Conclusions
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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