Management of tax reliefs Contents

Conclusions and recommendations

1.We are concerned that HMRC does not understand the impact of any of the largest tax reliefs, including reliefs on pensions which were forecast to cost £38 billion in 2018–19. In March 2015, we reported that HMRC did not systematically evaluate the effectiveness of all tax reliefs intended to change behaviour. In the five years since then, HMRC has not evaluated any of the ten largest tax reliefs supporting government’s economic and social objectives. These reliefs cost £117 billion a year, around 5% of the UK’s gross domestic product. Those evaluations it has undertaken show mixed results, with only one of the four reliefs costing over £1 billion having a positive impact on behaviour. Despite the large cost of reliefs on pensions, HMRC has not evaluated what benefit these reliefs provide.

Recommendation: HMRC should:

HMRC should report back to us to update on progress in these regards, within 3 months, and 12 months respectively.

2.HMRC and HM Treasury are insufficiently curious about the impact of some key tax reliefs on different groups. Data on who benefits from tax reliefs are crucial to understanding whether they are achieving their intended objectives and to informing decisions about which tax reliefs need amending. When he announced in the 2020 Budget that he was reforming entrepreneurs’ relief, the Chancellor stated that the relief was unfair, with nearly three quarters of the £2 billion a year cost benefiting just 5,000 individuals. However, HMRC does not collect and report data on who benefits from all major tax reliefs. It does not, for example, distinguish between subsidising new luxury properties or affordable homes that are built as a result of the £15 billion VAT relief on the construction of new dwellings, and subsequently does not know who benefits from the tax relief. The data HMRC publishes on who receives pensions reliefs is limited and we are concerned that some groups are not benefiting from tax relief on their pension when they should. For example, around 1.75 million low-paid and part-time workers earning less than the personal allowance of whom around three quarters are women, will not be getting tax relief on their pension contributions after being auto-enrolled into employer pensions.

Recommendation: HMRC should assess the groups and sectors benefiting from all significant reliefs and publicly report the results during 2021. For pension reliefs, HMRC should publish data showing who is benefiting, split by: income; groups with protected characteristics such as gender, age, ethnicity; people working in the public and private sectors; and people in defined contribution and defined benefit schemes.

3.The exchequer departments are not transparent with Parliament on which tax reliefs need to change taxpayer behaviour for government objectives to be achieved. Tax reliefs that are designed to change behaviour require more attention than those which are intended to simply benefit a specific group because it is uncertain how taxpayers respond to tax incentives. The objectives of a tax relief are not always clear. It is difficult for Parliament to scrutinise a tax relief if the exchequer departments do not set out what they intend the relief to achieve. In 2019, HMRC completed a provisional assessment of which tax reliefs had behavioural objectives, but it has not finalised that assessment or published it. While this assessment would help parliamentarians, there is also a need for information on the specific objectives of each relief which aims to change behaviour. In its public reporting, HMRC describes reliefs but does not state their objectives.

Recommendation: HMRC should, within three months, publish a list of all new and existing reliefs with objectives that include changing behaviour and specify the objectives of each.

Recommendation: For any new or amended tax reliefs HM Treasury should identify in the Budget’s supporting documents whether they are intended to change taxpayer behaviour and how the government will measure whether that objective has been met.

4.HMRC cannot explain why the cost of some tax reliefs is considerably greater than government forecasts presented to Parliament. Government forecasts of the cost of tax reliefs are prepared by HMRC and scrutinised by the Office for Budget Responsibility (OBR). The costs of some new tax reliefs are double the government’s published forecasts. For example, the research and development scheme introduced in 2013 for large companies now costs over £2 billion a year, twice what HMRC expected when it was introduced. In July 2019 the OBR concluded that the cost of tax reliefs was poorly understood. HMRC does not compare the costs of reliefs to forecasts and is therefore not well-placed to investigate the reasons for cost variances or report differences to Parliament. HMRC has committed to publicly reporting variances between the forecast and actual cost of tax reliefs.

Recommendation: HMRC should, as part of its next annual statistical publication on tax reliefs due in October 2020, identify all significant cost variances within tax reliefs, and report the reasons for those variances, explaining whether variations in cost are proportionate to the impact of the relief.

5.HMRC and HM Treasury do not publish sufficient information on the value for money of tax reliefs to enable Parliament to hold government to account. In response to examinations by this Committee, HMRC now publishes a list of all tax reliefs which support government objectives, and now reports costs for 158 of these reliefs, up from 46 in 2014. However, since our last major report in 2015, HMRC has published evaluations of the impact of just 13 tax reliefs. Although it claims to undertake internal assessments of reliefs, HMRC cannot show which reliefs it has evaluated internally. In 2017, HM Treasury began to make assessments of the value for money of tax reliefs. When assessing value for money, HM Treasury considers factors such as how the cost of the tax relief compares to forecast, the extent of behaviour change and deadweight loss, and consideration of spending alternatives. HM Treasury does not publish its value for money assessments as it asserts they are policy advice to ministers and do not represent the formal position of the department. Published information on factors covered by the assessments would help Parliament to hold government to account for their use of tax reliefs.

Recommendation:

6.HMRC and HM Treasury are far too slow in identifying and responding to some of the most serious problems identified with reliefs, including cases of abuse. In June 2014, we found that the exchequer departments did not respond promptly to unexpected increases in the costs of tax reliefs. In March 2015, we questioned whether entrepreneurs’ relief was value for money given that it was then costing £2 billion more than forecast. Despite our concerns, entrepreneurs’ relief was not fully evaluated until 2017. This evaluation found that at the point they invested only 8% of claimants reported that their behaviour had been influenced by the relief, but this finding was not acted on until the 2020 Budget. Between April 2015 and March 2019, entrepreneurs’ relief cost £11 billion. Companies with a minimal UK presence are abusing the £2 billion research and development relief for small- and medium-sized enterprises by exploiting a change to legislation made in 2012. Although HMRC identified the issue in early 2018, and is planning to introduce a new control that will restrict what companies with a limited UK presence can claim, the abuse is expected to continue to at least 2022–23, partly because of the time to identify and address the issue. HMRC estimates that the amount of money that is claimed through the relief but which would have been excluded by the latest proposed cap has risen from £70 million in 2016–17 to £130 million in 2020–21. This includes both claims that HMRC could challenge as abusive, and other claims where the exchequer was subsidising companies that were not doing research and development in the UK and which the cap would restrict. In 2019, HMRC forecast that introducing a new control on claims could save the Exchequer around £45 million a year. Officials must take the lead when problems with reliefs arise and, where necessary, quickly advise ministers about the action that could be taken.

Recommendation: HMRC and HM Treasury should, within 3 months, write to the Committee to explain how they will accelerate their response when reliefs are costing much more than expected, are subject to abuse, or are not achieving their objectives.





Published: 20 July 2020