Why we should not be taxing referendum donors

Over Christmas, there has been some controversy over the taxation of donations that were made to the Leave and Remain campaigns. Since most of the reporting has been written by people with very little idea of what is being taxed and why, I thought I’d note the basis of the taxation and why, in the interests of justice, the law should be amended to prevent it.

The UK has an inheritance tax which taxes a deceased person’s estate at a rate of 40%. There is a large nil rate band of £325,000, doubled to £650,000 for a married couple. There are also reliefs for business assets, some family homes and various other things. Inheritance tax is very unpopular but personally I have always thought it is one of our fairer taxes. The main asset it taxes is residential property, which is usually subject to an exemption from capital gains tax for our main residences. Also, an large inheritance is not something we do anything to deserve and it seems fair that the exchequer should get a cut.

Obviously, you should not be able to avoid inheritance tax by giving your money away just before you die. There are rules to prevent this from happening. Also, some people set up trusts for the benefit of their children to avoid some of the tax (although this is much less effective than it used to be). The Chargeable Lifetime Transfer regime is one of the ways that the tax code tries to prevent people avoiding inheritance tax by putting money into a trust. Basically, if you put £100 into certain trusts or other kinds of entity, you have to pay £25 in inheritance tax at the same time. To be clear – this tax charge is a way to prevent people from avoiding inheritance tax. It is not intended to tax gifts and donations to unrelated bodies and there are explicit exemptions for most such donations, including to charities, sports clubs and political parties.

HMRC is demanding that the donors to the Leave and Remain campaigns pay the 25% tax on their donations because it is treating them as Chargeable Lifetime Transfers. In other words, it is saying that the donors should be taxed as if they were trying to avoid inheritance tax (which, obviously, is not what they were trying to do). HMRC is correct that the amounts are due on a strict reading of the law. However, it is now a settled principle of tax law that the literal meaning of legislation is not determinative. What counts is the intention of Parliament. It is clear that when Parliament enacted the rules on donations to the Leave and Remain campaign, it did not intend that some of these donations should be subject to a 25% surtax. The only reason for the tax demands is that no one at the time realised that there was a problem. Admittedly, to put the matter beyond doubt, there should have been an explicit exemption in the European Union Referendum Act 2015. Unfortunately, there wasn’t because the parliamentary draftsman was careless and didn’t put one in.

HMRC has discretion not to pursue tax demands that are inappropriate. However, because of unwarranted criticism about ‘sweetheart deals’ and such like, it has become very cagey about using its discretion. In any case, it’s lawyers may well have decided that without anything explicit to exempt the donations, it should tax them anyway. I don’t think this is about the ‘revenge of the establishment’ (as one of the donors has complained), although the crowing from opponents of Brexit over the issue has certainly not helped put such fears to rest.

Luckily, there is a quick and easy solution to this manifold injustice. An amendment should be made to the Finance Bill currently wending its way through Parliament to put right the omission to the European Union Referendum Act 2015.