Mr. Davey: I enjoyed the speech of the hon. Member for Wimbledon (Roger Casale). I recall the debate to which he referred in which he made a powerful case on a similar issue. My hon. Friends and I joined with him on that occasion. He was right to set out the position with respect to the widow's mite: gift aid does not apply to non-taxpayers and the state operates the rather worrying scheme that might catch a citizen who signs a gift aid declaration thinking that he is a taxpayer and that the charity should be able to reclaim the tax on his donation, but subsequently discovers that he is a non-taxpayer that year. That person, by definition on a very low income, would suffer a tax liability for having made a charitable donation. The hon. Gentleman's description of the problem was right, and the Government need to address it.
I disagreed with the hon. Gentleman, however, on one point of detail: new clause 14 goes a long way towards dealing with the problem that he spent several minutes describing. It is specifically targeted at dealing with that problem and drafted with the help of the Low Incomes Tax Reform Group. During a previous debate, Ministers suggested that the Inland Revenue would do its best, by making its literature clear and advising charities, to ensure that there would be few or
Column Number: 399no cases of people inadvertently signing gift aid declarations. However, I am told that subsequent experience has shown that the complexity of gift aid is a real problem, not least in the pilot for tax help for older people that the Low Incomes Tax Reform Group has run with the encouragement of Treasury Ministers and the Inland Revenue.
The group told me that at least one client was told to sign the certificate on the ground that she and the charity would save tax, but that she had been a 10 per cent. taxpayer and should not have signed the form. The extension of the Government's policy to the 10 per cent. rate band will make the problem even worse. The problem is real, as are the concerns expressed by hon. Members.
Our concern is not only that an individual on a modest income might face an unexpected tax liability but that the measure will discourage the widow's mite. There will be press stories and anecdotes about people being punished for making donations, which will reduce the amount of giving. Of course, such a result would be exactly the reverse of the thrust of Government policy and would represent a serious error.
Those involved in the matter might be of the sort who would be scared of the Inland Revenue. Of course, all Committee members know how friendly and helpful the employees of that august body are. However, people such as elderly female pensioners may never have had to deal with the Inland Revenue, because their employers or spouses had dealt with it. Now that their spouses are deceased, they are suddenly faced with declaration and self-assessment forms and a letter in the post that tells them that they have made a mistake. One can imagine the anxiety that that would cause, over tiny amounts of money, to people who are simply trying to give money to charity. One begins to see the absurdity of the system that the Government have created, albeit with the best of intentions.
Treasury Ministers say that they are worried that the proposals will set a precedent and that the Treasury will effectively be giving tax subsidies to the donations, because no tax is being paid. In fact, the Treasury does just that in other areas of the tax system. With stakeholder pensions, the pension scheme member contributes a net amount and the Revenue tops it up by the basic rate of tax to the level of the earnings threshold, which is currently £3,600, whether or not the member is a basic rate taxpayer. That is one example of a tax subsidy that is analogous to the present proposals. The tax credit systems are also effectively tax subsidies to non-taxpayers or to people regardless of their tax position. In this Bill, the research and development tax credit is giving subsidy over and above the tax paid, because it is at 150 per cent. In other words, the Government have not identified a real problem, and if they continue to argue their case they should do so more convincingly.
New clause 14 would not get rid of the overall problem because it deliberately limits the amount that
Column Number: 400can be given to £520 a year, which is £10 a week. That is probably as much as many such people are likely to give. It is difficult to imagine a case in which a non-taxpayer, about whom we are all concerned, would give more than that. The £520 limit will deal with the issue of fraud. Inland Revenue officials are worried that if they allow charities to get tax back from donations from non-taxpayers, there might be a risk of fraud. The new clause deliberately sets a limit that deals with that rather dubious argument.
It is time for the Government to address the issue. The poorest in our society should be allowed to give without the threat of harassment from the Inland Revenue. I hope that the Economic Secretary takes that simple point on board.
