Charity tax debacle - update

The Spectator has a lot more information than my simple opinion piece, blogged yesterday, in its Coffee House blog: How Mitt Romney inspired the British charity tax debacle. Fascinating insight, and certainly confirming that the Departmental ministers for Business and for Culture, Media and Sport were cut out of the policy-making loop.
The Times gave five cases where HM Treasury say that charitable donations are abused. These all look pretty tenuous and could be handled under existing rules if the Charities Commission and HMRC do their jobs properly. To summarise the abuses and the charities' response:

	Treasury case	Charity response
1	Shares donated to charity found to be worth less than claimed	Relief is based on fair market value
2	Business gives money and claims relief. Money is then lent back.	Government has already cracked down on 'tainted donations'
3	Relief claimed for donation to a dubious charity that doesn't do much charitable work	This is for the Charities Commission to police
4	Tax relief claimed for donation to a dubious foreign charity	It's not allowed to claim relief on donations to charities outside the EU
5	Tax relief given on donation to UK charity which passes the cash to a dubious charity abroad	UK charity has to satisfy HMRC that the foreign charity would qualify

In a final dagger thrust to the Government's credibility, it also vented rumours that Oliver Letwin is to be asked to sort out the political mess. For heaven's sake!

Charities tax breaks - impact analysis?

The UK government has decided to limit the tax breaks that are available for charity donations because there are some cases where people use their donations to reduce their effective tax rates to very low levels. The feeling seems to be that money donated to charities is unjustifiably lost tax. The policy appears to have been introduced without proper planning or impact analysis. Other Government departments seemed not to have been consulted.

David Gauke MP, the Treasury Minister responsible for defending the policy on BBC2 Newsnight programme tonight (12th April) mentioned charities that don't distribute much money to real causes, but refused to name them. Apparently some charities lend money back to companies controlled by their 'donor'. To me this is a sign that the Charities Commission isn't doing its job properly, not a reason to cut off significant flows of major donations to key charities that support (to pick a few from many) health, social causes, sports, and the arts.

Whether he was completely out of his depth, or just defending the indefensible, is hard to say. But to me, without names and evidence, this just looked like bullshit being raked together to defend a poorly thought-through policy announcement.

Mansion tax - jobs for the boys (and girls)?

We're in the run-up to the Budget, and the temperature is rising.

Today there's been the spectacle of the Business Secretary trying to dictate the details of the Chancellor's proposals, in a way that would be slapped down very quickly in a single party Government, but which is apparently acceptable in a coalition.

Time and again, under the last Government and under this one, proposals are made and then become policy without the support of a proper impact analysis.

The 50p Income Tax rate was brought in as a political headline grabber without a decent analysis of its likely impact. There's always been concern that by driving away potential high earners, by making the UK appear less business-friendly, and by giving people a greater incentive to optimise their tax arrangements, this has actually had a negative effect on the total tax take. At least it's easy to collect, through the normal income tax system of PAYE and self-assessment returns, and payments are made direct to HMRC.

Now Dr Cable is trying to hit the rich through a so-called 'mansion tax', in exchange for which apparently his party would be happy to see the 50p rate abolished. Someone said on the BBC this morning that a 1% per annum tax on the value of properties above a £2 million threshhold could for some given set of assumptions bring in £1.7 billion, which is an improvement on the most optimistic guesses for the 50p rate. By the way, that's at least £10,000 that the owners of a £3 million property will have to cough up. Each year, and whether they have any free income or not.

Issue	Impact
No mechanism in this country for annual charges by central government on the owners of property - it only gets involved at sale or inheritance	Would the Government ask local authorities to collect the tax and hand it over? Would they pay local authorities a proportion of the collected amount for this service? And would they ask them to identify the target properties or would a whole new register, inspectorate and system of appeals be needed?
Tax would be assessed on unrealised gains	Either taxes have to be paid by liquidating some other asset or they have to be put on account and collected when the asset in question is sold or transferred. And that could be a very long wait.
Valuations can go up and down	It's fair to charge tax against capital gains when the gain is realised, but it must also be possible to reclaim or offset tax if a loss is made

I don't have a mansion or even an average-priced London house, but I fear that yet again, the UK is in danger of introducing a whole new piece of complexity to the taxation system. This will create jobs for the boys and girls - lawyers, tax collectors, surveyors and other hangers-on. However, it's quite likely that there will be little real positive benefit (after these costs) for the public purse, and an increasing level of misery for those affected.

