Oxfam on tax avoidance: do as I say, not as I do?
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But what of Oxfam’s own tax practices? Some of them look remarkably like tax avoidance.
One of Oxfam’s tax planning vehicles is Oxfam Activities Ltd, which enables it to avoid tax on the profits of its £15 million trading operations.
While it is commonly assumed that charities are exempt from tax, that is not actually the case. Although they are exempt from tax on certain types of income (from donations, rent or investments), the profits they make on business or “trading” operations are taxable, except in specific circumstances. By setting out the very limited circumstances in which trading profits are exempt (see section 524 of the Income Taxes Act 2007), Parliament made it very clear that it intends charities’ other business income to be taxable.
The reaction of Oxfam, and most of the other charities, has been to run their business operations through a separate company. That company would be taxable on its profits, but it donates all its profits to its parent charity through the “Gift Aid” scheme, which exempts them from tax.
This fits the standard definition of tax avoidance – an artificial structure (separating out some of the charity’s activities into a separate legal entity) that gives it a tax advantage.
Of course I do not think there is anything wrong with Oxfam doing this; like all good tax avoidance it is perfectly legal and it is an ingenious way to escape a tax liability. But should Oxfam really be criticising other businesses for avoiding taxes when it does just that with its own?
Oxfam’s second, tax avoidance is its “Tag your Bag” scheme, which its website says allows people to “Gift Aid your donated goods”. Well, it doesn’t. You can’t Gift Aid donated goods; the “Tag your Bag” scheme is actually a sophisticated piece of tax avoidance that allows charities including Oxfam to claim £80 million a year in tax relief from the government.
Gift Aid for donations to charities by individuals allows the charity to claim 25% of the amount of the donation from the government as tax relief, despite the charity not having paid any tax (and it allows the donor to claim extra tax relief if they are higher rate taxpayers). It is a hugely valuable tax break for charities. But there is a problem – it only works for cash donations (and a few donations of investments), it doesn’t work for goods donated to a charity shop, neither when they are given (because they aren’t cash) nor when they are sold (because the money then is not a donation, it is to buy the goods).
Again, this is clear in the law – section 416 of the Income Taxes Act makes one of the conditions to claim Gift Aid that “the gift takes the form of a payment of a sum of money.“ Parliament has clearly excluded donations of goods from the Gift Aid scheme.
Despite the law, several major charities have therefore developed schemes to try to make donations of goods look like donations of cash, so that they can claim the Gift Aid tax relief on them. These work as follows:
- the donor does not give the goods to the charity; instead he keeps ownership of them and the charity sells them on his behalf;
- once the charity has sold the goods, it contacts the donor to say that they have done so and asks him to donate the money to the charity (i.e. to allow the charity to keep the sale proceeds);
- the charity then classes this as a cash donation of the sale proceeds, and claims 25% tax relief on it under the Gift Aid scheme.
Is this legal? Yes. Is it tax avoidance? Yes, clearly. Let us compare it to what we generally regard as tax avoidance schemes.
First, Oxfam and the other charities are setting up an artificial structure in order to gain a tax advantage. The ‘normal’ transaction would be for the donors to donate goods to Oxfam, so that Oxfam can sell the goods and keep the profit. Changing this so that the goods remain the property of the ‘donor’, with the charity shop selling them on his behalf, is an arrangement entered into purely to allow Oxfam to claim the Gift Aid tax relief.
Second, although the scheme may be legally correct, in many cases it is highly doubtful that the legal structure accurately reflects the commercial activity. Does the ‘donor’ really think that they are keeping ownership of the goods until they are sold, and then making a separate donation? In many cases they probably consider that they have given the goods to Oxfam at the point they hand them over in the shop. This increases the artificial nature of the scheme.
Third, the scheme uses what looks like manipulated pricing to maximise the charity’s Gift Aid claim. When the goods are sold by the charity, theoretically on behalf of the donor, the charity has to charge a commission. That commission does not qualify for the Gift Aid tax relief, because it is a payment for services rather than a donation. It is therefore in the charity’s interest to minimise that commission, so as to maximise its Gift Aid claim, and Oxfam charges just 3%. Is 3% a realistic commission? By way of comparison, ebay charges 10% commission provides only a web platform and makes the seller do most of the work; 3% commission to be able to sell goods through a staffed high street shop is extremely cheap and I find it difficult to imagine that Oxfam would agree to that unless it was pretty certain that it would be allowed to keep all the money, not just the 3% (and it is pretty certain; a study found that over 99.9% of donors using similar schemes allow the charity to keep all the sale proceeds).
This use of artificial transfer pricing to gain a tax advantage is the sort of thing that various charities have condemned when used by commercial businesses; it weakens their position to be using the same techniques themselves.
