Please read our student and staff community guidance on COVID-19
Skip to main content Skip to navigation

Tax policies towards charities and the financial sector


Research by Professors Kimberley Scharf and Benjamin Lockwood led to tax policy changes in the UK and EU.

Reversing proposed changes to the UK gift aid programme

Research by Professor Scharf and Professor Sarah Smith (University of Bristol) explored how charitable giving might vary with changes to the UK Gift Aid programme, which grants tax relief on charitable donations. It showed how changes to tax relief may have sizeable effects on the volume of private donations.

The research triggered public discussions about tax incentives for giving, which came to a head in Spring 2012 when the Government proposed to put a cap on tax reliefs that could be claimed by individuals, including tax reliefs on charitable donations. The research was cited by numerous charities and NGOs in public statements and policy proposals to campaign against the proposed changes.

In response, the Government reversed its decision: while the cap on tax reliefs was introduced in April 2013, gifts to charity were excluded. With more than 50% of UK residents making charitable contributions worth over £4 billion on an annual basis, this protected a significant amount of revenue for the sector.

Reforming taxation in the EU financial services sector

The financial services sector has also had an exemption from VAT. The industry benefits from not having to charge VAT to its customers, although it is unable to claim tax relief for the VAT it pays on inputs. Following the 2008 financial crisis, policymakers began to question the merits of VAT exemption for financial services.

PricewaterhouseCoopers commissioned Professor Lockwood to estimate the revenue effects of removing VAT exemptions from firms offering financial services in the EU. Lockwood’s methods for analysing the costs and benefits of a full VAT system were adapted by the European Commission to calculate whether the financial sector receives favourable tax treatment. Finding that it did, the Commission introduced a Financial Transactions Tax (FTT) for the sector. The FTT was implemented in 11 EU member states from 2014 and is estimated to raise €57 billion annually, approximately 0.4% of EU Gross Domestic Product (GDP).

References to the research

1. Scharf, K., Tax incentives for charities in Canada, 1997, Canadian Policy Research Networks Working Paper No. 03 (1997).

2. Scharf, K. and S. Smith, 2009, Gift Aid donor research: Exploring options for reforming higher-rate relief, Research Report 91, HM Revenue and Customs, December 2009.

3. Scharf, K., 2000, Why are tax expenditures for giving embodied in fiscal constitutions? Journal of Public Economics, v75, pp 365-387.

4. Horstmann, I., A. Silvinski, and K. Scharf, 2007, Can private giving promote economic segregation?, Journal of Public Economics, v91, pp 1095-1118.

5. De La Feria, R. and B. Lockwood, 2010, Opting for Opting-In? An Evaluation of the European Commission's Proposals for Reforming VAT on Financial Services, Fiscal Studies, v31n2, pp 171202.

6. Lockwood, B., 2011, Estimates from National Accounts Data of the Revenue Effect of Imposing VAT on Currently Exempt Sales of Financial Services Companies in the EU, Appendix 2 in PricewaterhouseCoopers, 2011, How the EU VAT exemptions impact the Banking Sector.