2 Monitoring and reporting the cost
and impact of tax reliefs
10. HMRC told us that there were various influences
on the costs of tax reliefs that meant that simply thinking that
an increase in cost was either a sign of abuse or a sign of a
lack of accountability was problematic. HMRC believed it should
be held accountable for watching these things and providing advice
but considered that tax reliefs should not be seen as the same
as spending. HMRC accepted that it should make enquiries into
unexpected increases in the costs of tax reliefs and noted that
changes in cost had driven it to investigate whether there was
abuse in Seafarers' Earnings Deduction. HMRC considered that its
risk approach worked successfully but accepted it should be more
systematic in using cost data to monitor tax reliefs.[11]
11. The National Audit Office found that there was
a difference of around £2 billion between HMRC's forecasts
of the costs of Entrepreneurs' relief after adjusting for the
changes to the scope of the relief and the actual cost. HMRC told
us that a significant element of the cost variation was as a result
of multiple changes in the scope of the relief. HM Treasury told
us that this was a highly uncertain area. There was no quantified
measure of how much investment there should be or how many people
should be impacted.[12]
12. We asked HMRC whether, given the significant
sums involved, Entrepreneurs' relief was value for money. HMRC
told us it had no evidence to suggest that there was systematic
abuse of Entrepreneurs' relief and no evidence to suggest that
Parliament's intentions were not being achieved. We asked whether
HMRC could provide positive assurance that there was no systematic
abuse. HMRC offered to seek more positive assurance.[13]
13. The National Audit Office reported that HMRC
had detected large scale abuse of Share Loss Relief in 2006-07
but did not monitor changes in the use of the relief until 2013.
In 2006-07 the cost of share loss relief claims against income
tax rose from £385 million to £1,206 million, but this
was not calculated by HMRC until 2013 and was not published until
the details were included in the National Audit Office's report.
We asked the Departments why they had not published this cost
data sooner. HMRC told us it had not done so because it did not
think it was sufficiently accurate to publish. HMRC noted that
it knew the value of the share losses on which relief was claimed,
but could not estimate the amount of tax relief that flowed from
that because there were so many variables it would have to look
on a case-by-case basis to calculate the amount involved. In response
to our concern that such technical issues needed to be resolved
to provide proper accountability to Parliament for the relief,
HMRC noted that they were now monitoring Share Loss Relief more
closely as it was now subject to an annual cap introduced in 2011
to limit the amount of income tax relief any individual person
can claim. HMRC expected the cap to have a major effect on whether
the relief was used as a vehicle for tax avoidance.[14]
14. We asked HMRC whether it should be checking that
a tax relief designed to change behaviour produced the desired
result. HMRC told us it had undertaken behavioural research in
relation to Research & Development (R&D) relief, Entrepeneurs'
relief and Business Premises Renovation Allowance. It said that
with Business Premises Renovation Allowance, which had the objective
of encouraging the renovation of unused commercial buildings in
disadvantaged areas, it had seen abusive features and had responded
by tightening up the relevant legislation. HMRC accepted that
it should be looking at whether reliefs work. In this case the
issue had been identified by tracking behaviour rather than by
tracking costs.[15]
15. The National Audit Office found that the costs
of R&D relief had increased from £100 million in 2001
to £1,060 million in 2011-12 while the actual amount of business
expenditure on R&D had stayed more or less static. We asked
HMRC about the effectiveness of this relief and whether it was
meeting Parliament's intentions. HM Treasury postulated that without
the relief, R&D expenditure by businesses might have gone
down. However, HMRC said that some of its evidence suggested it
was a relief claimed by businesses' tax departments and it was
not featuring in their internal business cases to decide whether
to invest in R&D. It said the decision to create an "above-the-line"
relief is precisely intended to make sure that businesses take
the relief into account when making decisions about how much to
spend on R&D. HMRC told us it was important that research
be done to determine whether recent policy changes had led to
R&D relief having a greater behavioural effect than in the
past. Accordingly, HMRC had commissioned two evaluation projects
to look at R&D tax credit. One of them was looking specifically
at decision making within small businesses, and how that was affected
by R&D tax credits.[16]
16. Unlike the practice in some other countries,
decisions to increase or reduce a department's funding do not
take into account the revenue foregone through tax reliefs that
operate in the department's area of responsibility. For example,
Parliament votes on funding for the Arts Council without taking
into account the effectiveness of those tax reliefs intended to
stimulate more culture and media productions. These include the
Film Tax Relief, the High-end TV tax relief, the Orchestra Tax
Relief, the Video Games tax relief, and the Children's Television
tax relief, HMRC told us that film tax relief alone had cost £225
million in 2013-14. Clear and accurate data on the costs of reliefs
are essential to help Parliament consider the value for money
of reliefs and whether their costs reflect its priorities in providing
financial support to different parts of the economy. We asked
the Departments whether tax reliefs and expenditure should be
considered together in this way to increase transparency and accountability.
HM Treasury told us it believed accountability was in place to
Parliament and the Treasury Committee. Whilst we recognised that
Parliament has an opportunity to debate changes to tax reliefs
in finance bills, we did not agree that this is sufficient to
provide adequate accountability after tax reliefs have been introduced.[17]
11 Qq 9, 45, 62 Back
12
Qq 60-68; C&AG's Report, paras 2.11-2.14, Figure 8 Back
13
Qq 64, 68-71 Back
14
Qq 46-49; C&AG's report, 7 April 2014, para 19 Back
15
Q44 Back
16
Qq 90-96; C&AG's Report, Online Appendix 4 Dashboards Back
17
Q3-8,21-23, 54-56; C&AG's Report, 7 April 2014, para 15 Back
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