2 Administering tax reliefs |
8. While government policy has been for simpler taxes,
the UK taxation system has become increasingly complex. Despite
the fact that tax revenues as a proportion of GDP remain relatively
stable over time, the tax code increases in length and complexity.
The length of Finance Bills has increased from around 100 pages
in the 1970s, to over 500 pages currently. The number of tax reliefs
increased from 1,042 in March 2011, to 1,128 in December 2013.
During this period, Parliament abolished 48 tax reliefs, but introduced
a further 134. Each
new tax relief has made the tax system more complex, and provided
an opportunity for avoidance and abuse, either individually or
in conjunction with other reliefs. HMRC told us that it had put
its best resources into designing tax reliefs to reduce the risk
of abuse. However, rules which the Departments introduced to guard
against potential abuse, could add further complexity to tax legislation.
9. In March 2011, the Office of Tax Simplification
(OTS) reviewed 155 tax reliefs and recommended that 47 should
be abolished, either: because they had expired; there was no longer
a policy rationale for them; the value of the relief was negligible;
or the administrative burden outweighed the benefit. Forty three
of these 47 tax reliefs were abolished, and the exceptions were:
land remediation relief; capital gains compensation for mis-sold
pensions; late-night taxies; and, national insurance contribution
exemption for awards for the assistance with lost credit cards.
The Departments told us they supported the work of the OTS, and
HMRC agreed with OTS's view that there was a great deal of work
to be done, to make tax simpler. However, OTS had only around
six people working for it, and HM Treasury acknowledged that the
role of OTS could be increased.
10. HMRC told us its compliance work aimed to examine
whether the conditions of a tax relief were being met. It pursued
cases as tax avoidance, if it had determined that contrived and
artificial arrangements were in place. We were pleased to note
that HMRC was taking more cases of tax avoidance to tribunals.
However the backlog is enormous and HMRC told us there are around
43,000 cases where it expected to receive payment for outstanding
tax, and that as many as 17,000 of these related to film tax relief.
11. The tax avoidance industry makes profits from
devising and selling avoidance schemes. Some high-risk promoters,
in particular, make money from their fees, rather than from any
success of their avoidance schemes. It is questionable whether
there are sufficient disincentives and sanctions in the system
to prevent advisers from promoting aggressive tax avoidance schemes.
HMRC was shifting to collecting the tax at the point where it
had made inquiries, both to reduce the cost of administration
in pursuing disputed tax, and to incentivise people who were participating
in avoidance schemes, to reach an agreement.
12. HMRC told us it was looking to improve its systems,
so that it could gain better information on how its customers
were using reliefs. It hoped to design new services that provided
tailored prompts for information to help with compliance. For
example, higher risk companies might have to provide more information
on how they calculated their tax.
13. Good management information and feedback are
essential to ensure problems with cost increases are addressed
quickly, and the effectiveness of tax expenditure policies is
constantly monitored. Escalating costs indicate that a relief
needs further investigation, to ascertain whether it is being
14. To get data on possible upsurges in the costs
of reliefs, HMRC has to wait for it to come through on tax returns.
This can be as long as two years after the relief has been used.
HMRC explained that it was not always an increase in costs that
would lead to questioning whether a relief is working as expected;
other factors may also have an impact. It believed it was a case-by-case
judgement, and changes should not necessarily be made just because
costs had increased. HMRC wanted to avoid overreacting, so it
might decide to wait to determine what was taking place before
it made changes to a relief, particularly for tax expenditures
that sought to bring about a behavioural change.
15. Delays by HMRC in responding to abuse might increase
the amount of public money at risk. In the case of film tax relief,
it had taken ten years to resolve the problems and cost over £2
billion, after initial assessments by HMRC and the Treasury had
predicted the tax relief would cost £30 million a year. The
Departments acknowledged that even reliefs that cost relatively
small sums of money were important, as they would add up to significant
amounts over time.
16. The introduction of the Disclosure of Tax Avoidance
Schemes (DOTAS) system had allowed HMRC to react more quickly
to avoidance schemes. It was now able to make changes to legislation
within days of having a disclosure through DOTAS. HMRC gave us
the example of the quick changes it had made to the Seed Enterprise
Investment Scheme to limit the relief and to stop an unintended
connection between it, and a relief for renewable energy.
17. 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. A large proportion
of the increase for two of the reliefs related to changes in the
rate of VAT. For these reliefs, HMRC told us that it would not
evaluate the change in cost, because it already knew the reason
for the increase. HMRC told us some of the other reliefs identified
by the National Audit Office were relatively small. HMRC considered
that while small reliefs were worth monitoring, it might not be
worth spending much time or money to evaluate them.
18. The main focus of HM Treasury was to monitor
major changes in the value of tax receipts. It depended upon HMRC
for this information. Between 1999-2000 and 2012-13, the value
of agricultural property relief and business property relief had
increased by 160% and 200% respectively, but Inheritance Tax revenue
had risen by only 10% over this period. HM Treasury said that
while such an increase would be reported to Ministers, the total
annual costs of agricultural property relief and business relief
were relatively small (currently, £370 million and £385
19. HMRC told us that it undertook a great deal of
monitoring of reliefs, and that this could be through both published
evaluations, and the work it carried out internally. Smaller reliefs
received a different level of monitoring to larger reliefs. HMRC
did not provide full details of its monitoring approaches for
different types of reliefs. However, it said those reliefs with
negligible cost (which it defined as costing £2.5 million
or less a year) were ones on which it did not do a great deal
20. The Departments told us they did not carry out
options appraisals for all reliefs and did not always undertake
a full evaluation, because they reviewed risks as they emerged.
In particular, they considered that they had improved the design
of reliefs to reduce the risk of abuse, and the need for evaluation.
10 Qq 54-55, C&AG's report, paragraphs 14, Figure
Qq 14, 25, 54, 62-63, 66-67, 129 Back
Qq 54-56; C&AG's report, paragraphs 14, 1.11 Back
Qq 21-24, 134-135 Back
Qq 64-65 Back
Qq 107-108 Back
Qq 20, 26, 137 Back
Qq 31-33, C&AG's report, paragraph 3.24 Back
Qq 12-13, 132 Back
Qq 31-33 Back
Qq 35, 42- 44 Back
Q 29; C&AG's report, paragraph 24 Back
Qq 4, 34-35, 37-39 Back
Qq 8, 58-61 Back