Management of tax reliefs Contents

2Transparency and reporting on tax reliefs to Parliament

Clarity of objectives for tax reliefs

17.When we examined tax reliefs in June 2014, we found that many tax reliefs were introduced without clear objectives. As part of our evidence session in 2014, HM Treasury told us that it was rare to have detailed objectives for reliefs, which we noted was a cause for huge concern.30 In February 2020, the NAO reported that HMRC considers some tax reliefs to be difficult to evaluate because they have multiple or unclear objectives. For the new and revised tax reliefs NAO examined, HM Treasury had set objectives in general terms but did not provide baselines against which benefits could be measured. In its public reporting, HMRC describes reliefs but does not explain the objectives they are designed to achieve.31

18.Some tax reliefs incentivise behaviour, while others represent a choice by government to reduce the tax burden on particular groups or sectors. In 2019, HMRC completed an assessment of reliefs with economic and social objectives, resulting in them being grouped into three broad categories reflecting the broad type of outcome they were designed to achieve. Around 40% are designed to incentivise a specific behaviour, 40% to benefit a specific group, and 20% to serve a social purpose. This internal assessment was provisional. HMRC told us that the exchequer departments want to focus attention with their evaluations on those reliefs that are designed to achieve behaviour change. The NAO found that while HMRC’s categorisation was useful in understanding the broad objectives of tax reliefs, it was not sufficiently detailed to be able to identify tax reliefs targeted at similar sectors or with similar objectives.32

19.We asked the exchequer departments why new reliefs were being introduced with unclear objectives. HMRC responded that some tax reliefs were expected to apply to a certain group and reflected a political choice about who or what to tax. It gave the example of marriage allowance, which recognises marriage in the tax system. HMRC explained that it could demonstrate the extent to which those who were entitled to it were receiving it, but questioned what objective this would demonstrate and whether the success of this relief could be assessed by the numbers getting married or the length of marriages.33 We also asked HM Treasury whether it was guilty of not giving Parliament sufficient clarity about the purposes of tax reliefs. It similarly explained that in some cases it was clear that a tax relief was intended to have a particular objective but in others it was a decision by Government to not levy tax on something. It asserted that in these cases, such as the decision not to charge VAT on food, the objective was simply to not tax a particular activity or group of people and the fact that the relief existed meant that the objective had been met.34

Reporting on the cost and value for money of tax reliefs

20.When we examined tax reliefs in 2014 we found that HMRC published estimates of only 46 reliefs which had economic and social objectives.35 Since then HMRC has responded to our recommendations that it be more transparent. In October 2019, it published for the first time a list of all 362 tax reliefs with economic and social objectives.36 It has now reported costs for 158 of these reliefs and plans to reports costs for more reliefs over the next two years.37 However, in its public reporting HMRC does not compare the cost of tax reliefs to published forecasts.38

21.Government’s published estimates of the costs of tax reliefs are prepared by HMRC and scrutinised by the Office for Budget Responsibility (OBR) in its role as the government’s official forecaster. Higher costs can indicate that a tax relief is working well or that it is not being used as intended.39 In 2014, we concluded that departments did not keep Parliament adequately informed of changes to the costs of tax reliefs. We also found that there was no feedback mechanism to alert Parliament if the actual cost of tax reliefs varied from HM Treasury’s forecasts, on which Parliament had based its approval of the relief. We said that in the future we would look at what the exchequer departments had done to provide proportionate feedback and analysis to Parliament each year on the costs of principal tax reliefs (those costing more than £50 million annually), including significant changes in costs.40 In their response, the exchequer departments said that the government was transparent about both the costs of existing reliefs and the costs and likely impacts of new reliefs with, for example, HMRC annually publishing information on the Exchequer cost of existing tax reliefs.41

22.HMRC has not compared the costs of tax reliefs to government’s original published forecasts. The NAO examined the costs of ten tax reliefs introduced since 2013. Of these, the costs of four tax reliefs were at least double government’s original forecasts. For example, the research and development scheme for large companies cost £2 billion in 2017–18 against a forecast of £1 billion when it was introduced. In July 2019, OBR reported that the cost of tax reliefs was poorly understood. It found that HMRC could not offer explanations for large changes in the cost of the research and development reliefs or entrepreneurs’ relief.42

23.We asked the exchequer departments whether reliefs costing double what HMRC had forecast meant that they were out of control. They asserted that they could not anticipate everything when they made their forecasts. They outlined factors that could affect costs including shifts in science and technology, reliefs driving changes in behaviours and changes in the economic determinants which underpin forecasts, such as the level of investment. They also stated that variances between forecasts and actual costs can occur because of changes in the underlying tax rates.43

24.We asked HMRC and HM Treasury what action they took to follow up on cost forecasts and understand the actual costs of new tax reliefs. HM Treasury told us that there was a variety of reasons why the cost of a tax relief might be different to what was expected and that it kept the cost of reliefs under review. HMRC similarly asserted that it based its forecasts on modelling using the best evidence it had available but that unexpected changes, such as in exchange rates, could occur that could result in significant variances. HMRC confirmed that it was committed to increasing the transparency of the information it made available on costs and in its autumn 2020 statistical bulletin it would start including explanations for how costs compare to original forecasts.44

25.In March 2015, we concluded that there was inadequate assessment of the value for money of tax reliefs.45 In 2017, HM Treasury began to make assessments of the value for money of tax reliefs and by 2019 had assessed the value for money of 63 tax reliefs.46 We asked HM Treasury how it assessed value for money. It explained that in considering a proposal for a tax relief it first tried to establish the ultimate objective and consider alternative ways of achieving that objective, such as through spending or regulation. It said it then looked at the relief’s cost, likely impact including on behaviour, possible levels of deadweight loss47 and the potential for fraud and abuse. It also explained it looked at how the relief would interact with the wider tax system, and then it made an overall assessment of the likely consequences of the new relief.48 HM Treasury’s value for money assessments of tax reliefs also often compare actual costs to the forecast cost of tax reliefs. HM Treasury’s assessments of the value for money of tax reliefs contain information which could help Parliamentary scrutiny of tax reliefs. However, HM Treasury does not publish its value for money assessments as it asserts these to be policy advice to ministers which do not represent the formal position of the department.49


30 Committee of Public Accounts, Tax Reliefs, Third Report of Session 2014–15, HC 282, June 2014

31 C&AG’s report, paras 2.5, 3.5, 3.19 and Figure 9

32 Q 46, C&AG’s report, paras 1.4, 1.20–1.21 and Figure 7

33 Q 42

34 Q43

35 Committee of Public Accounts, Tax Reliefs, Third Report of Session 2014–15, HC 282, June 2014

36 HMRC, Estimated Costs of Tax Reliefs, October 2019

38 C&AG’s report, paras 3.18 and 3.19

39 C&AG’s report, paras 2.16–2.17

40 Committee of Public Accounts, Tax Reliefs, Third Report of Session 2014–15, HC 282, June 2014

41 HM Treasury, Government responses on the Sixty First report (Session 2013–14) and the First to the Seventh reports from the Committee of Public Accounts: Session 2014–15

42 C&AG’s report, paras 2.17, 2.24, Figures 10 and 11 (2017–18 is latest year for which data are available)

43 Qq 28, 36, 39

44 Qq 28–29, 36

45 Committee of Public Accounts, The effective management of tax reliefs, Forty-ninth Report of Session 2014–15, March 2015

46 C&AG’s report, paras 2.13, 3.8

47 The amount of relief going to taxpayers’ whose behaviour is unchanged.

48 Q64

49 C&AG’s report, paras 19, 3.13, Figure 15




Published: 20 July 2020