The National Audit Office (NAO) – University of Birmingham Tax Centre launched on 23 January 2018. It will:

• Identify and conduct research on tax issues.
• Encourage debate, stimulate ideas and exchange knowledge through events and networks.
• Enable government bodies, academics and tax practitioners to discuss needs and practical challenges in a ‘safe place’.

At the launch event, the Tax Centre presented a case study on Gift Aid, which started with an NAO study and was followed by several years of in-depth independent academic research.

The aim of the exercise was to provide answers to two difficult questions:

1. Whether providing a tax relief on charitable donations results in more income being received by charities than if the government had just given the equivalent amount of the tax relief directly to the charities?
2. And, if it does, to what extent is that increase due to new donors versus more giving by existing donors?

The primary aim of Gift Aid is to reduce the cost of donations, thereby encouraging more people to give. Does this tax incentive change behavior? And does it do so by more than the cost to taxpayers of giving the tax relief?

The NAO’s 2013 value-for-money study, Gift Aid and reliefs on donations, highlighted the lack of evidence to answer such questions. Following NAO and Public Accounts Committee recommendations, HMRC worked with our team of academics to produce better evidence.

To measure the impact of a tax incentive on behaviour requires data from before and after a change in that tax. Tax reforms in 2010 introduced a higher tax bracket of 50% for incomes above £150,000 and removed the tax-free personal allowance for those earning above £100,000, which had an unintentionally large impact on the marginal tax rate of those in the £100,000-£112,950 income band. Both changes further reduced the cost of giving for taxpayers with incomes in these ranges.

HMRC gave the Tax Centre team access to over 75 million self-assessment income tax returns for the fiscal years 2004/05 through 2012/13 – i.e. before and after the 2010 change. There were many complexities in assessing this information, and the methodology, and detailed results, are explained in the Tax Centre’s working paper, More giving or more givers? The effects of tax incentives on charitable donations in the UK.

The results can’t provide a total view of Gift Aid, as the data is only from those required to submit self-assessment tax returns. However, for the first time, the UK now has a measure taking account of both whether Gift Aid incentivises:

• existing donors to give more – this is called the ‘intensive-margin price elasticity’
• people who have not donated to start doing so – the ‘extensive-margin price elasticity’

The combined elasticity for higher-rate taxpayers earning more than £96,163 (i.e. those both eligible to claim the rebate on their self-assessment tax return and in the bracket affected by the tax rate changes in 2010) was -0.27. This means that the amount of giving does respond positively to a change in the cost of giving, but every additional £1 spent on tax incentives is generating only £0.27 more in donations. In other words, charities would get substantially higher donations if the value of the Gift Aid relief were given directly to them.

Within this overall result, the intensive-margin elasticity was about -0.22 and the extensive-margin elasticity -0.05 – showing that, overall, the increase in donations for these taxpayers is mostly driven by existing donors giving more. Averaged out, these tax incentives induce only very small numbers of higher-rate taxpayers who have not donated to start donating.

Among the 75 million tax returns analysed, the researchers found that many basic-rate taxpayers filled in donation amounts on their self-assessment forms even though they were not entitled to a rebate. Taxpayers earning less than £96,163 are not included in the main estimates outlined above. But the researchers carried out further analysis and discovered that although the tax reforms did not in fact reduce the cost of giving for those earning less than £100,000, the reforms did have an impact on giving, even for those who couldn’t claim any Gift Aid rebate at all. In particular, the lowest income group (those earning less than £8,389) were most likely to start donating when they hadn’t previously. We don’t know whether those who started donating or increased the size of their donations in response to the tax changes did so because they thought they could claim a rebate. The behaviour is unexpected and warrants further investigation.

The findings show how donations changed over time for taxpayers that experienced a fall in the price of giving due to the reform and for those taxpayers that were not affected by the reform. There was a sharp rise in donations after the reform for taxpayers earning more than £150,000 per year. The donations of taxpayers earning between £100,000 and £112,950 look quite unresponsive, which raises the question of “why?” since these are the taxpayers that experienced the sharpest reduction in the price of giving.

The next steps are for the Tax Centre to liaise with HMRC’s Charities Policy Team to explore how these results might be used by them and to see whether there is scope for using additional data for further analysis.

The independent evidence produced so far can now be used to inform the debates about the best way for government to provide public support to donors and charities, and the debate about whether taxpayers understand the benefits to them of existing methods of provisions.

CTG Vice-Chairman Richard Bray will be meeting members of the Tax Centre later this month to discuss this new research.