A tax break that favours rich charity givers by €18 million a year should be extended to everyone, according to Cork's Labour TD Ciarán Lynch.
Mr Lynch said PAYE employees are being discriminated against because they cannot claim relief on donations, like self-assessed givers and big business can. Mr Lynch said the system is skewed towards benefiting the wealthy over ordinary workers and could be depriving good causes of extra cash.
He has demanded the Finance Department change rules which say the €25 million a year tax break on donations by the PAYE sector can only be claimed back by the charity receiving the money, and not the individual giving it.
The Cork TD insists a reform would actually see more money going to charities as PAYE donors would bump up their contributions to them if they knew they could claim a substantial stake back as self-assessed workers do.
“The current system would seem to favour the rich at the expense of PAYE employees and that is not fair and that is an anomaly which needs correcting. I don’t think such a change would mean charities getting less money, quite the opposite," he said.
“If PAYE people know they will be able to claim the relief back, they will probably give the charity more, or invest the rebate in another charity of their choice, so in that sense everyone will win," he added.
Just over €25.1 million was claimed in tax relief by charities and approved bodies in 2007 on donations by 80,974 PAYE employees who donated a total of €46.8 million.
That was down from the previous years’ amount of €28.4 million claimed on 84,373 gifts from the PAYE sector on donations of €58.4 million.
The last year for which self-assessed figured are available, 2005, shows that such people gave €48 million to charity and personally claimed some €18 million back.
Donations of more than €250 are eligible for refunds and companies can claim money back on such gifts as a trading expense.
Comments
Bruce's reply
Bruce, try to make your comments a bit more comprehensive in future!
Verbiage
Nuff said!
Wrong problem
I think Ciarán Lynch is trying to fix the wrong problem. The differentiation in treatment between PAYE and self-assessed taxpayers is for administrative reasons to suit Revenue. Both forms of rebate benefit both the donor and the charity in that they create leverage - i.e. for €X net cost to the donor, it produces a total benefit of €Y to the charity (for higher-rate taxpayers, Y is approx 69% greater than X; for standard-rate taxpayers, Y is 25% greater than X).
The only inequity is that the €250 threshold is net in the case of PAYE taxpayers and gross in the case of self-assessed - so a self-assessed higher-rate tax payer only has to give a net donation of €147.50 (€250 less 41% tax rebate) to make their gift tax-effective (meaning that a gross donation of €250 will cost them less net than a gross donation of €147!). Although this favours the self-assessed taxpayer by effectively lowering the threshold by €102.50 compared to their PAYE equivalent in the higher tax band, the charity benefits more as well - by pointing out the "€250 will cost you less than €147" anomaly to donors.
The ratio of total value to charities to net cost to donors appears to be high, given the above figures – in the case of PAYE-payers, it is 149% for 2006 and 154% for 2007 (this increase in tax-effectiveness, despite a decrease in overall giving, suggests that charities are getting better at getting CHY 2 forms back from donors). In the case of self-assessed, the 2005 figures show a ratio of 160%. This is better than the PAYE ratio (and presumably has improved since 2005 as more self-assessed people have become aware they can claim the deduction), but this premium could be explained by the fact that self-assessed taxpayers have higher average incomes and so are presumably more likely to reach €250 threshold. In all cases, the Irish tax-efficiency premium (between 49% and 60%) appears high.
It would be interesting to compare the tax-efficiency premium between countries where all the tax benefit goes to the charity (e.g. USA), where the benefit is split according to rate (e.g. UK where GiftAid gives the standard rate benefit to the charity and the difference between that the and the higher rate to the donor) and where the benefit is split according to type of assessment (e.g. Ireland). Such comparisons might show that one system is more tax-efficient than others but it would be harder to prove which system creates more overall income to charities, because tax systems can increase charity income not just by the amount of the tax benefit but also by the added incentive to give. In the absence of two countries with otherwise identical factors - wealth, culture of philanthropy, etc - where you could test one tax system against another, it is difficult to disaggregate these factors.
The incentive to give more is the true net benefit of any system of tax relief for charities – because it is increases the size of the “cake” of money available for good causes, whereas the tax rebates themselves only determine what proportion of the cake is administered by charities and what proportion by government (which can choose, instead of giving tax rebates , to use that share of the cake to directly grant aid charities or provide state services that obviate the need for those charities).
The change that perhaps Labour should argue for is to lower or preferably entirely scrap the €250 threshold – i.e. to have a system where every €1 donated can be tax-effective. While this might lessen the incentive for some to give as much as €250, this would be more than compensated for by the wider scope of claimable donations - we know that the average annual donation per donor received by most charities is well under €250. The scope of donations should also be broadened as it is in the UK and US to include gifts in kind – e. g. shares or goods donated to charity shop.
Another improvement would require a change in mindset within Revenue: We should ditch the current system that requires long paper declarations to be signed by each donor at the end of each year, to be collated and submitted by each charity. We should switch to a simple system such as in the UK where donations are treated as tax-effective just from the tick of a simple GiftAid box at the point of donation – a system which is based on trust and validated by random audit. The higher benefit under the Irish system in respect of donations from higher-rate taxpayers could be retained simply by having two boxes on each donation form – one for 20% and one for 41%, although in the case of automated payments, this would need to be reviewed periodically as donors’ tax rates change from year to year. This simpler system would also do away with the need to differentiate between PAYE and self-assessed taxpayers.
A simplified system could vastly improve the total value of donations that could be made tax-effective. The current total (adding the 2007 figure for PAYE-donors to the 2005 figure for self-assessed donors) gives an indicative total of about €77m net or €120m gross. Yet we know that overall donations to charity from non-statutory sources is much higher (e.g. “Exploring the Irish fundraising landscape” reported that 960 charities alone raised over €193m from private and corporate sources – and that is just those that responded to this 2006 survey). So, while tax benefits as a proportion of donations for which claims are made is high, it is low as a proportion of overall giving. Even a standard-rated relief applied at point of donation across the board, irrespective of type or size of donation, would generate more income for charities because it would greatly widen the scope of donations that could be made tax-effective – these tax benefits would leverage higher overall levels of donation, giving a double benefit to charity.
Overall, we need to widen the debate to argue for systems that:
- encourage all levels of society (individual or corporate, wealthy or less well-off) to give more;
- encourage diverse forms of donation – e.g. money, property, volunteer time;
- are simple, efficient and transparent (for charities, donors and government).
Bruce Clark