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Proposed New Tax Treatment of Charitable Donations

Julie Herlihy, a Tax Partner at Baker Tilly Ryan Glennon responds to recent proposed changes to the tax benefits for charitable giving. Julie is a member of The Community Foundation’s Professional Advisor Philanthropy Network.

The current turbulent economic climate is proving challenging for charities. The combination of sometimes dramatic decreases in financing with increasing numbers of requests for assistance has resulted in increased pressure on most charities.

Against this backdrop, the Irish Charities Tax Reform Group have been involved in detailed discussions with the Revenue Commissioners and the Department of Finance in an attempt to ensure policies are adopted by the Government to incentivise independent fundraising and promote activity within the sector. In particular, they have sought two changes for charities; the current tax relief system and the current VAT system.

As a result of ongoing discussions, on 8 February 2012, the Minister for Finance, Mr. Michael Noonan, T.D., announced his intention to simplify the tax relief that is available for donations to approved bodies. The changes are subject to a consultation process but are expected to come into effect on 1 January 2013. The proposed amendments to the existing regime are as follows:
• Donations from all individual donors under the scheme will be treated in the same manner, with the charity, rather than the individual, benefitting from the tax relief in all cases. This would mean that self-assessed taxpayers would no longer be able to claim a deduction on their tax returns for donations made.

• Introduce a blended rate of relief that would apply to all taxpayers regardless of their marginal tax rate. This would involve a rate of refund of around 30%. All donations would be grossed up as is currently done for donations from individuals within the PAYE collection system.

• The charitable donations scheme will be removed from the scope of the high earners’ restriction.

• An annual limit of €1 million per individual which could be tax relieved under the scheme may be introduced.

While some of these amendments may go some way to assisting charities in these difficult, care is needed. While the removal of charitable donations from the scope of tax relief restrictions sounds like a welcome step indeed, bringing us into line with many other countries, this step will happen automatically if taxpayers are no longer entitled to tax relief on donations. There has to be a serious risk that the removal of tax relief from the self assessed donors may further reduce the level of donations made.

Movement is also expected in connection with the long running issue of VAT compensation for charities. Unlike businesses, charities are not entitled to recover VAT on their expenditure. This could represent a real cost of over one million euros for a number of charities. The recent increase in VAT from 21% to 23%, therefore, is already having a significant impact on the charity sector.
The Minister for Finance has indicated that he is prepared to have the matter examined by his Department. Disappointingly, however, nothing to this effect was announced in either the Budget or Finance Bill 2012. However, discussions should start later this year. Given the increased pressure this would directly have on the Exchequer, balanced by the growing cash needs of the charities, the outcome of such discussions will be interesting.

In summary, most of the proposals, particularly the removal of charitable donations from the list of restricted tax reliefs and any movement on the VAT issue, would be welcomed warmly by the cash–strapped charity sector. However, care is needed regarding any change in the entitlement of self employed donors to tax relief to ensure overall donations do not drop dramatically.