The budget’s implications for arts organisations were, to some extent known, before George Osborne started his one hour speech at 12.30 pm today. The majority of the Finance Bill 2011 had already been published, covering the announcement of increases to the rates of national insurance (NIC), and an increase in the NIC earnings limits. Businesses formed the focus of the majority of Osborne’s speech, though towards the end charities (relative to previous years) received a lot more positive attention regarding charitable giving. However, the majority of these announcements are to be implemented over the next two to three years – these are discussed towards the end of this article, but planning considerations should start now.
Budgets, to my mind, are a ‘robbing Peter to pay Paul’ approach, and the reconciliation of expectation (pre-Budget speech) and apparent reality (post-Budget speech). An example of the Peter-Paul approach is the estimate by the Institute for Fiscal Studies (IFS) that 500,000 people will no longer pay income tax but that 750,000 people will become higher rate taxpayers.
This budget has a mixed impact on arts organisations’ level of gross income and cost base. Arts organisations obtain their income from a combination of sources, including grants, performances and exhibitions, donations, service level agreements, charitable giving, sponsorships, and various commercial and ancillary trading activities. Government funding through Arts Council England has already been limited and cut, and there is still uncertainty as to the exact detail. The impact on ‘self-generated’ income streams is mixed, and it is useful to consider this from the point of view of who an arts organisation’s audience (broadly) is, and where the financial contribution comes from.
The ability of the domestic audience, with its wide range of socio-economic/mosaic classification, to financially engage with the arts will be influenced by levels of disposable income. Tax rates will have a mixed effect on disposable income levels: an individual with a gross annual salary of £15,000 would be £6 per week better off, those with annual salaries of £42,500 would be no better or worse off, and those earning just over £150,000 per annum would see about £30 per week less in their pay packets.
There is no change in the three main rates of income tax, 20%, 40% and then 50%. The personal tax allowance is increased by £1,000 to £7,475 as announced, the 40% rate band kicks in at a lower level of gross income: a higher rate tax payer is now one with gross earnings of £42,475 compared to £43,875 in 2010-11. An additional rate taxpayer is one with gross earnings over £150,000. The personal tax allowance is set to increase from 2012 to £8,105 and the gross income limit for a higher rate taxpayer will drop to £34,370.
The income tax and NIC changes above are unlikely in themselves to have a material impact on the spending of arts consumers. However, factoring in items such as the increased duty rates on alcohol (four pence on a pint of beer, 15 pence on a bottle of wine, and 54 pence on a bottle of spirits), reduction in fuel duty, loss of child tax credit for higher rate tax payers, living cost increases and wage restrictions, discretionary spend has certainly not been boosted.
Perversely, the Budget can present good opportunities for arts organisations to reinforce the (consequential) tax benefits for higher rate and additional rate tax payers of charitable giving. For example a higher rate tax payer can claim back up to £25 for every £100 Gift Aided donation, £37.50 if they are an additional rate tax payer. On a related note the present Gift Aid rule relating to substantial donors is being relaxed; the present law requires an analysis of donations of £25,000 or more in one year or of £150,000 over six years. Consideration must then be given to whether there are any "value extracting transactions" between the donor and charity. The new provisions replace the analysis test with a purpose test, and to shift the compliance burden from the charity to the donor.
Income tax relief for donors can also be claimed for Gifts of shares and property to charities and employees can contribute via the Payroll Giving Scheme. Donations are made out of income before Income Tax is taken off; donors are given tax relief on their donation immediately, and at their highest rate of tax.
The current donor-benefit rules for donations to charities to be eligible for Gift Aid tax relief have limits placed on the value of the benefits that donors can receive as a consequence. The Finance Bill 2011 will increase the benefit limit for donations of more than £10,000. The existing rule that the benefit must not exceed five per cent of the Gift will remain the same, but the overriding annual limit to the value of benefits a donor may receive will be increased from £500 to £2,500.
From April 2013, charities that receive small donations of £10 or less will be able to apply for a Gift Aid-style repayment without the need to obtain Gift Aid declarations for those donations. In order to qualify for this new repayment, charities will need to have been recognised by HMRC for Gift Aid purposes for at least three years, have been operating Gift Aid successfully throughout that time and have a good tax compliance record.
In 2012–13 HMRC will introduce a new online system for charities to register their details for Gift Aid and to make Gift Aid claims, and will initially publish four new forms for charities to use. HMRC will also work with the charity sector to develop a supporting electronic Gift Aid database for declarations. In addition, the Government is considering introducing a tax reduction for taxpayers who give a work of art or historical object of national importance to the State, details to follow.
Self-assessment (SA) taxpayers who are due a repayment of tax from HMRC may currently direct that the repayment should be made instead to a charity of the taxpayer’s choice. SA Donate was introduced in 2005 but it will be withdrawn in relation to repayments of tax in respect of:
• Tax returns for the tax year 2011–12 onwards; and
• Tax returns up to and including 2010–11 where the repayment is made on or after 6 April 2012.
The Government has announced that a reduced rate of inheritance tax (IHT) will apply where 10 per cent or more of a deceased’s net estate is left to charity. In those cases the current 40 per cent rate will be reduced to 36 per cent. The new rate will apply where death occurs on or after 6 April 2012.
Income from the business sector, philanthropic giving aside, is typically generated from sponsorship and fundraising. The budget will impact on the business sector, which will in turn impact on the levels of sponsorship and fundraising for the arts sector. On the plus side for businesses, corporation tax will be reduced by 1% for large and small companies alike, the new headline rates will be 27% and 20% respectively – but the rate reduction was expected to be 2%. A large company is defined as one with annual profits in excess of £1.5m. This benefit is countered by other business cost pressures, such as increases in payroll costs and duty.
All employers, whether from the business or arts sector, will see an increase in employers NIC rates. Where annual gross salaries exceed £24,300 employers will have to bear a cost increase; employers’ NIC will range on average from between 10% to 13% of gross salary on salaries paid in excess of £24,300. The Budget announcements for the business sector are likely to have a more material impact on the spending patterns and levels of this group of arts consumers; if we factor in other variables such as the non-increase duty rates on fuel, and the impact on consumer spend the landscape is as always a challenging one.
Approved mileage rates (AMAP) rates go up to 45 pence from a current 40 pence. This covers volunteers carried as passengers. Volunteer drivers may reclaim the actual cost of motoring expenses from the relevant voluntary organisation as long as they keep records to demonstrate that no taxable profit has been made, but, for administrative ease, they are allowed to use the AMAPs rates if preferred. In addition to claiming AMAPs rates, an allowance for passenger payments currently in place for employees at 5p per passenger per mile will be extended to volunteers.