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The Public Accounts Committee publishes its reports on Gift Aid and other tax reliefs on charitable donation, and the Charity Commission.

The report on Gift Aid was based on evidence from HMRC. The report on the Charity Commission was based on evidence from the Commission.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"We are dismayed by the fact that the Charity Commission is still performing poorly and failing to regulate the charity sector effectively. It is obvious that it has no coherent strategy and has been simply buffeted by external events.

It is clear that the Charity Commission is not fit for purpose.

The Commission too willingly accepts what charities tell it when it is  investigating alleged abuses. It too often fails to verify or challenge the claims made. Some of the most serious cases of abuse have not been properly investigated. It has been too slow in removing or suspending trustees and in pursuing investigations promptly - as demonstrated in its feeble investigation into the Cup Trust.

We have little confidence in the Commission’s ability to put right its problems and failings. When the Commission finds its new Chief Executive, they will have to bring about radical change in the Commission’s culture and operations, to restore confidence in its ability to regulate charities.

This will be unsettling news for the charity sector at a time when we also find that the abuse of Gift Aid reliefs on charitable donations by individuals and companies risks giving the charity sector a bad name.

We know this abuse has lost tax revenue - an estimated £170 million in 2012-13. At the same time, the cost to the taxpayer of Gift Aid has increased, to £2 billion in 2012-13, only half of which is going to charities themselves.

It is also deeply concerning that HMRC does not know if Gift Aid reliefs have encouraged more people to give more to charity, because it does not have the data.

In particular, HMRC does not have enough information about the effect of reforming Corporate Gift Aid in 2000. It was designed to give an incentive to corporate donors to donate more to charity by providing tax benefits for the donors rather than for the charities.

But HMRC does not know if this is happening or if, in practice, charities are receiving less income because companies have not increased the amount they are donating in response to this incentive.

We were also surprised that the sharing of information both within HMRC and externally with such bodies as the Charity Commission has been poor.

HMRC should also go further in providing information to this Committee as part of its work to preserve public confidence in the tax system."

Gift Aid and other tax reliefs on charitable donations

Successive governments have legislated to exclude charities from income tax, including income from donations, and there is cross party support for measures that will simplify and increase charitable giving. Gift Aid allows charities to reclaim the basic rate of tax paid on donations. Other reliefs allow the donor, rather than the charity, to receive all of the tax benefit on donations. These reliefs on donations provide a tax incentive to donors by allowing them to reduce their tax liability. In 2012-13, charities received just over £1 billion in tax repayments through Gift Aid donations; and individuals and companies also received a tax benefit on their donations worth almost £1 billion.

HMRC has not collected data to enable it to evaluate if Gift Aid is working as Parliament intended. When reliefs on donations were reformed in 2000, HMRC’s predecessor, the Inland Revenue, undertook to fully monitor and evaluate the impact of the new measures once the changes were up and running. HMRC has failed to plan for how to achieve this or to collect relevant data, and as a consequence it has not fully evaluated the effectiveness of these reliefs. HMRC does not know if these reliefs have encouraged more people to give more to charity as was intended, and the evidence for increased charitable giving is at best inconclusive. In particular HMRC does not have enough information about the impact of changes to Corporate Gift Aid, with some evidence suggesting the change may have reduced the income charities receive from donations by businesses.

Recommendation: HMRC should work with the charity sector to gather better evidence of the impact of the reliefs on donor behaviour. In future HMRC must ensure that when it commits to evaluating the impact of a new tax relief, or a change to an existing relief, it collects the data it needs to undertake a robust assessment.

The abuse of reliefs on charitable donations by individuals and companies has lost tax revenue and risks giving the charity sector a bad name. HMRC estimates that £170 million was lost in 2012-13 through avoidance, fraud and error resulting from the misuse of these reliefs. HMRC has publicised the success it has had in prosecuting fraudsters and challenging the promoters of some marketed tax avoidance schemes, but accepts its deterrents could be stronger. In particular, dealing with the flagrant abuse of these reliefs has been an incredibly slow process.  Since 2004 HMRC has identified, investigated and challenged eight marketed avoidance schemes, and it has concluded that these have misused reliefs on donations, but 1,800 cases (90% of the original subscribers to these schemes) with £217 million of tax at risk remain open as the users are willing to test HMRC’s assessment at tribunal. 

Recommendation: HMRC must promptly investigate schemes which appear to use reliefs on charitable donations in ways unintended by Parliament, and ensure it both penalises and maximises publicity of those who have been proved to have misused reliefs in such a way, to deter potential promoters and users of such schemes.

The sharing of information within HMRC and with other bodies, such as the Charity Commission, has been inadequate. HMRC’s charities team is responsible for dealing with the tax affairs of charities, but it has little visibility of the work carried out by other parts of HMRC’s business which process claims for relief on donations by individuals and businesses. HMRC recognises that it has not done enough to join-up relevant information about donors and charities from across its business, and it has committed to improve this. HMRC acknowledges its relationship with charity regulators is important in tackling abuse, so we were surprised that the sharing of information has been poor and that there has been a failure on both sides to work together effectively. HMRC only took legal advice to clarify what information it can share with the Charity Commission after the publicity surrounding abuse of tax reliefs by the Cup Trust. Prior to this HMRC would not tell the Commission if a known promoter of tax avoidance schemes was involved in the running of a charity. 

Recommendation: HMRC must set out a plan to improve how it shares its information internally. It must also set out more clearly how it will work better and more closely with the regulators of charities.

