Tax Reliefs - Public Accounts Committee Contents

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.[10] 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.[11]

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.[12]

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.[13]

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.[14]

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.[15]

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 used appropriately.[16]

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.[17]

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.[18]

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.[19]

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.[20]

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 million respectively).[21]

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 of work.[22]

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.[23]

10   Qq 54-55, C&AG's report, paragraphs 14, Figure 3 Back

11   Qq 14, 25, 54, 62-63, 66-67, 129 Back

12   Qq 54-56; C&AG's report, paragraphs 14, 1.11 Back

13   Qq 21-24, 134-135 Back

14   Qq 64-65 Back

15   Qq 107-108 Back

16   Qq 20, 26, 137 Back

17   Qq 31-33, C&AG's report, paragraph 3.24 Back

18   Qq 12-13, 132 Back

19   Qq 31-33 Back

20   Qq 35, 42- 44  Back

21   Q 29; C&AG's report, paragraph 24 Back

22   Qq 4, 34-35, 37-39 Back

23   Qq 8, 58-61 Back

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Prepared 25 June 2014