Tax reliefs report: fundamental part of wider debate
26 Jun 2014 04:02 PM
The Public Accounts
Committee's Third Report of Session 2014-15 is published as HC
282.
The Rt Hon Margaret Hodge MP,
Chair of the Committee of Public Accounts, today said:
"This report on tax reliefs
is a fundamental part of the wider debate on taxation. We have 1,128 different
tax reliefs in the UK, creating a very complex tax system.
Within these, the Government
spends £100 billion every year on reliefs designed to encourage
behavioural change, whether promoting jobs and growth, or investment in the
arts.
Whilst well-intentioned, every
one of these tax reliefs creates opportunities for avoidance and
evasion.
The example of film tax relief
highlights how the tax avoidance industry has exploited loopholes in
legislation to devise and sell aggressive avoidance schemes.
The European Commission and OECD
are currently considering whether the Government’s Patent Box tax relief
designed to encourage innovation in fact constitutes a 'harmful tax
practice'.
Government made a commitment to
simplify the tax system and established the very welcome Office for Tax
Simplification. However, whilst the Government has so far abolished 43 tax
reliefs, another 134 have been introduced since 2011.
Much more radical simplification
of the tax system is required if we are to get to grips with aggressive tax
avoidance.
Reliefs, such as the late night
taxi relief, which ended up benefitting big law and accountancy firms rather
than shift workers on low incomes, appear difficult to
justify.
If Government chooses to spend
£100 billion on tax reliefs, at a time of austerity, this expenditure
should be considered in the same way as spending programmes. Many tax reliefs
are introduced without clear objectives and are not evaluated as
fully.
Departments need to demonstrate
the case for introducing new reliefs, as opposed to other options such as
direct grants. It must monitor them systematically to ensure they are achieving
Government’s stated objectives, rather than after risks
emerge.
Government also needs to ensure
there are appropriate disincentives and sanctions in the system to inhibit
advisers from promoting aggressive tax avoidance
schemes."
Margaret Hodge was speaking as
the Committee published its 3rd Report of this Session which, on the basis of
evidence from Sir Nicholas Macpherson, Permanent Secretary, HM Treasury and Lin
Homer, Permanent Secretary and Chief Executive, HM Revenue and Customs,
examined tax reliefs.
Tax reliefs are a substantial,
complex and poorly managed element of the tax system. HM Treasury and HM
Revenue & Customs (the Departments) are accountable to Parliament for
providing timely feedback on what reliefs cost, and whether they deliver
Parliament’s intent. Complexity in the tax system is a longstanding
issue, but the Departments appear not to have been able to cope with the
growing demands of managing increasing numbers of tax reliefs. They are
uncertain about the scale and value of different types of
relief—including which reliefs should be treated as "tax
expenditures" (reliefs to encourage behavioural change). The tax
expenditures in the UK tax system are estimated to cost over £100 billion
per annum. With the breadth, number and tax complexity of reliefs HMRC cannot
be fully vigilant and knowledgeable about the cost and value of reliefs. The
case of film tax relief highlights how a minor, but poorly designed, relief
eventually cost the exchequer over £2 billion. The Departments were slow
to respond and did not bring the surge in costs to the attention of Parliament.
We look to the Departments to set out clear proposals on how to improve the
management and accountability to Parliament of the cost and performance of tax
reliefs.
Conclusions
At the end of 2013 there were
1,128 tax reliefs in the UK and the number continues to grow. Tax reliefs can
range from fundamental components of the tax system, such as the level of
personal allowance, to tax expenditures with more specific objectives to change
behaviour, such as film tax relief. HM Revenue & Customs (HMRC) estimates
there may be 150 tax expenditures overall, across its tax streams.
Parliamentary approval through the Finance Bill is not a sufficiently robust
way to provide assurance that tax reliefs are working as intended. Too often,
tax reliefs provide opportunities for abuse, avoidance and evasion and there is
a risk that costs might rise and remain above expectations, as Parliament is
not kept adequately informed of changes in their costs. In this initial review
of tax reliefs, we have identified the areas of concern. In future work, we
plan to look at how the Departments have addressed the concerns we have
highlighted in this report.
