Announcing the Treasury’s third budget U-turn of the past week, chancellor George Osborne said the debate over capping tax relief from charitable donations had become a “distraction”.
“Frankly, at a time like this the government is going to focus on the big issues like the worsening Eurozone crisis and Britain’s deficit, and not get distracted with unnecessary arguments.”
Osborne’s decision came the day after leading venture capitalist Jon Moulton said that he would stop donating to the Conservative party after becoming disillusioned over the charity tax, and other economic issues.
Last night Moulton told City A.M. that he “absolutely” supported the decision to drop the policy but “the government should have done it earlier”.
“[The cap would have] discouraged large gifts to charity and they can substitute for government cuts. I regard myself as insensitive but this is well off the scale of what I’d normally do.”
Heather Self, tax specialist at law firm Pinsent Masons said: “The government appears to have conceded that it was wrong to draw charities into a cat and mouse game of tax avoidance. This was a poorly thought through proposal which would have harmed charities without being well-targeted on abuse.”
Despite the U-turn the government will push ahead with plans to cap other forms of tax relief at £50,000 a year, or 25 per cent of an individual’s income.
Critics say going ahead with this policy will affect reliefs that are designed to encourage entrepreneurship, such as relief for trading losses and interest relief for borrowing.
“While the desire to stop the abuse of these allowances by the minority is understandable, the restriction of these reliefs for all high earners risks discouraging entrepreneurial activity,” said Carolyn Steppler of Ernst & Young.
Gareth Thomas, shadow charities minister, said the policy “has already done considerable damage”.
Sir Stuart Etherington of the National Council for Voluntary Organisations praised the decision: “This is a victory for common sense. This is a great day for philanthropy.”