U.K. Nixes Charitable Tax Deduction Cap

May 31, 2012; Source: BloombergBusinessweek

The conservative government in the U.K. is having problems similar to the Democratic government in the White House regarding efforts to cap the tax benefits of charitable giving.  The proposal of Chancellor of the Exchequer George Osborne to include charitable donations in a cap on tax relief, like President Obama’s proposal to cap charitable deductions along with mortgage interest and local and state tax deductions for the wealthy, has had a rough go of it, getting savaged by nonprofits and from the governing parties’ own backbenchers.

The proposal engendered such widespread opposition that Osborne reversed himself and dropped the cap because, he said, it could have “potentially damaged” charitable giving. The government’s reversal will cost the budget 10 million pounds, which, along with other 180s that the government has made on tax issues in recent days, has turned the Cameron government’s austerity plans into what a Labour Party spokesperson called an “embarrassing shambles.”

CEO of the Charities Aid Foundation John Low said that he and his colleagues were “delighted that the government has responded to the challenging calls from philanthropists and charities across the country and taken the bold decision.” Daniela Barone Soares, CEO of Impetus Trust, called the decision “a big win for the sector, the people we serve and for society as a whole.”  Nick Starr, executive director of the National Theatre, announced, “This is great news and the speed and decisiveness with which it has been done is heartening.” The voices of British charities supporting the Osborne proposal or criticizing the government’s reversal are few and far between.

The Osborne proposal had basically capped the amount of tax relief a British taxpayer could claim at 50,000 pounds. The reversal removes tax relief for charitable giving from that cap.  The Chancellor told the Financial Times, “It is clear from our conversations with charities that any kind of cap could damage donations, and as I said at the Budget that’s not what we want at all.”  But dropping the “charity tax” was preceded only a few days ago by Osborne’s decision to drop a value-added tax on hot pastries (the so-called “pasty tax”) and caravans (or, in the U.S., mobile homes), neither of which are quite as high-minded as a decision to protect charitable giving.

Like President Obama’s charitable giving cap, Chancellor Osborne’s charity tax might not be entirely dead. A day before the Osborne announcement, Budget officials hinted at possible future revisions to the austerity plan, such as raising the tax relief cap above 50,000 pounds or structuring the charitable giving limitation to be averaged over three years rather than taken on an annual basis.

Labour whacked the remainder of Osborne’s increasingly shattered austerity plan, but even in more of a shambles is the Cameron government’s “Big Society”—its plan for reducing the heavy hand of the British government and stimulating charities to take on more responsibility for addressing social problems. Can someone tell us what is really left of the Big Society proposal? What’s in, what’s out, and how did Chancellor Osborne’s charity tax cap proposal fit in with the Tories’ concept of greater reliance on charities?—Rick Cohen