Mr. Jack: I just want to explore with the Economic Secretary why, if I understand the clause correctly, basic rate taxpayers do not figure in the ability to carry back unutilised tax payments in relation to the gift aid scheme. What happens when, for the sake of this discussion, a basic rate taxpayer in financial year 1 achieves an income that would take them into higher rate tax part of the way through financial year 2? They would not necessarily have received a self-assessment form for that year because, for the previous tax year, they would have been deemed to be, and in fact were, a basic rate taxpayer, and they would get their self-assessment form in financial year 3. If they have a cyclical pattern of income—very low one minute, very high the next—they might, if they had become an extremely generous taxpayer, have missed out on potential benefits under clause 97. I should be grateful if the Economic Secretary would tell me what happens to people who realise by financial year 3 that they are higher rate taxpayers and wish to make a substantial donation to use up the previous year's tax potential. Given that they would not have made an election, where would they stand?
Clause 97(1) states that those who will be affected by that
A basic rate taxpayer pays tax and does not have to fill in a self-assessment form, but is still assessed to have a liability for tax. If it so happened that the person concerned had come into money in financial year 2 and, for whatever reason, wanted to make a substantial charitable donation, are they expressly forbidden, although they did not fill in a self-assessment tax form but are assessed to have a liability for tax, from utilising the facility in the clause? I should be grateful for the Economic Secretary's guidance on that, because some people have erratic earnings to which the examples that I have put before the Committee may well apply.
Mr. Hoban: If I may, Mr. Gale, I shall go back to the subject of my hon. Friend's amendment. With the use of numbers I shall illustrate the impact that the amendment would have. If one were a taxpayer with a taxable income, which was not complicated by other factors, of £100,000, one would pay £38,388 tax in, for example, 2003. If one were to receive a gift making one's income £200,000, one's tax bill based on the
Column Number: 401same income would go up to £44,000 because of the taxes that were withheld at the rate of 22 per cent. on the value of the gift of £200,000. Therefore, a taxpayer motivated by generosity who makes a substantial gift out of some assets that he has—someone who is asset rich and income poor, or relatively so—would actually lose out by about £9,500 as a consequence of his generosity.
People may be willing to give away their assets to the benefit of charities. I think that the prospect of becoming poorer as a consequence, by virtue of the way in which the tax system operates, would act as a disincentive. If such a person had an income of £300,000 rather than £100,000, he would make a tax saving of £36,000 under the current rules. If one is income rich and asset rich, a significant tax saving can be made by making a gift of £200,000 using gift aid. If one is income poor and asset rich, one would make a loss of about £9,500. My hon. Friend's amendment would give those people who are asset rich and income poor the opportunity to spread forward the value of their gift. Lo and behold, if one does that over two years and one's taxable income remains £100,000, the tax saving over three years amounts to £36,000, simply by the way in which the numbers work out. My hon. Friend's amendment would give—
The Chairman: Order. For the record, the hon. Gentleman has referred to an amendment three times. I assume that he is referring to the new clause.
Mr. Hoban: Of course, it is new clause 12. That new clause would provide the opportunity for income poor, asset rich taxpayers to benefit from the same provision that the Finance Acts currently offer to income rich, asset rich taxpayers. On the grounds of equity, it might be appropriate to give taxpayers the benefits of the new clause. Moreover, it would stimulate giving from those people who benefit from safe flotations and the profits that can be made from the sale of shares. There would be an incentive for them to give more money to charity. The new clause is a sensible measure aimed at encouraging the civic mindedness to which the hon. Member for Wimbledon referred. We all want to see that in this country.
Mr. Flight: I wish briefly to pick up the point about the returns having to be done for gift aid, and the risk of people not paying tax. I would question the notion of millions and millions of bits of paper being filled out, particularly in relation to cash gifts. Personally, I find it maddening when one is given something and then keeps receiving bits of paper to return.
When we were discussing the matter two years' ago, there was a fairly sensible suggestion, which applied to cash gifts, that a rough and ready analysis could be done of the national proportion of tax paid, and a block tax credit could be given based on that proportion. Supposing that the average rate of tax paid on gifts to charity were 26 per cent., a central grossing up could be carried out, which would get rid of the need for all those pieces of paper. Anyway, I am sure that the poor Inland Revenue cannot check 15 million pieces of paper and pursue the discipline.
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