The real cost of charities to the taxpayer

Tot up all the tax breaks and the real cost of the charity sector to the taxpayer is far higher than you think, says Merryn Somerset Webb.


Britain's red squirrels have six charities working for them

Right. Brace yourselves. I am going to give you a pile of statistics. I am then going to say some things that will make most of you really angry. And, finally, I am going to go on holiday for two weeks somewhere where there is no wi-fi and I can't hear you complaining. Ready? Here we go.

Let's start with HMRC's 40-page paper on UK charity tax relief statistics. Covering the past 25 years, this takes all the charitable tax reliefs that can be accurately calculated, and adds them together.

The most well known of these reliefs is Gift Aid, which works like this: you give £100 to a charity and the charity immediately gets to claim back basic rate tax on the cash that's £25.

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Should the donor be a 40% taxpayer, he gets to claim back the rest of the tax paid via his self-assessment form that's another £25 (£125 times 20%).Sofor every £100 our donor hands over to the causes he loves, the Treasury chucks in £50. If he is a 45% taxpayer, it is slightly more. That adds up.

Direct payments to charities (not the donors, just the charities) under the Gift Aid scheme came to £1.2bn in 2014-15. Charities also get at least 80% relief (and often 100% relief) on business rates. That comes to another £1.6bn-odd.

Then there is VAT relief (£250m) and stamp-duty relief on buying property (another £100m or so). Add that lot up and you get a total of about £3.3bn. But it doesn't end there.

Next, we have to add in the reliefs given to individuals. Inheritance-tax relief comes to another £600m (and rising). Payroll giving (where people give before-tax through their workplace) is £40m, and the Gift Aid relief to higher rate taxpayers discussed above adds another £400m. The total relief to individuals comes to about £1.2bn. Added together, this gives us a running total of £4.5bn.

But we still aren't finished. HMRC doesn't give the numbers itcan't count accurately. Companies don't pay any tax on the profits they hand to charities, and charities don't pay any tax on dividends, interest income (despite producing some £3.5bn in investment income every year), or on capital gains.

Finally, if we want to come up with a total to tell us how much the charitable sector costs the state, we need to look at the direct grants to them that have nothing to do with HMRC (the now closed Kids Company got £3m as a direct grant last week).

According to the National Council for Voluntary Organisations, this comes to another £2.2bn. Our running total of the cost of the charitable sector to the taxpayer now comes to a minimum of £6.5bn and that doesn't include the £11.1bn paid by government bodies to charities for some of the services they provide. Charity is a serious business.

This matters.Firstly, because is it is a huge amount of taxpayer money. And secondly, because all too often, that money isn't spent as taxpayer money should be spent.

There are nearly 200,000 charities in the UK, but only a tiny percentage of these can be adequately scrutinised by the Charity Commission, which has no real control over how the money is spent anyway.

If you want the detail of the inadequacies of the sector, you might want to read David Craig's The Great Charity Scandal. There are, he says, three key problems.

The first is duplication and inefficiency why does the UK need six charities devoted to the wellbeing of the red squirrel, or over 80 separate charities for people with alcohol problems?

The second is that not enough cash goes on charitable activity. I know of some charities who spend more on keeping their final salary pension schemes going than they do on their charitable activities. A reader recently sent me details of a hospice in Cornwall with a mere 24 beds that pays its top five staff a total of £500,000.

The third is that what you and I might think of as charitable activity is not the same as what many charities think of it as. Oxfam spends some £20m a year on political campaigning. Is that really a charitable expense, or is it just lobbying? And if it is just lobbying, why does the taxpayer have to cover it?

I will add one more thing: tax hypothecation. Our Gift Aid system allows the wealthy to direct tax money to their pet causes. If a 45% taxpayer decides to put £1m into his family foundation, then allows his sweet children to be educated in social climbing and philanthropy by each choosing who to donate their share to, we all have to stump up as well.

In this case, £450,000 that would have made its way into the Treasury (think schools and hospitals) ends up saving donkeys or subsidising someone's local opera club. The same happens if he decides to give the lot to the Serpentine Trust in the hope of being invited to the Serpentine Gallery's summer party.

You might think that the idea of being able to direct your taxes to the causes you like is democratic. But it is actually anti-democratic: choose where to spend the tax you should be paying into a group pot, and you just opted out of the democratic system. This just doesn't make any sense, politically or financially (given how much the money is needed elsewhere).

So here's my solution: some charities are absolutely brilliant and absolutely vital to the successful and compassionate operation of the state; some are awful; others are just pointless. So we need to decide what is a taxpayer priority and what is not.

Anything that is a priority cancer research, good hospices and the like can keep being government-financed, but also be treated more like a government department (subject to the Freedom of Information Act and all the usual transparency, for starters).

But anyone who wants to keep financing donkeys, literary festivals, political lobbyists, art projects and the apparently endless UK squirrel crisis can continue to do so out of their post-tax income.

There is no need for the levels of do-goodery in society to fall, just for the state financing of that do-goodery to fall. That should cut the sector down to a manageable size, remove much of the potential for corruption and inefficiency, and give the government another £4bn or so to spend on the basics of good government rather than on the non-core business of other people's passions.

This article was first published in the Financial Times.//

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.