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You would not immediately expect tax and religion to interact too closely, and certainly not some of the basic principles of tax and those of making charitable donations as recommended by religious statute.
Indeed, given that the underlying intent and rationales between tax and charitable donations are widely different, it is perhaps more reasonable there should no expectation of similarities.
Nonetheless, when considered from the perspective of Judaism, the faith with which this article concerns itself, there are very close similarities between how the level of charitable donations should be determined and the basic principles underlying the application of current tax.
These cover issues like:
- the distinction between capital and income;
- the determination of income; and
- the deductions from income.
For example, take inheritance tax, in which the assets of a deceased are taxed once and the potentially taxed again on the subsequent beneficiaries’ death.
Isaiah Horowitz, the 16th century rabbi, stated, in relation to the laws of charitable giving, ‘It seems to me that a person is obliged to give charity from an inheritance which he has inherited from his father’.
The implication being that, potentially, the same underlying capital can be subject to the laws of charitable giving twice, with the difference that for this there is no availability of quick succession relief.
What perhaps is more interesting is the fact the following principles have been developed in Jewish law over more than 2,000 years, as distinguished from, for example, capital gains tax, which is not yet 50 years old. Could it be our tax system borrows from much older principles?
For the references to the background and laws of Jewish charitable donations, this article is entirely dependent on published works, primarily Maaser Kesafim by the British Association of Orthodox Jewish Scientists. The term maaser refers to tithing one’s income to give to charity.
The general principle of Jewish law is 10% of income and gains should be made as donations. It can be appreciated from this starting point why appropriate definitions are required as to what is income or gains and how they are calculated.
For example, over what period should the determination of income be accounted?
The 10% calculation should generally be applied over one year. Rabbi Yechezkel Landau said in the 1700s, ‘A separate account must be kept for each year’. That can be aligned to the Jewish new year festival of Rosh Hashanah, as opposed to 5 April.
There are various written authorities for dealing with aspects of income and capital gains determinations, accounting for the effect of inflation, currency exchange gains and losses, and the actual tax point aligned to an accounting period.
Other areas of determination consider the differences arising between cash accounting and accruals and, perhaps more fundamentally, what profits can be considered.
For example, one of the more headline-grabbing tax cases over the past 20 years has been ‘Miss Whiplash’, officially CIR v Aken [1990] 63TC395. It confirmed that illegal activities – in this instance, prostitution – were taxable when carried on as a trade.
Judah ben Samuel of Regensburg’s 1538 book Sefer Hasidim, first printed more than 260 years before income tax was introduced in the UK, made clear that donations should come from all income sources, including income and gains from prohibited activities. Indeed, even the Sharkey v Wernher [1955] 36TC275 decision is mirrored in relation to goods taken for own use.
Rabbi Yisrael Meir Kagan, better known by the title of his most famous book, the 19th century Chofetz Chaim, referred to this concept, identifying the need for shopkeepers to keep a separate account of the value of goods personally taken out of the business, to ensure they were brought into the determination of income to be tithed.
Having determined what percentage rate of charitable donations should be made, and over what period and in relation to what resources, it becomes necessary to consider how the relevant amount is calculated, particularly by reference to deductions that can be claimed.
The laws of Jewish donations have their foundations in agricultural tithes, which held that no deduction was possible for items such as raw material costs: seeds and labour, the price of harvesting and so on.
Clearly, the rules needed modifying to take account of actual monetary donations, as expounded by Rabbi Yair Chaim Bacharach (born 1638) who said that ‘the profit in excess of the expenses is to be regarded as the “new produce”’ from which donations should be deducted.
Having established the principle that expenses may be deducted, the question was then about which expenses were allowable, very much in line with the current ‘wholly and exclusively’ rules for determining taxable profit.
The general principle established, as set out by David Oppenheim, a rabbi whose life spanned the 17th and 18th centuries, is that ‘the trader deducts all damage and expenses which arose in the transaction’. While this suggests a potentially wide range of deductions, there are restrictions.
As an example of this point, consider the issue of travelling and subsistence. The basic position of HMRC is set out in BIM47705, which states, ‘The cost of food, drink and accommodation is not in general an expense incurred wholly and exclusively for business purposes, since everyone must eat in order to live.’
Potentially, Jewish law differs, with Rabbi Yechiel Michel Epstein Epstein stating in the 1800s, ‘All expenses incurred in the transaction including travelling expenses and food and drink are all considered as business expenses and can all be deducted’.
This was a later view of original interpretations of the law and is not necessarily the prevailing custom, with many preferring the earlier consideration by the 18th century rabbi Raphael Shlomo Laniado, who said, ‘I am doubtful regarding the expense of food and drink which a man consumes on a business journey until he returns home whether they may be deducted; for whether at home or on a journey he must eat and drink.’
However, HMRC make an exception for business journeys outside the normal pattern: ‘But extra costs may be incurred wholly for business purposes where a business is by its nature itinerant (for example in the case of commercial travellers), or where occasional business journeys outside the normal pattern are made.’
In the same way, Rabbi Yaakov Reicher suggested some time before his death in 1733 that travelling expenses could be allowable ‘if a person travels to a market to buy certain specific merchandise in the market, or to sell there, so that his expenses are incurred for goods which are available for purchase or sale, his expenses are deductible’.
Within the general determinations, there does not appear to be any overriding concept of duality of purpose, currently one of the most contentious areas, judging by Revenue accounts enquiries, leading to apportionment of allowable expenses.
Rabbi Oppenheim said, ‘The cost of clothing specifically needed for a journey can be deducted and all other expenses of this kind’.
Contrast this remark with the outcome of Mallalieu v Drummond [1983] 57TC330, which decided no deduction was available for everyday wardrobe, even if the taxpayer could show the clothes were not of a type that would be worn outside the work environment.
Following on from deductions there is the question of business losses. The original application of the laws to agricultural tithes did not permit allowance be taken of business losses; those made on one crop could not be deducted from the profits made on another for determining the 10% donation.
The extended application of the laws to monetary donations led to a number of differing opinions relating to the major questions of whether losses on one trade can be set against profits of different trade, and whether losses of one year can be applied against those of another.
In the context of one accounting period, the offset of losses is allowable but without any carry forward or carry back facility, as is available for sole traders for income tax purposes.
Ephraim Katz, a rabbi born in 1616, said, ‘If at the time when the loss occurred he made an account which dealt with the loss, then the profit which he earned subsequently is a separate matter, and he must take masser from the total profit. However it is different if he did not make an account when the loss occurred, but at the end of the year he calculated his total profits and losses for a whole year, then he may deduct the loss from the profit and take masser from the net result.’
The result is a clear restriction to losses arising in the same accounting period.
Perhaps analogous to the treatment of tax losses being available only where the same trade is continued in the future, Rabbi Reicher referred back to the original agriculturally related laws to draw a comparison to business losses.
He mentioned the position of incurring a loss on one crop that cannot be offset against a gain on another, and hence does not permit a loss on one transaction to be offset against a gain on another unless they have clear common expenditure.
We often think of tax legislation and associated case law as being comparatively modern. Hopefully, the above demonstrates many of the principles utilised today have been around, in a different context, for hundreds of years.
When it comes to Judaism, there are not only similarities in the principles for determining charitable donations. There are also clear links to IR35 – but that’s another discussion!
Russell Eisen is tax director at Elman Wall chartered accountants
