Tax Deductibility for Donations to Political Parties in the United Kingdom: the case for reform

Political parties in the United Kingdom are overwhelmingly financed from private sources: membership subscriptions, affiliations, and donations from private parties. Party fundraising typically peaks in general election years, and with the United Kingdom having held three general elections in four-and-a-half years political parties have raised record sums of money. The Neill Committee on Standards in Public Life concluded in 1998 that it would be preferable for donations to come from a large number of small donors rather than a small number of large donors, with tax deductibility playing a key role in incentivising such a structure. A key challenge to such a system is the fact that very few UK taxpayers ever have any need to complete a tax return. Consequently, such reforms have never been implemented, and statutory deductions for donations to political parties remain extremely limited. Nevertheless, a large number of donations to UK political parties are made by companies and benefit from deductibility from corporation tax. This paper argues, however, that such deductions rarely satisfy the ‘wholly and exclusively’ test for duality of purpose. Furthermore, the limited deductions available for inheritance and capital gains taxes have not kept pace with changes to the UK’s political landscape or the advent of devolution. This paper argues for a wholesale review of the tax treatment of donations to political parties. This paper commences with a consideration of complex regulatory environment for party political finance in the United Kingdom and its interaction with the tax system. This paper proceeds with an empirical analysis of corporate donations to political parties. This paper then considers options for making tax deductions for donations to political parties more widely available in light of international experience.