It’s just over a month since Labour’s landslide victory in the general election and already the impact of the new administration on the charity sector has been felt, with more upheaval anticipated.

As touted in Labour’s election manifesto, the King’s Speech on 17 July included a commitment to bring forward measures to remove the VAT exemption for private school fees. It means that VAT at the standard rate of 20% will be added to private school fees from 1 January 2025. The government says around 50% of private schools in England are registered charities and benefit from charitable rates relief

Labour is also removing business rates relief for charitable independent schools from April 2025, which leaves the charity sector pondering whether more widespread changes to charity reliefs might be on the cards. 

Bearing in mind the £22bn black hole in the public finances outlined by Chancellor Rachel Reeves in a statement to Parliament last month, speculation is rife that the government may contemplate withdrawing or reducing business rates reliefs for charities more generally.

Treating charities equally

Richard Bray, Chair of the Charity Tax Group, a member of the Finance Regulatory and Taxes team at Cancer Research UK and of ICAEW’s Charity Committee, says: “When you suddenly have a situation where you’re saying that one charity is more worthy than another, that is where we have concerns. Charities should be treated equally. If you don’t think an organisation should be a charity, the best way of dealing with that is to remove its charitable status.”

HMRC charity tax relief statistics published on 31 July show that business rates relief claims by charities, the single biggest source of tax relief for the sector, continue to grow. For the tax year to April 2024, charities received £2.56bn of relief on business rates; total reliefs for charities and their donors were worth £6bn, up 3% year-on-year. 

Bray says that, given the significance of charity reliefs, it is important to make sure charities don’t lose out as a result of unintended consequences of changes to rules: “If charities stopped getting a relief, we would be very concerned.” 

Inheritance tax (IHT) and capital gains tax are areas that might be earmarked for change to help plug the tax gap, Bray suggests: “If those taxes are raised, it might increase the profile of certain charitable reliefs. So, for example, if you make it more likely that people have to pay IHT, they might consider giving to charity in a will that is taken out of the IHT calculation. 

“With capital gains tax, again, there are certain reliefs for charities such as the gift of shares relief, which can be very generous and which could become more attractive. Even if it affects a very small proportion of people, that could represent a lot of money for the charity sector,” he adds.

Nick Sladden, partner and head of the charities and independent schools team at RSM UK, says Labour’s removal of the VAT relief for private schools could be the thin end of the wedge for the charity sector.

Gift Aid reform

Labour has made much of its intention to modernise the tax system. The ICAEW Manifesto has also called on the new government to publish an overarching tax strategy including a tax simplification roadmap. The Charity Tax Group’s Future of Gift Aid project also seeks to modernise the Gift Aid claiming process to help it reach its full potential. It advocates a move towards an automated Gift Aid system, which it says would help to unlock more than £500m of Gift Aid for UK charities each year. Gift Aid payments to charities were static at £1.6bn in the tax year to 2024, with 49% of this being claimed by just 0.3% of all charities that claimed Gift Aid. 

Bray says: “We know that HMRC think it’s a good idea, but it requires investment so the question is, how much of this is good sounding rhetoric, and how much of it will actually be implemented? We would like to see a commitment to improving that system to ally itself with government policy.”

Sladden adds: “Bigger players in the charity sector continue to attract the bulk of donations and gift aid claimed, often because they are able to invest in fundraising teams and technology to make donating more accessible for individuals. For smaller charities, it’s about making sure that they can claim what they’re entitled to, rather than what the back-office systems they use might allow them to do.

“Until we get to a point where charities across the board are claiming what they can in Gift Aid, I don’t think there’s much compulsion on a government to inject more money into the sector through changing the Gift Aid scheme.” 

Good housekeeping essential

However, Bray says any suggestions that charities are not making the use of existing reliefs on a widespread scale is not true in his experience: “For example, with Gift Aid a charity has to get a donor to sign a Gift Aid Declaration which that charity cannot force the donor to do. As a result, charities will not be claiming all the Gift Aid that they could. This should not, therefore, be a reason for the government not to improve the existing Gift Aid system.”

Sladden says good financial governance is vital in a period of change and charities should focus on increasing the uptake of existing reliefs rather than relying on reliefs becoming more generous: “If you’re a trustee or someone in charge of the finances in a charity, do a regular review of your Gift Aid scheme to make sure that you’re compliant, and make sure you’re claiming everything that you’re entitled to. 

“Do a stocktake of which reliefs you’re benefitting from and what the impact on your finances would be if those assumptions changed, using financial modelling, forecasting and what-if analysis.”

Further reading

• King’s Speech includes VAT on private school fees
• Budget to be delivered on 30 October