Wednesday, August 25

Money For Nothing

Not being particularly romantic about these things, I would be the first to note that all charities need to eat. Not only do they need funding to do their good work, they also need some to function. Some take a lot (apparently Cancer Research spent 3 million quid on a CRM system; a system to solicit more donations), while some probably just take enough to pay for rent, employees and teabags.

This is all fine. And I have no qualms with that. But since I'm writing an article, I must have a problem with something right? Well yes, and it's to do with the transparency of these costs. I don't think anyone will disagree with me when I say that they should be clear and public. This is particularly important for a Muslim paying Zakat who happens to follow the opinion that none of his due can be spent on the distribution of the wealth (ie, that this has to paid on top of the Zakah amount).

Most charities recognise this and are quite forthcoming with their costs by displaying various pie charts and the like, although it must be said in the case of some Islamic charities (or ICs) it had been done in reaction to increasing customer pressure rather than an internal drive to be transparent.

And even so something isn't quite right with these figures. The British Red Cross (for example) seem to spend around 37.9%[1] on administration (including fundraising). If we look at Islamic Relief they state a more modest 20%. However, take a look at Muslim Hands and you see a pie chart showing that an impressive 0% of your donation is spent on administration.

How can this be? Well, they're not working for free, that's for sure. Their explanation is that they use something called Gift Aid (or GA) to fund all non-charitable costs, something which is given in addition to the basic donations of most people. I don't mean to pick on Muslim Hands though - most ICs (including Islamic Relief and Muslim Aid) seem to pull this kind of line in order to allay the fears of donors who want 100% of their money to be spent on what's been religiously obligated. After asking on Twitter if anyone knew of an IC which didn't take a cut a few people suggested that some don't, again citing the GA reason as why. For now, let's put aside the idea that you can't really separate "pots" of money anyway and accept that by "all your money is spent on charity" we actually read "those who need it get the total value you originally gave".

But what is GA? Well I have talked about it before (as well as any possible abuse of it by charities) but it's worth going over the topic again.

A fair few years ago, the UK Government in their benevolent way decided that any money given to charity shouldn't be taxed. This is sound in principle (since they're taking from those who need it most, not the donors), but I'm guessing a main reason was also to encourage giving more. This was an absolutely good thing, and a rare reminder that Governments can do things right.

However the complication comes due to the way tax is collected at source here (we call it Pay As You Earn, or PAYE). Usually by the time it comes to giving, you would have already been taxed. In that sense the Tax People actually owe you this money back. Since we're all either stupid, lazy or a bunch of crooks, they decided that instead of giving us this tax money, they would instead give it to the charities in question. This is what we call Gift Aid.

At this point it is worth mentioning that there is another way for a person on PAYE to give money that hasn't been taxed. Some larger companies (those that are willing to administer it) allow you to pay charity off your payroll. This is called Give As You Earn, or GAYE (no sniggering at the back). The idea is that you pay charity before the tax man looks at what's left to tax, and so it won't be.

Before we talk about how Gift Aid works, let's stick with GAYE for the minute. We're going to do some maths now - you've been warned. First some assumptions to make things simpler. Let's say you earn £100 a month, and that income tax is set at a straight 20% (and there are no allowances etc). Let's also say that you want to donate £10 to a charity, that is you want the charity to receive £10 (you'll see why I have to clarify this a little later). How would this work in the GAYE situation?

Gross pay, G = 100.
Gross pay after donation, G2 = 90. Charity, C = 10.
Tax, T = 90*0.2 = 18
Net pay, N = 90*0.8 = 72.

So we get £72, the tax man gets £18 and the charity gets £10. Superb. Bear in mind that since no tax has been paid on C's £10, it does NOT qualify for Gift Aid. Now, let's give as most of us usually do, out of our net pay:

Gross pay, G = 100.
Tax, T = 100*0.2 = 20
Net pay, N = 100*0.8 = 80.
Net pay after donation, N2 = 70. Charity, C = 10.