HMRC has not adequately simplified the tax rules for reliefs on donations. HMRC told us that an underlying objective of the changes to Gift Aid in 2000 was to simplify the tax system. Deeds of covenant, the previous method of tax efficient giving, were undoubtedly complex. However, government has had to introduce five pieces of legislation to tackle abuse of Gift Aid and the reliefs on donations that replaced covenants. For example, Self-Assessment Donate was introduced to encourage charitable giving, but was then abolished, because HMRC identified it was too susceptible to fraud. These changes to legislation have complicated, not simplified, the tax code.

Recommendation: HMRC should examine ways in which the rules can be simplified to both reduce abuse and make the system easier and simpler for charities to claim the reliefs.
 
HMRC has still not committed enough resources to administering Gift Aid. HMRC has made good progress in tackling the abuse of reliefs on donations. It has doubled the number of compliance staff working in this area since 2009-10 and gets a good return from its investment. In 2012-13 HMRC saved £44 in tax revenue for every £1 spent on compliance staff, compared to £21 for every £1 in 2009-10. This increased yield suggests that there is still some way to go in stopping losses through the misuse of these reliefs, but HMRC has not identified what resources it should invest in this area.     

Recommendation: HMRC should establish what the right staff profile is for administering reliefs on donations and implement it, taking into account its cost effectiveness in relation to other compliance work.

HMRC recognised that this Committee has contributed to a debate which has led people to be less content about artificial and contrived tax minimisation schemes. HMRC could go further in providing information to this Committee as part of its work to preserve public confidence in the tax system. HMRC should provide this Committee with information that would enable appropriate parliamentary scrutiny and thereby improve public confidence in its administration of the tax system. This would be consistent with the welcome assurance HMRC gave us that it would put as much information as it can in the public domain and continue to improve HMRC’s transparency.

Recommendation: HMRC must in the future be more willing to share information with us, in confidence where necessary, to help us scrutinise its actions and provide the assurance needed to improve public confidence in the tax system.

The Charity Commission

The Commission is the independent regulator of some 165,000 registered charities in England and Wales. It is funded entirely by, and is directly accountable to, Parliament. Its budget for 2013-14 is £22.7 million. The contribution charities make to our society is hugely important to all of us and the Commission has a key role in preserving public trust in charities. The annual income of the charitable sector is around £60 billion, and charities deliver around £14 billion worth of public services annually, funded through central and local government grants and contracts. The Commission’s statutory objectives include increasing public trust and confidence in charities and regulating their compliance with charity law.

The Commission has no coherent strategy for delivering clearly defined priorities within its broad remit. The Commission does not know how much its activities cost and has not focused its resources on its priorities. Lacking strong leadership and a strategy for effective and efficient regulation of the charity sector, the Commission has been buffeted by external events. It has responded to budget cuts by salami slicing its activities rather than radically rethinking its purpose. It has therefore failed to fulfil its duties to register, regulate and intervene in charities effectively.
 
Recommendation: The Commission should develop a clear strategy detailing how it will deliver its responsibilities as a regulator effectively, and set out how it will use its budget to implement that strategy. If it is being asked to do too much with too little it should clearly set out its case for additional resources to Government.
 
The Commission has not regulated the charity sector effectively. The Commission has placed insufficient emphasis on the monitoring and investigation of charities relying mainly on receiving information from others, rather than actively generating its own information and intelligence to identify risks in individual charities. The Commission is too willing to accept what charities tell it, without verifying or challenging the claims made, and it does not appropriately prioritise its limited resources to investigate the most serious cases of potential abuse of charitable status. In the last 3 years, the Commission has not removed any trustees, it has only suspended a trustee twice and it has only restricted charities from entering into specific transactions 17 times when it is responsible for overseeing 165,000 charities. The Commission has continued to make poor use of its powers, its internal processes and whether, for example, with the Cup Trust or the Afghan Heroes investigations are too slow and inefficient, and when faced with clear cases of abuse, it has failed to act promptly and robustly, or use the full range of powers to intervene that it has available.

Recommendation: The Commission needs to use its statutory powers to regulate charities more effectively. This should include making better use of the intelligence it already holds on charities to identify risks, improving how it prioritises the use of its resources, and responding more quickly to serious concerns in individual charities.

The Commission’s leadership has consistently failed to tackle poor performance and ongoing weaknesses in the organisation. In response to critical reports from this Committee, and our predecessors, over the past 26 years, the Commission has repeatedly said that it will get things right.  In practice, it has failed to implement our recommendations, its performance has not improved, and the Board has not exercised adequate oversight of the Commission’s leadership when it failed to deliver the necessary changes. The Commission’s strategic review in 2011 failed to achieve a fundamental transformation of the organisation, and it remains weakest in identifying deliberate wrongdoing by charities and in taking effective action. The Board is searching for a new Chief Executive and that person will need to bring about the much needed radical change in the Commission’s culture and operations, to restore confidence in the organisation’s ability to regulate charities effectively.

Recommendation: The Commission needs to introduce a determined and focused new leadership to radically transform the Commission’s culture and operations, and the Board needs to have sufficient grip on the Commission’s performance and operations to hold the executive effectively to account.

We have little confidence in the Commission’s ability to put right its problems and failings. Nothing we heard convinced us that things have changed significantly since we last examined the Commission, and we are concerned that it does not possess the capability to put right its problems and address its failings. The Board is developing a change management plan, with the intention of tackling its engrained problems. We intend to return to review the Commission’s progress in a year’s time.

Recommendation: The Commission needs to act decisively to finalise and put into action a robust change management plan to tackle effectively its enduring failings.

Further information

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