There is a lack of transparency
and accountability for tax reliefs and no adequate system of control, following
their introduction. HMRC and HM Treasury share responsibility for tax reliefs,
but there is no accounting officer with responsibility for the stewardship of
tax reliefs, as there would be for public spending. In 2010, HM Treasury
committed to developing a framework for the introduction of new reliefs,
recognising that it should consider new reliefs carefully, and that these
should only be introduced when there is a strong and proven case. But it has
not done so. Without a clear framework, or adequate definitions to distinguish
between different types of reliefs, it is not possible to categorise reliefs
effectively, and to understand how they should be managed.
Tax expenditures are often
alternatives to spending programmes, but are not managed or evaluated as
closely. Tax expenditures are reliefs introduced to support certain behaviours.
They are, in effect, a form of public expenditure and should be treated as
such. HMRC is not clear which reliefs fall within the category 'tax
expenditure'. Unlike spending programmes, many tax expenditures are
introduced without clear objectives, and are not evaluated as fully. The
Departments do not carry out options appraisals for all reliefs, and
evaluations are undertaken after risks emerge, rather than systemically. They
have estimated the value of only 46 of the around 150 tax expenditures. Smaller
reliefs, in particular, receive less evaluation. Spending programmes require
departments to abide by the rules of Managing Public Money, but HMRC and HM
Treasury are not subject to similar rules for their management of tax
expenditures.
The Departments do not keep
Parliament adequately informed of changes in the costs of reliefs. Parliament
approves the introduction of new reliefs, and relies on accurate advice from
the Departments for it to make informed decisions. HMRC publishes online annual
estimates of the cost of only 180 tax reliefs. However, there is no feedback
mechanism to alert Parliament, when the actual cost of tax reliefs varies from
HM Treasury’s original forecasts, on which Parliament based its enactment
and amendment of reliefs.
The Departments are unable to
cope with the demands of an increasingly complex tax system, including tax
reliefs. Tax revenues as a proportion of GDP remain stable over time but the
tax code becomes more complex year on year. In March 2011, the Office of Tax
Simplification reviewed 155 reliefs, and recommended that 47 should be
abolished. While this led to the removal of 43 of these reliefs, a further 134
new reliefs have been introduced since 2011. Each new relief complicates the
tax system, and increases the length and complexity of British tax law. It is
unclear whether the impact of particular tax reliefs on tax revenue streams is
properly considered, for instance the impact of agricultural property and
business property reliefs on overall inheritance tax revenue. To accommodate
new legislation, and anticipate the actions of avoiders, Finance Bills are
four- to five-times longer than 50 years ago. HMRC has a considerable workload,
with a huge backlog of cases outstanding in the tribunal, 43,000 of which will
receive a notice to pay under new accelerated provisions. HMRC is looking to
improve its systems, as these are not sufficiently adept at obtaining relevant
information promptly from its customers.
The Departments do not respond
promptly to unexpected increases in the costs of tax reliefs. Data on movements
in the cost of reliefs is not available until tax returns are received, and
HMRC takes time to react when it notices a cost increase, as it wants to ensure
its response is appropriate. However, a longer elapsed time in reacting to an
increase in the cost of a tax relief raises the total amount of public money at
risk. In the case of film tax relief, it took ten years to resolve the problems
and cost over £2 billion. We welcome the introduction of the Disclosure
of Tax Avoidance Schemes (DOTAS) system which provides richer information on
avoidance schemes, and allows HMRC to take more immediate action to close legal
loopholes. We would question whether there are sufficient appropriate
disincentives and sanctions in the system to inhibit advisers from promoting
aggressive tax avoidance schemes. 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. HMRC told us some of the reliefs which the National Audit
Office had identified were small, and it carried out less monitoring of these.
However in terms of public spending programmes these figures are
substantial.
Future work
In future work we plan to look
at how the Departments have addressed the above concerns, in particular, what
they have done to:
- Define and establish clear
accountabilities, and deliver on commitments to develop and introduce a
framework for effective assessment, management and reporting of tax
reliefs.
- Provide proportionate feedback,
and analysis to Parliament, on the costs of principal tax reliefs each year,
including significant changes in costs.
- Define which reliefs are tax
expenditures, and improve the management, evaluation and reporting on the
performance of tax expenditures to Parliament.
- Report regularly to Parliament
on the development of new tax avoidance products and the action being taken to
mitigate their impact.
- Develop stronger checks and
balances, to guard against the increasing complexity which is created by adding
continually more reliefs.
- Dedicate sufficient resources to
implement the policy, to simplify the tax system.Analyse and report clearly why
the cost increases identified have occurred.