Tax Reliefs - Public Accounts Committee Contents

1  Accountability for tax reliefs

1. On the basis of a Report by the Comptroller and Auditor General, we took evidence from HM Revenue & Customs (HMRC) and HM Treasury (the Departments) on tax reliefs.[1] This is a wide-ranging topic and we see it is as our role to examine the effectiveness of tax expenditures—the tax reliefs that are most similar to spending programmes. In our role of considering value for money, it is for the Committee of Public Accounts to review the costs and impact of a relief against its policy intent, and to consider the cost of abuse.[2]

2. At the end of 2013 there were 1,128 tax reliefs in the UK. HMRC publishes data on around 400 each year. It has estimated the value of around 180 of these reliefs, 46 of which it has categorised as tax expenditures, in its published tables. HMRC does not categorise all the reliefs on which it publishes data, but has estimated that there may be around 150 tax expenditures, overall, across its tax streams.[3]

3. Some reliefs are pure policy decisions. Other reliefs, known as tax expenditures, are intended to encourage behavioural change. HMRC told us it took a 'purist' view of tax expenditures, compared to other countries. It explained that this meant it tried to capture the widest possible range of reliefs, within its definition of tax expenditure. Therefore, it included zero-rate and reduced-rate VAT within this category. However, the Departments acknowledged there was no clear definition of tax expenditures. HM Treasury told us that the objectives of tax policies could be broad, and it was rare to have detailed objectives for reliefs. The lack of clarity in defining tax expenditures added to the difficulties in determining their objectives, and in examining their effectiveness. As the cumulative cost of tax reliefs is billions of pounds a year, the absence of examinations into their effectiveness, in achieving any detailed objectives, is of huge concern.[4]

4. In 2010 HM Treasury committed, in Tax policy making: a new approach, to developing a framework for new reliefs. This framework has still not been introduced. The framework was intended to ensure reliefs were considered carefully, and enacted only when there was a strong and proven case. HM Treasury told us it had put other measures in place, aimed at improving tax reliefs instead. It had increased the length of the consultation period for new legislation, and had introduced Tax Impact and Information Notes (TIINs). These were designed to consider a broader range of tax policy changes, than the previous impact assessment regime.[5]

5. Tax expenditures cost £101 billion in 2012-13. The Departments told us that each year they publish data on the costs of tax expenditures and structural reliefs. The Departments felt that this data gave people, and Parliament, the opportunity to make representations.[6]

6. The data published by HMRC did not compare the actual costs of tax reliefs with forecast costs. When a revised form of film tax relief was introduced in 1997, officials had forecast it would cost £30 million in the first three years. However, its costs rose significantly, and reached nearly £700 million by 2005-06. It took ten years, at a total cost of over £2 billion, before HM Treasury and HMRC amended the relief to bring down the costs. A significant proportion of the costs incurred in film tax relief had not fulfilled the purpose of the relief, or the intention of Parliament. HMRC told us that it had taken a series of steps, from 1997 to 2007, in which it had put in place various restrictions for the relief, and that it had introduced each restriction after considering the policy perspective. However, it had not been Parliament's intention that the excessive cost of film tax relief should have been allowed to continue for so long. [7]

7. Such cost increases would not be tolerated in the same way if film tax relief had been provided as a grant programme. Other government departments are required to abide by the rules of Managing Public Money when administering a spending programme, but formal requirements do not exist for HM Treasury and HMRC in relation to tax reliefs.[8] The Departments are responsible for managing the tax system as a whole, and for implementing policy decisions, yet no individual accounting officer is assigned responsibility for managing tax expenditures, as would be the case for public spending. HM Treasury told us that no such an arrangement had been made before, because tax expenditures had always been regarded as different to spending programmes. HM Treasury acknowledged that, in principle, it could design a system where all reliefs were managed in the same way as public spending, with a dedicated accounting officer responsible for tax expenditures. HM Treasury said it is a decision for both Government and Parliament, whether or not to design such a system.[9]

1   C&AG's Report, Tax reliefs, Session 2013-14, HC 1256, 7 April 2014 Back

2   Qq 1-2, 8-9, 136 Back

3   Q 3; C&AG's Report, paragraphs 14, 24, 1.7 Back

4   Qq 4-9 Back

5   Q 57; C&AG's Report, paragraphs 23 & 2.10, Figure 16 Back

6   Qq 2, 34 Back

7   Qq 12-13, 16-20 Back

8   Qq 8, 16-17, 58-61 Back

9   Qq 9, 16, 45-46, 59 Back

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Prepared 25 June 2014