Philip Spedding invokes an anecdote about the Tate to lambast the government's proposed cap on tax relief for charitable donations.

The Tate, the fourth most visited museum in the world, came to life because Henry Tate wanted to give to the nation his collection of British paintings and some money so as to create a new gallery of British art. In terms of comparable purchasing power, the £80,000 he was offering then is the equivalent to about £31.5m today. One imagines that this would comfortably breach the new donation guidelines set by the government.

Remarkably, given how important we now know the gallery to be, Tate discovered that making this donation to the nation was not going to be easy. It seems the Treasury was unhappy with the idea, resulting in a protracted, and occasionally public debate.

In reporting that debate, the Daily Telegraph wrote on 8 March, 1892: “It is a little unwise, as well as churlish, to subject a princely donor to all the annoying delays and vexatious snubs which are usually reserved for those who penetrate into the mysterious kingdom of red tape.”

It seems astonishing that almost exactly 120 years later, the Chancellor’s Budget included measures which would make the government’s approach to major philanthropy so much worse.

The issue of building or developing arts buildings is as alive today as was 120 years ago. Only last month Arts Council England announced £114m worth of grants to arts building projects.

Many of the more ambitious plans being nurtured by the likes of the National Theatre, Chichester Festival Theatre, Southbank Centre, the British Museum and, perhaps ironically, Tate will all require significant single gifts from individuals before they can go ahead. These projects, which will do so much to improve our cultural landscape, have all been placed in jeopardy by this Budget announcement.

But it is not just capital projects. Of late there has been a spirited debate within the arts about the value of arts organisations developing significant endowments, as some have in America, to help ameliorate their future revenue funding challenges. The DMCS, with the Arts Council, have announced a £55m matching programme to encourage this. The experience in the US underlines the vital importance of leadership gifts in the development of significant endowments. Again, the Budget announcement has placed the success of this programme in jeopardy.

The reason that this Budget proposal will cause so much damage is that philanthropy at all levels is primarily driven by a personal desire to help improve things; by a recognition of how giving money can help develop the greater good. Therefore the primary role of tax legislation in terms of developing philanthropy is to endorse these psychological factors.

The government knows this.  They rightly and deliberately made a considerable public impact with the new legislation on using tax relief to encourage legacy giving.  The fact that only 3 per cent of estates in the UK even pay inheritance tax was barely mentioned – the key message inspired by the legislation was that including a charitable bequest in your will is a good thing, whoever you are.

The underlying messages promulgated by the current Budget proposal and subsequent briefings is that major gifts are somehow suspect.  The government have reportedly been saying that this legislation is needed because there are “bogus charities”.  In not naming the charities, the unwitting implication is that there is a widespread problem of bad charities in the UK.  The excellent work of the Charity Commission in overseeing charities means that this is simply not true.

The most recent government statements suggest that these “bogus charities” are actually not in the UK at all but were set up abroad.

We at Arts & Business are hugely concerned that this ongoing issue is causing real damage to major-gift philanthropy in the UK.  We, like others, have been told by philanthropists that they are rethinking their giving.  Indeed, the government’s own research has shown how reducing tax relief on philanthropy will result in less money being given.

To repair the damage being done, four things need to happen:

First, we call on the government to publicly enshrine the principle that money given away for the greater good (through giving a donation to registered charity), should never incur income tax.  This has been a central tenet of the British tax system for a long time and surely one of the lessons from the last few weeks is that this needs to be enshrined.   Clearly tax avoidance schemes need to be addressed but giving money away for the greater good should never be deemed as some form of tax avoidance.

Second, we call on the government to publically endorse the vital difference being made by major donations in the UK.   This has to be more than just a statement from the leading figures in the government.  For too long we have been informed by major philanthropists that they feel that their philanthropy incites suspicion in HMRC.  Through our position on the Treasury’s Charity Tax Forum, we have called for a thawing of the relationship between HMRC and major donors and we would urge the government to now pursue this.

Third, we call on both the government and the charity sector to better communicate the basic rationale of gift aid.  It seems that too many people still believe that gift aid is some sort of grant from the government to the charity sector facilitated by the donor signing a piece of paper; whereas in truth it is the repayment of the income tax paid on the money that the donor has given to the charity.  This confusion has led to the persistent belief that there is no tax-efficient giving in this country.  It is been part of the reason, we suspect, why there has been little publicity about the recent EU ruling that any European charity is now eligible for gift aid if they attract a UK donor.  The idea of the government seeming to give a grant to, say the Louvre, following a donation from a UK taxpayer would likely cause outrage.  Whereas if the government is understood to be augmenting the donation by repaying the tax that has been paid on it, it makes somewhat more sense.

Finally, we call on the government to look again at the 'fit and proper person test'.  As we understand it, this provision was introduced to help resolve the issue of so-called “bogus” foreign charities.  Given the announcements now being made by the government justifying the Budget measure, it is clearly not working.

Rather than causing untold damage to philanthropy in this country, the government should amend its own legislation to resolve what they are now saying is the core of the problem.

Delivering on these steps will ensure that when the next Henry Tate wants to make a profound difference to our country by making a donation, the tax system encourages and supports that decision rather than delivering “vexatious snubs”.

Philip Spedding is director of Arts & Business. This blog is based on a speech he delivered to Charity Tax Group's Tax Conference last month.