So currently we get £70 (a loss), the charity gets the same £10 but the tax man wins slightly by getting £20 too. However, since the charity's £10 has been taxed, they can now claim Gift Aid. One way this is calculated is by asking "how much of that tax was due to this £10?". For example if we had given half our net pay (£40) to charity instead, they could take back half that tax (£10). But since we've actually given an eighth (10/80), they can only claim an eighth of that tax, 20/8, or £2.50.

So let's see what the numbers look like now. We still have our £70, the charity now has £12.50, and the tax man is left with £17.50. We're still quite a bit out of pocket compared to when we used GAYE, and the charity has benefited quite a lot, but the Government has only lost 50p. We can check the numbers by giving £12.50 via GAYE:

Gross pay, G = 100.
Gross pay after donation, G2 = 87.70. Charity, C = 12.50.
Net pay, N = 87.50x0.8 = 70.

Which is what we were left with above. In effect, we've actually given 20% more in charity than we had intended to.

So, how do we actually do what we intended to do? That is, give £10 to charity after it's already been taxed? Well we essentially need to give an amount which, after the calculations above, would result in the same numbers as in the GAYE method. We want the charity to get a total of £10, after they've claimed GA. Looking at the analysis above, this is simply £10 after taxation:

C = 10*0.8 = 8

Which, after GA will result in the charity getting £10, the tax man £18 and ourselves £72, which is what we wanted. Just for completion, it's worth noting that GA is fixed at 25%, and so higher rate tax payers will get back the extra portion of tax they've paid, but only if they ask for it (so make sure you do!).

The real point I'm trying to make here is that GA is not free money that the Government have decided to just give away. It's not like a company matching scheme - as a tax payer this is directly your money that they're giving to charities on your behalf.

This doesn't mean that it's necessarily a problem. After all, the 20% extra that you're paying compares well with what other charities charge their donors, and you can only get extra reward for paying more charity. There are some practical concerns though: we can't make the above discount adjustment with our Zakah since most IRs say they'll use the GA gained for purposes other than our intended, so we have to pay the full amount regardless of any GA claimed. We also have to pay Zakah precisely from our holdings - we can't use "cashback" or indirect means to fund it. And finally not everyone pays this default fee; those who qualify for GA are effectively subsidising those who don't (like the self-employed). Whether or not these bother you may depend on your own understanding of fiqh and justice.

But ultimately the issue I have is with the lack of transparency and the blatant way in which GA is spun on IC websites. I'll say it again: it's not free money, it's your money. And what with charity being such big business (Justgiving earn a bucketload), I think it's quite important that we know where we stand when it comes to funding. Curiously no real mention of these "free donations" are made in their official and audits reports (it's a bit like those VAT free sales you sometimes see where they actually only reduce the price), presumably because any official auditor would laugh at such a gimmick, but I doubt the average Muslim donor reads these documents. The cynic in me also wonders about the efficiency of an operation that sees GA primarily as "funding" money. What do they do with a shortfall if any?

So now I've complained, what would I suggest they do instead? Well a possible option is to actually implement an explicit "admin charge" of whatever percent they need (much like some companies do with credit cards) on Zakah payments, with the option to pay this fee via GA if available. Or they could keep donations free and charge an annual membership instead, or even restructure themselves to rely more on funds explicitly raised for operational costs. I have faith that Muslims who want to be sure that their money is going to the right place will be willing to pay these charges, but I guess the risk is that in the real world it would put people off who now see a charge for something that used to be "free", and possibly even result in less money being given; remember, Zakah and charity passed on via "private" means aren't eligible for GA anyway (so it's only the Government who wins here). I personally would still prefer a level of transparency to the current method of spinning how things are actually funded.

I'll end on a personal note by saying that I'm actually a bit disappointed that, once again, the two concepts of Islam and money together result in something opaque and not entirely clean-cut. But then that often seems to be the case with good old Islamic finance. Who exactly is to blame for this I don't quite know, but it probably has something to do with the value money seems to play in the average life of a Muslim.

[1] I've included "Trading Activities", "Supporting the movement" and "Governance" as well as fundraising in the total of 68.6m.