Fourth, these schemes are strongly marketed by the charity, a feature that can be seen as a sign of aggressive tax avoidance. Oxfam last year advertised for a salaried Head of Tax and Treasury, one of whose functions was to identify “opportunities to increase income” from Gift Aid (according to the job description, the post holder is also responsible for Oxfam’s “tax planning”).
Moreover Oxfam has linked their scheme to Nectar, allowing donors to claim Nectar points on goods but only if done so through its “Tag your Bag” scheme to allow Oxfam to claim Gift Aid tax relief.
Again, all of this is perfectly legal and there is absolutely nothing wrong with legal tax avoidance – or at least so I believe. Just as business done through tax havens is perfectly legal (except perhaps for occasional errors, which those involved carefully seek to eliminate) and there is nothing wrong with it. But that is not Oxfam’s view; it is a strange philosophy that condemns actions in others whilst busily engaging in them oneself.
20 thoughts on “Oxfam on tax avoidance: do as I say, not as I do?”
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Oxfam also have a large pension fund. I imagine some elements of that are likely based “offshore”?
I agree with what you say. Especially when some charities do not seem to be doing the “tag your bag” scheme properly.
I just received a letter a few days ago from a different charity saying: “Thank you so much for donating your goods…” and confirming how much Gift Aid that they had reclaimed. Which is strange because I thought that I asked them to sell the goods on my behalf and then allow me to donate the net of commission proceeds to them (I read the small print).
Now a typical person won’t read the small print and will just think that they are donating goods to charity. And if the charity thinks that they have donated goods, does that mean that there is a “sham” in the legal sense?
Presumably for the Tag your Bag scheme to be legal, there must be the option for the ‘donor’ to refuse to give the proceeds of the items sale to Oxfam, and just pay the commission’ and keep the remaining cash? If by signing up for the Tag your Bag scheme you cannot decide to keep the proceeds then by definition ownership of the goods has already passed to Oxfam.
So I suggest that the system be tested – take some items to Oxfam you want sold (but can’t be bothered to photograph/list/package and post via Ebay), ask them to sell them for you for 3% commission, and see what the response is. If they say ‘No we wont do that’ then you have prima facie evidence that their selling goods on commission business is a fiction.
Really? You really think that a charity making a donation of profits from a trading subsid is in the same category as tax avoidance by amazon, google et al?
Can I perhaps point out that any corporation is free to chose to make donations to a charity and have this deducted from their profits for tax purposes. The ending of this “loophole” would be a disaster for many charities who chose to launch innovative social enterprise based initiatives to augment their funds and make them less reliant on grants and Government funding.
In my judgement, accusing Oxfam of hypocrisy in the way you have done is facile charity bashing for a reason that I cannot determine. All of this at a time when grants to charities are shrinking (in part due to the money seeping out of our economy due to the tax structures of multinationals!)
The article says – “Use of artificial transfer pricing to gain a tax advantage is the sort of thing that various charities have condemned when used by commercial businesses; it weakens their position to be using the same techniques themselves,”
There is a clear distinction here between what Oxfam and other charities are doing and tax avoidance. This is not some artificial scheme it is in fact following exactly what HMRC suggests should be done. There is extensive guidance from HMRC on these matters and the charities have been following this guidance
There are also rules that prevent structures and operations that are set up simply to avoid tax and both the Charity Commission and HMRC are very clear that using a trading company is not to avoid tax.
There is no special treatment here. Any company donating its taxable profits to a charity will get a tax deduction equal to the amount of the profits donated. If all the taxable profits are donated no Corporation Tax will be payable.
Good old Mr Framjee.
Always standing up for charities regardless. Of course charities having subsidiaries is good news for his firm – more companies to audit, more fees and Mr Framjee specialises in auditing charities.
No wonder he sees no problem.
I am flabbergasted by this article. Trying to draw a moral equivalence between not paying tax to benefit good causes (Oxfam) and not paying tax to enrich yourself (private businesses). It’s not the same. Not the same at all. Try harder.
You might not like charities, and yes there are question marks over the salaries a minority of charities pay to their chief executives, but to make some sort of moral equivalence between the use of Gift Aid to apply more money to good causes and the squirreling away of money by the already rich so they can get richer is absolutely laughable. You are grasping at straws in your defence of the indefensible.
Peter C – when it comes to defending the indefensible the charities and their shoddy, self interested, ignorant trade bodies have made this into an art form.
How many overpaid Chief Executives, chuggers, charity shops, and countless scandals does there need to be before this sector actually admits it need root and branch reform so as to get back to its founding principles. These large charities eg Oxfam have lost sight of why they were set up and what they should be delivering.
The government needs to step in and reform this out of control sector.
Dear old Anonymous (it would be nice to know who you are)
I have long advocated doing away with the need to have a trading subsidiary – I believe a charity should be allowed to trade through the charity as long as it applies the profits of the trade to its charitable purposes.
