David Cameron today repeated the claim his spokesman made yesterday that one of the reasons for the cap on tax reliefs was that some wealthy people were putting money into bogus offshore charities as a way of reducing tax.
The prime minister said:
I’m quite convinced we can get the balance right increasing philanthropy and charitable giving, which is an important part of our culture which I want to see expanded, and making sure the tax system isn’t abused.
The government’s comments on this have been met with confusion: if bogus charities were in operation, why didn’t the Charity Commission stamp them out?
The answer, strangely, lies in a legal case launched by a German man, Hein Persche, against his local tax office in the province of Lüdenscheid, in 2009.
Herr Persche had tried to claim tax relief on a donation he had made to a Portuguese charity, which was denied by the German authorities. He then took his case all the way to the European Court of Justice, which ruled it was unlawful for a European member state to discriminate against a charity based in another member state in this way.
All this means that British donors can now give to charities that are not based in the UK, and therefore not regulated by the Charity Commission, and still claim tax relief.
According to Treasury insiders, this has led to cases of wealthy people setting up charities abroad into which they pay money, but which are then used to fund their own companies, or even leisure activities, rather than for any serious charitable purpose. In one case, for example, a person ran a “fundraising function” through their charity that looked suspiciously like a personal party.
HMT admits this sort of abuse is not entirely connected to the cap on tax reliefs, which has so angered the charitable sector, and which would merely limit, but not stop, this kind of abuse. It is, say advisers, a “separate, but related, issue”.
However related it is, government sources admit this kind of abuse adds up to tens of millions of pounds at most, and is relatively easily spotted by the tax authorities. For that reason, the chancellor is unlikely to announce any major clampdown on this specific issue.
By bringing it up, the prime minister may have thought he had found a clever way of winning back support for his controversial policy, but instead he has angered the charitable sector further by connecting donations to tax avoidance by a small minority.