The Chancellor has confirmed that he is scrapping proposals, originally announced in the 2012 Budget, to limit tax relief for charitable donations.

Should this be called "another U-turn", or "The Consultation that Never Was"?

Both labels are unfair: these were, after all, simply proposals for consultation. The more general cap on tax reliefs is, at least as I write this - and I shall be checking again before posting just to make sure - still to go ahead for consultation in the not too distant future.

Nevertheless, the underlying issue with these aborted proposals is that they should never have seen the light of day. Tuesday's article "Pasty Tax": Government Climbs Down on VAT Proposals but is it Enough? observed that gauging VAT status by reference to something as transient as "ambient temperature" was absurd. The idea that removing tax relief for charitable donations would not adversely affect the total amount of such contributions was, likewise, not a very good one. At all. (Assuming of course that someone actually thought it through that far).

There is an argument that unlimited tax relief effectively allows wealthy donors broadly to double the value of the contributions they make to their chosen charity but potentially at the expense of other charities: the government itself has less to give to the charitable sector, if it has to hand more money back in tax relief. However, a more effective solution might have been to better define those suitable bodies to which people could donate and still claim full tax relief. It would almost certainly be difficult to settle on the appropriate criteria for those bodies but it might also have less of a negative impact on the extent of overall donations.

The problem with overly simplistic remedies to complex tax issues is that they can cause more harm than good. We are now left with the residual proposals, which are to foist a statutory cap on previously unlimited reliefs, such as for trading losses and on qualifying interest payments. It is difficult to reconcile these proposals with the notion that this was a "business-friendly" budget, as the Chancellor claimed, because the cap clearly increases entrepreneurial risk. It is difficult to see why someone should risk being denied tax relief for a genuine economic loss incurred as a result of a genuine trading activity. And if this is not parliament's intention then the proposals should be dropped, or amended - carefully.

It is perhaps worth noting that these proposals are meant to form part of a budget strategy that ostensibly aims to provide certainty for business, by consulting with external stakeholders including businesses, and doing so early. Genuine consultation is both useful and welcome. But do these continual changes make for certainty?

I am not sure.

Article Added Thursday, 31 May 2012 | 714 Hits

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