It would be much better to direct the lawmaking effort aggressively at the Stamp Duty system, bringing all property in the UK under its scope, regardless of ownership, and then only giving relief against it under carefully-assessed criteria.

Kiva - an invitation

I just realised that Kiva wasn't among my blog tags. It should be. It's a US-based organisation that allows you to contribute to small loans made by microcredit institutions across the world. It allows people who don't normally have access to credit to develop businesses or personal opportunities that can change their lives.

Some people are worried by microcredit because the institutions that arrange loans and collect the repayments make a profit from doing so. To me, so long as the lending terms are fair and not usurious, I have no problem with that at all. It's all part of the development of an entrepreneurial business culture, and I think it should be applauded.

The process is fairly simple. The lending screens enable you to see the headlines of (usually) the thousand or so loans that are currently fund-raising, and filter them or order them by country, duration, purpose, male/female, individual or group, and so on. Then click through to see full details and make a loan. You can fund your account through PayPal which in turn can be funded from a debit or credit card, or a bank account.  The minimum loan amount is USD 25.00, about GBP 15.77 at current rates, less than a few beers at my local pub.

When you make a loan, the process allows you to make a donation to Kiva's running costs. This is deductible in some way that I don't understand for US taxpayers, but there's no Gift Aid deduction for UK taxpayers and so I decline the opportunity. When I eventually stop doing this, I'll simply donate my whole balance instead.

My experience has been pretty good. Two loans out of 79 so far have ended with a loss, one of USD8.70 when the borrower defaulted, and the other a currency exchange loss of USD0.10. Two more are delinquent, very late with payments but both have paid back more than 80% of their loans.

 I don't know of any equivalent that's Gift Aid-efficient in the UK, but I'd recommend this as a relatively low cost way to make a real difference to people that are doing their best to improve their lives and the prospects for their families. Here's a personal invitation link.

RBS - stop rocking the boat

I love the BBC Radio 4 Today programme, and listen to it every weekday.  But this morning's (23rd February) episode had me shouting at the radio.  Michael Fallon, MP, member of the Treasury Select Committee, and James Barty, of the Policy Exchange, were interviewed by Evan Davis following the Royal Bank of Scotland results announcement - a £700 million loss in 2011 compared with about half of that in 2010.  In the context, that's not actually too bad a set of results.

Evan Davis asked Michael Fallon questions with the drift that we need to change track - sell, hold, or do something else:
(a) the Government should dispose of its RBS shares now and 'cut its losses'
(b) "why do we need to get our money back, we know we've lost the money"
(c) if not then clearly investing in banks is good, and we should buy a couple more
(d) if share price is going to go up why don't we buy more shares
(e) or maybe we should break RBS up into smaller businesses or mutualise

James Barty thought it would be a good idea to give away the shares but with a clawback for the Government when selling.  This would remove the Government overhang of 83% of the shares, and reduce political interference in the bank's management, but it's never been tried in this country.  [Given the known track record of public sector information systems, it could even be a struggle to identify eligible reciipients in a reliable way].

Here's a link to BBC iPlayer - the segment starts at 07:52 (1hr 52mins 15sec into the recording). 

Harm is already being done to the financial sector in this country, with the media fanning the flames of an anti-business culture. The Government is damaging the valuations of banks by imposing stricter banking regulations far faster than competing countries.

The drift of the interview was disappointing, and the questions badly thought out.   It's really unhelpful to the aim of recouping the full public stake in RBS, for the BBC to probe for ways to destroy the value of assets that we're seeking to sell. Stephen Hester has charted a course - stop rocking the boat.