence or data to help us understand the implications of such change: hence they became agendas for the future, not immediate proposals.
But even a bit of digging into the data can enable new agendas to emerge. For instance, the data report we published alongside the main report is some of the most crucial reading – with some of the striking things the data showed about where the tax breaks go. Surely some work trying to understand how charities are turning themselves upside down to minimize tax, in terms of charity structure (especially where there is some trading going on, or in joint research etc) is worth studying.
Charity tax simply has not kept up with the modern word. Not just digital, but the growth of charities trying to get government contracts, being half social enterprises, mixing grants and contracts, having social investment, wanting to collaborate on research etc. It has not kept up with the way we think about civil society and its role.
The whole panorama of civil society, the charity sector and philanthropy deserves more study and more policy thinking. Let’s hope our report has sowed a few seeds in policy and academic minds.
Dan Corry is Chief Executive of charity sector think tank and consultancy NPC. He has had a varied career in public policy and economics, including as Head of the Number 10 Policy Unit and Senior Adviser to the Prime Minister on the Economy from 2007 to 2010.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Pixabay (Public Domain).