lucia's: Government confirms U-turn on charity tax

George Osborne's reversal on removing tax breaks for donations is fifth policy climbdown in less than a week

George Osborne has announced his third U-turn over his budget this week by scrapping "charity tax" proposals that sought to remove tax breaks from wealthy donors to good causes.

The announcement by the Treasury at lunchtime on Thursday drew immediate criticism that the chancellor was attempting to draw attention away from damning evidence against senior ministers at the Leveson inquiry into press standards.

The Treasury said it would go ahead with a proposed cap on tax relief – which is to be set at 25% of income or £50,000, whichever is greater – but that it would no longer include donations to charity. The main component of the cap will now be the amount of previous business losses that can be offset against future taxable profits.

Officials said the decision was not a U-turn, but the conclusion of a consultation the government promised as soon as it announced the measure in the March budget.

Just two days ago, the Treasury insisted critics would have a chance to make their case in a formal consultation this summer, but it is believed that Osborne backed down after a vigorous campaign by charities. They warned that the moves would deter philanthropic giving and drive charities to the wall, undermining David Cameron's repeated exhortations to create a "big society".

The former prime minister Tony Blair made a rare foray into domestic politics to criticise the plans.

Osborne said: "It is clear from our conversations with charities that any kind of cap could damage donations and, as I said at the budget, that's not what we want at all. So we've listened.

"Frankly, at a time like this, the government is going to focus on the big issues like the worsening eurozone crisis and Britain's deficit, and not get distracted with unnecessary arguments."

Sir Stephen Bubb, the chief executive of the Association of Chief Executives of Voluntary Organisations, said: "This is good news for charities up and down the land. The chancellor has listened and done the right thing, and I applaud him for doing so."

Labour called the coalition's budget a shambles, noting that the charity tax climbdown follows U-turns over plans to impose VAT on pasties and static caravans.

Away from the budget, proposals to capture and remove buzzards – a protected bird of prey – to help pheasant shoots have been dropped, and controversial plans to expand secret courts have been scaled back.

Ed Balls, the shadow chancellor, said: "Another day, another budget tax U-turn – three successive U-turns in four days – all when parliament is not sitting and just a few weeks after ministers were defending these measures, show just what an embarrassing shambles George Osborne's budget has become."

Gareth Thomas, the shadow charities minister, said: "This decision has already done considerable damage and, taken alongside huge cuts in government funding and contracts like the Work Programme not delivering the money for charities that ministers once promised, has been responsible for the toughest year in a generation for Britain's charities and community groups."

Higher-rate taxpayers giving to a charity can reclaim more than half the income tax they have paid on the donation, irrespective of the sums involved. This means that wealthy businesspeople, especially those who have sold businessses and lived off the interest from investments, can reduce their tax bills by donating to their favourite charities.

The coalition argued that this was unfair and wanted to limit the ability to reclaim tax on donations of £50,000 a year, or a quarter of the individual's income, whichever is higher.

Sir Stuart Etherington, the chief executive of the National Council for Voluntary Organisations, said: "We are delighted that the chancellor has listened to reason and pledged to drop the charity tax. This is a victory for common sense and validates the strength of feeling from the thousands of organisations who lent their weight to the Give it Back George campaign. This is a great day for philanthropy."

Heather Self, director and tax specialist at the international law firm Pinsent Masons, said: "The government appears to have conceded that it was wrong to draw charities into a cat and mouse game of tax avoidance.

"This was a poorly thought-through proposal which would have harmed charities without being well targeted on abuse. We are glad that today's developments mean that those individuals who legitimately want to support charities will not be penalised for doing so."

Alana Lowe-Petraske, solicitor in the charities team at the international law firm Withers, said: "It remains to be seen if donors and charities trust this government on philanthropy issues after the unfortunate way the proposal was handled, but this is excellent news for the whole sector, from philanthropists to the smallest charities."

In a sign of the tensions in the coalition government about the original proposal, Lord Oakeshott, a former Lib Dem Treasury spokesman, said: "[This] is the right decision after a monumental unforced error. It was deeply offensive to donors and damaging to charities to imply that people could be better off personally by giving to charity."

The deputy prime minister and Liberal Democrat leader, Nick Clegg, said in April: "If you don't do something about these allowances, which allowed very wealthy rich people to avoid paying income tax altogether, you are effectively asking ordinary taxpayers to subsidise them."

Randeep Ramesh

Juliette Jowit