Tax avoidance and charitable donations

The opening question on last night’s Question Time concerned whether Gary Barlow should retain his OBE. Whilst I’m personally care little about that precise issue, the wider debate about tax avoidance, privilege and charitable work was very interesting. Some audience members sought to defend Barlow, pointing to his charitable work. I suspect the claims may have been that his charitable giving should serve to protect his reputation rather than be seen as a credible alternative to paying tax. It was unclear from the comments whether Barlow was being credited for personally donating money or for his fundraising efforts which has encouraged others to give. However, this notion of not paying tax being acceptable if you pay charitable work instead is believed by many rich people, including celebrities, living in tax havens to avoid their national tax laws. I previously worked for a charity researching charitable trusts and came across many grant-making bodies which were linked to individuals living outside the UK and suspect for many donations were a form of rationalisation for their undersized tax bills.


I don’t see an argument that charitable donations could be viewed as a proxy, which is sometimes put forward. If an individual gives as much money in donations as they would it tax it might financially appear to be a form of equity, but there are very different meanings to the payments made. Taxes are paid and applied as our elected politicians see fit, giving us relatively little control over how our money is spent. Donations are provided to specific causes, aligned to the interests of donors, and therefore give much control to individuals on what sort of social benefits their money can bring. Therefore, there can be large inequalities in terms of how people see their money being used. Therefore, when rich people use tax avoidance schemes we should congratulate on them on the money they voluntarily provide to charitable causes, but we shouldn’t allow that to justify the funds they are keeping out of the public purse.


These issues can be compounded by Gift Aid, a system which enables individuals to make their donations the levels they would be if given before income tax was applied. Put simply, for every £1 a basic rate taxpayer donates, the receiving charity can apply for the extra 25p they could have received had the payment been made before income tax was applied to the donor. For higher-rate tax payers the charity receives the extra 25p in the pound, but the donor can apply to be repaid the extra 25p/31.25p.


Gift Aid can only be claimed by income tax payers and therefore, it might appear irrelevant to a discussion on tax avoidance. However, my understanding is that the schemes mentioned in the press are about limiting, rather than removing, the amount of income tax paid. Thus, many who are donating to compensate for tax avoidance will be benefiting from not only determining what their charitable giving funds but also legally diverting part of their tax payments to those causes.


I’m very supportive of Gift Aid, but there are a couple of issues with the system. If a basic rate tax payer gives £100 that’s worth £125 to the charity, but if someone who earns too little to pay income tax donates the same amount it’s worth £25 less to the charity. It’s unclear to me why some people’s donations should be financially worth less than others. Similarly, if a charity receives £125 in total from a basic rate tax payer it costs the donor £100, but receiving the same amount would only cost a higher-rate payer £75 and the highest band payer £68.75. It is argued that repaying the richest givers will encourage them to donate larger amounts, but it does seem odd that donations should cost higher earners less money.


A quick scan of the indexes of a few recent popular books on inequality and social difference in the UK (Chavs, Injustice and Revolting Subjects) show no reference for ‘Gift Aid’, ‘donations’ or ‘charity’ and a quick online search shows little discussion of this issue amongst the inequality literature. It’s arguable that these inequalities are socially beneficial in terms of soliciting larger donations from the richest, which in turn reduces wealth inequality. Such trends, however, appear lacking in the inequality literature.


People should be congratulated for their charitable donations. However, I don’t support the argument that donations are a substitute for paying tax as they are two very different things. People don’t generally believe tax-avoiding companies are justified if they have strong corporate social responsibility programmes and I struggle to see why individuals should be viewed differently.


About Dave Griffiths

I am a lecturer in Quantitative Methods in the School of Applied Social Science at the University of Stirling.
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