You might want to check the proceedings of the Joint Committee on the Draft Charities Bill (2004)
http://www.publications.parliament.uk/pa/jt200304/jtselect/jtchar/167/4062319.htm
I said to the committee when considering the need for a trading company – “Really, it serves no benefit at all; there is no tax gain or loss in any way, this might sound like heresy from a professional adviser but the only people who benefit out of this structure are professional advisers.”
So I think you need to reconsider your point of view about my point of view!
Thank you but no. I have read your comments elsewhere.
You are simply an overpaid mouthpiece for charities. No more no less.
How much exactly does your firm charge these charities in total for auditing – any sign of any pro-bono work? of course not, might dent your firms profits.
Dear Mr cannot see the wood for the trees c/o Mr Framjee
The issues raised here are part of the many billions that members of the public are effectively spending in order to subsidise a grossly inefficient sector and the various overpaid charity suppliers.
I suggest you look at the HMRC numbers which show a total cost in terms of tax relief of £3.4 bn per annum.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/456405/CommentaryDocument.pdf
Of course, no doubt these structures and benefits are all legal but the cost of £3.4bn helps finance an over-staffed sector and the numerous companies earning a great living from supplying them.
Anonymous – Surely someone who purports to speak with such authority and has such strong views should not have to shelter behind anonymity. But ofcourse it is easier to rant and rave in this way.
Don’t lose the thread of the discussion which was about whether using Gift Aid in the way recommended by HMRC is the same as tax avoidance.
This was followed by your now proven to be wrong comment that I think that charities having to use trading subsidiaries is good news.
If you do want to continue a constructive discussion please drop the “Anonymous” mask.
Dear Mr Framjee
Maybe you could first answer these simply questions:
1. How much income has you firm received from registered charities in the last 3 years?
2. What has been your personal income, derived through auditing/ advice to charities in the last 3 years?
3. How many hours have you donated ‘pro bono’ to registered charities in the last 3 years?
When it comes to being conflicted in terms of talking about charities, you win the gold medal.
To those who say that tax avoidance by Oxfam is different to tax avoidance by companies, because Oxfam uses its money for good causes, that is to allow “the end to justify the means”, a philosophical position that most people rightly reject.
Oxfam’s behaviour should at least live up to the standards that it expects for others.
Dear Anonymous – Are you ready to move on from being a keyboard warrior? – if you are so sure of your position about the “grossly inefficient sector” and ready to stop hiding behind anonymity lets engage in a head to head debate in person. I am sure that IEA or another organisation would be ready to arrange this.
I believe I recognise your style and perhaps I should call you Peter. You wont be getting any more response from me unless you have the courage to stand up for your convictions and drop the mask.
Surely you should be ready to emerge from the shadows to express your point of view in person. If not I am going to take the advice in https://www.psychologytoday.com/blog/your-online-secrets/201409/internet-trolls-are-narcissists-psychopaths-and-sadists and just ignore you and your rants.
Pesh you are simply yet another charity bully who when confronted with any argument attacking your faith (the charities are wonderful and no criticism can ever be levied religion) you simply attack the person making the argument rather than the argument itself.
Since you have gone on the record in your own name, it would be appropriate for your comments to contain statements regarding your extensive conflicts of interest in this matter, since your own salary will of course be geared to the overall number of charities and their subsidiaries requiring audit or other advice.
I’m sure there are plenty of turkeys who if they could write would be objecting to Christmas as it does not personally help them much. Your views on charities operating with subsidiaries can be put in the same bucket.
It seems to me that charities such as Oxfam are either intellectually confused or intellectually dishonest.
Aside from the mental gymnastics involved in their tax position, I have always wondered how a charity whose purpose is to help people escape from poverty, focuses its attacks on small islands, little relics of empire, which were largely abandoned in the wave of decolonialisation, and whose only path to escape poverty was to choose independent economic progress, by invoking a sovereign right to set their own tax rates.
What would Oxfam prefer, that such islands only thrive on tourism and sugar cane plantations? Or do they picture a world where such islands can only exist on Oxfam handouts? There is something darkly neo-colonial about Oxfam’s approach to offshore places, and richly hypocritical in criticising islands that have chosen their own successful and sovereign path to growth, while playing by international rules – even though those rules keep changing in what seems to be a deliberate strategy to throttle growth in such sovereign nations (owing in large part to Oxfam & Co’s politicised lobbying – all paid for, of course, by their donors).
I can only surmise that there is some profound cognitive dissonance at play, where charities such as Oxfam think it is fine to attack tax avoidance structures, while operating their own tax avoidance schemes, or where such charities attack developing nations that have achieved independent success, while professing to help developing nations escape poverty.
