Proposed Amendments to the Tax Relief for Donations to Charities

This was originally posted on Sponsor.ie on February 9th 2012.
I read via Fundraising Ireland yesterday that the ICTR has made a major breakthrough on charitable donations tax relief. The government proposal would see a blanket rate of tax relief of “around 30%” and that the benefit of all tax reliefs would now go to the charity, i.e. self-assessed individuals would no longer receive the benefit themselves.

So far the reaction to this news has been positive but, ever the cynic, I feel it’s important to look at both sides of it and make sure we know what we’re getting ourselves in to. You have to remember that the government are trying to increase tax revenue in all areas and have been making some pretty harsh cuts recently…so why this act of benevolence?

The current rules require individuals to donate over €250 in a calendar year before their donation can even be considered for tax relief. The charity must then ensure the individual signs a CHY2 Cert giving their permission for the charity to claim their tax back. The number of individuals who meet the criteria and also sign and return their form is disappointingly low due to a lack of understanding by many donors, a lack of resources by charities, and simple inertia of donors.

The Irish government has successfully set up a tax relief scheme that ensures the amounts paid out to charities are far lower than it could or should be. Compare it to the UK where ‘GiftAid’ allows a charity to claim relief on every single pound and permission can be sought from donors at the time of their donation. That’s a huge difference.

So let’s look at the proposed changes and the possible issues…

Firstly, the proposed composite rate: at the moment it’s said to be a delightfully vague “around 30%”. The Report of the Commission on Taxation proposed 20%!

20%?!

This doesn’t sound like the proposal of someone that is attempting to “support fundraising initiatives”.

Last year our tax relief campaigns saw 45% of people who return their CHY2 Certs at the higher rate of tax. If we assumed this was the current rate across the board and always will be then we would need to see a composite rate of between 31% and 32% to be fair.

The ICTR are proposing 33%. Fantastic. Love the ICTR. They know what they’re doing – this would be an improvement for all of our charity partners.

But anything less than 31% and essentially what we’re doing is reducing the amount of tax relief charities can claim. Not good, is it?

Suddenly the words “around 30%” are significantly more important. Our definition of “around 30%” and the government’s definition of “around 30%” are very different. It reminds me of the time a tour guide told me there was around a 20% chance of rain…while it was raining.

Secondly, charities receiving all tax relief from self-assessed individuals’ donations would be amazing and a huge injection…I think.

But what about the other side?

Let’s look at one of our fundraising campaigns from last year where we recruited just over 2000 donors for one charity. 5% of those donors were self-assessed for tax purposes (this campaign was slightly lower than our overall average).

Now, the average gift of self-assessed donors was €16.50 per month while the average gift of everyone else was only €15.39.

And what about attrition? A PAYE donor is much more likely to cancel than a self-assessed donor, because in real terms their donation is costing them more. Where 35% of your donors might cancel in the next year, you might find only 20% of your self-assessed donors cancel.

The tax relief these self-assessed donors receive personally is an incentive to keep donating and to donate more. By removing that incentive we will see donor retention decrease and average donations decrease.

But surely the benefit will outweigh the cost?

Perhaps not when you consider that a number of charities receive less than 30% of the CHY2 Certs that they send out (due to poor data, no resources for follow-ups, etc. – we can help! Sales pitch!). A number of smaller charities don’t even send out CHY2 Certs. So it’s not a huge stretch of the imagination to think that, actually, perhaps we need to keep this incentive to the self-assessed so they will continue to support us.

But the ICTR are a smart organisation. They have undoubtedly looked at the stats and know what they’re doing. The problem is that there aren’t that many stats out there. So it’s important you look at your own organisation’s figures and that you do it before May 2012 – the closing date for the receipt of submissions.
Let’s be sure this is what we want.

Regardless of what happens it’s fantastic to see the government talking about it and the ICTR continuing to do great work. Only through this united front will the regulations on charitable donation tax relief continue to change until the point that charities receive the full relief on every single donation.

One thought on “Proposed Amendments to the Tax Relief for Donations to Charities

  1. The ICTR have developed a tool for charities to measure the impact of the proposed changes to the scheme – and to work out what the universal rate of relief would need to be to make it budget-neutral. It's a simple spreadsheet with a macro that only takes a second to run – assuming you have your own data ready.

    It doesn't take into other factors such as what if the new scheme is simpler to reclaim the tax. Let's hope it is. The universal rate will make it much simpler for charities to market tax-effectiveness – a simpler reclaim mechanism will boost tax income – because people dislike long official forms.

    Like

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