Tax Reliefs - Public Accounts Committee Contents


1.  At the end of 2013 there were 1,128 tax reliefs in the UK and the number continues to grow. Tax reliefs can range from fundamental components of the tax system, such as the level of personal allowance, to tax expenditures with more specific objectives to change behaviour, such as film tax relief. HM Revenue & Customs (HMRC) estimates there may be 150 tax expenditures overall, across its tax streams. Parliamentary approval through the Finance Bill is not a sufficiently robust way to provide assurance that tax reliefs are working as intended. Too often, tax reliefs provide opportunities for abuse, avoidance and evasion and there is a risk that costs might rise and remain above expectations, as Parliament is not kept adequately informed of changes in their costs. In this initial review of tax reliefs, we have identified the areas of concern. In future work, we plan to look at how the Departments have addressed the concerns we have highlighted in this report.

2.  There is a lack of transparency and accountability for tax reliefs and no adequate system of control, following their introduction. HMRC and HM Treasury share responsibility for tax reliefs, but there is no accounting officer with responsibility for the stewardship of tax reliefs, as there would be for public spending. In 2010, HM Treasury committed to developing a framework for the introduction of new reliefs, recognising that it should consider new reliefs carefully, and that these should only be introduced when there is a strong and proven case. But it has not done so. Without a clear framework, or adequate definitions to distinguish between different types of reliefs, it is not possible to categorise reliefs effectively, and to understand how they should be managed.

3.  Tax expenditures are often alternatives to spending programmes, but are not managed or evaluated as closely. Tax expenditures are reliefs introduced to support certain behaviours. They are, in effect, a form of public expenditure and should be treated as such. HMRC is not clear which reliefs fall within the category 'tax expenditure'. Unlike spending programmes, many tax expenditures are introduced without clear objectives, and are not evaluated as fully. The Departments do not carry out options appraisals for all reliefs, and evaluations are undertaken after risks emerge, rather than systemically. They have estimated the value of only 46 of the around 150 tax expenditures. Smaller reliefs, in particular, receive less evaluation. Spending programmes require departments to abide by the rules of Managing Public Money, but HMRC and HM Treasury are not subject to similar rules for their management of tax expenditures.

4.  The Departments do not keep Parliament adequately informed of changes in the costs of reliefs. Parliament approves the introduction of new reliefs, and relies on accurate advice from the Departments for it to make informed decisions. HMRC publishes online annual estimates of the cost of only 180 tax reliefs. However, there is no feedback mechanism to alert Parliament, when the actual cost of tax reliefs varies from HM Treasury's original forecasts, on which Parliament based its enactment and amendment of reliefs.

5.  The Departments are unable to cope with the demands of an increasingly complex tax system, including tax reliefs. Tax revenues as a proportion of GDP remain stable over time but the tax code becomes more complex year on year. In March 2011, the Office of Tax Simplification reviewed 155 reliefs, and recommended that 47 should be abolished. While this led to the removal of 43 of these reliefs, a further 134 new reliefs have been introduced since 2011. Each new relief complicates the tax system, and increases the length and complexity of British tax law. It is unclear whether the impact of particular tax reliefs on tax revenue streams is properly considered, for instance the impact of agricultural property and business property reliefs on overall inheritance tax revenue. To accommodate new legislation, and anticipate the actions of avoiders, Finance Bills are four- to five-times longer than 50 years ago. HMRC has a considerable workload, with a huge backlog of cases outstanding in the tribunal, 43,000 of which will receive a notice to pay under new accelerated provisions. HMRC is looking to improve its systems, as these are not sufficiently adept at obtaining relevant information promptly from its customers.

6.  The Departments do not respond promptly to unexpected increases in the costs of tax reliefs. Data on movements in the cost of reliefs is not available until tax returns are received, and HMRC takes time to react when it notices a cost increase, as it wants to ensure its response is appropriate. However, a longer elapsed time in reacting to an increase in the cost of a tax relief raises the total amount of public money at risk. In the case of film tax relief, it took ten years to resolve the problems and cost over £2 billion. We welcome the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) system which provides richer information on avoidance schemes, and allows HMRC to take more immediate action to close legal loopholes. We would question whether there are sufficient appropriate disincentives and sanctions in the system to inhibit advisers from promoting aggressive tax avoidance schemes. The National Audit Office identified 26 tax reliefs which had increased in cost by more than 50% in real-terms in the past ten years, and 30 that had increased in cost by more than 25% in real-terms in the past five years. HMRC told us some of the reliefs which the National Audit Office had identified were small, and it carried out less monitoring of these. However in terms of public spending programmes these figures are substantial.

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Prepared 25 June 2014