Of course, if small resource poor islands can succeed on their own, then there is little need for charities such as Oxfam any more…
Starting almost any article with a bizarre presumption – in this case that Oxfam are engaging in tax avoidance – and then seeking to “prove” your case is pretty poor journalism.
Had the article started from the premise that successive Governments and the HMRC had together determined efficient and effective – and yes “legal” – routes to ensuring that monies given to, or earned by charities, were maximised so that they might be spent on charitable activities – the article would have been quite different but would probably not have attracted very much interest.
The continued grudging acceptance that these practices are “legal” seems to imply that even if they are on the right side of the law they are somehow immoral or reprehensible. As to suggesting that charities are improperly reclaiming tax through Gift Aid when they have not paid any is – at best – an obfuscation. The charities are reclaiming the tax already paid by the donor. As to charities not paying any tax– the levels of irrecoverable VAT incurred by the sector are, frankly, eye watering and represent one of the main outflows of funds for many.
As a finance professional, who has worked in the charity sector for more than 20 years, I can assure you that the requirement to operate separate trading companies is a burden that we could do without. I support Pesh Framjee’s proposition that charities should be allowed to undertake trading activities in support of their aims without having to jump through these hoops – and have spoken publicly in this vein.
As to the various “Anonymous” contributions – added and abetted by “Distant Onlooker” – to this discussion collectively demonstrate the degree of ignorance around the operation of the Third Sector in the UK and the obtuse opinions expressed are only fuelled by Mr Teather’s ill-judged article.
Wow! Never thought I’d see such a passionate debate about charity tax! Didn’t see that coming!
Let me start by being completely transparent. I make my living and support my family by being a senior employee in the charity sector. I made a conscious decision a long time ago to use my skills and abilities in the not-for-profit sector, rather than in commerce, as I wanted to have the satisfaction of helping people. We’ve revalidated this regularly, even though it means that we can’t afford those nice things in life that many other people can. But please don’t think that I’m looking for pity or any sort of pat on the back. Instead, I’d love to see a debate around what I believe are our society’s skewed values, that allow enormous payments (sometimes wholly unjustified) to those working in commerce, and under-value so many people, at different levels, delivering services to the most vulnerable in our society. But that’s just a personal bugbear, away from the main thread of this conversation, i.e. taxation.
Tax evasion is illegal and is defined as working outside of the tax framework. I don’t think anyone in this thread would disagree with the statement that tax evasion is wrong. In contrast, tax avoidance, as touched upon in Richard’s article, can be defined as:
• Seeking to obtain results contrary to the clear intention of Parliament in enacting the relevant legislation
• Using highly artificial or contrived arrangements to exploit shortcomings in the prevailing legislative framework
Therefore, the questions to ask are whether any of the charity sector “schemes” aim to obtain results contrary to the intention of Parliament or aim to exploit shortcomings in the framework supporting the legislation. HMRC and the Charity Commission are great at consulting with the charity sector to establish what the impact of any legislative or regulatory changes might be and different tax scenarios regularly come up in those conversations. I struggle to see how they can then fall within the definition of a tax avoidance activity, if they are taken into account in the very constructing of the tax framework that charities then use. The sector is also very aware of its need to operate ethically and therefore, once legislation is in place, it regularly seeks to gain clarity over “schemes” from regulators in advance of putting those practices in place. How much more tax compliant do charities need to be!
(Check out the following article to see an example of how this sometimes works: https://www.charitytaxgroup.org.uk/news-post/2016/minister-welcomes-ctgs-insightful-valuable-input-charity-tax/)
I have no evidence for this, but, on the balance of probability, there are probably charities operating outside of the current tax regime. But it is wrong to characterise the whole sector as one where tax avoidance proliferates. A simpler tax regime for charities is regularly called for at the meetings I attend, but there just doesn’t appear to be the political will to tackle this.
I’ll admit, I don’t know the details of Oxfam’s letter on tax avoidance, but, if there are tax authorities seeking to obtain results contrary to the intention of the relevant legislation or are performing gymnastics to enable arrangements to be tax compliant due to legislative shortcomings, then Oxfam and others are right to campaign on those grounds. And if their supporters want to support that activity, they have the right to do so too. I also agree that establishing a competitive tax environment is not in itself wrong (according to our current value systems). So those authorities working within the existing frameworks need to be applauded. But those operating outside of them should be held to account – as should charities.
Instead of focussing on tax, perhaps a better place to start would be to actually have a debate (or even a referendum!) on society’s value system! I’m no economist, but to kick this off, let me ask the following:
How can we as a society justify valuing an Adult Nurse working on a hospital ward at £21,909 (NHS Point 16, Agenda for Change, from April 2016) and yet the average (I repeat, average) UK graduate salary is around £28,000 (in 2014-15, Association of Graduate Recruiters)? Perhaps IEA could start that debate rolling, please?
Sorry, couldn’t leave the bugbear alone! 🙂