Tax reliefs and their administration

Tax and tax reliefs are plainly different and require different accountability arrangements.

Put simply tax is where you get money in through taxation and a tax relief is where you make a conscious decision to forgo that income. Some reliefs are structural parts of the system to ensure a more progressive system or avoid double taxation. But other reliefs, costing some £100 billion a year, are designed to deliver a policy objective that could be met instead through spending programmes. HM Treasury and HM Revenue and Customs (HMRC) do not keep track of those tax reliefs intended to influence behaviour. They do not adequately report to Parliament or the public on whether reliefs are working as intended and what they cost and whether they represent good value for money. While HMRC is accountable for implementing and monitoring all tax reliefs, its statements about the extent of its responsibilities are inconsistent with its actual practices. HMRC accepts it has a role to assess, evaluate and monitor reliefs, but is unable or unwilling to define or to categorise reliefs by their purpose. While HMRC accepts the need for reporting the costs of tax reliefs, it does not see the merit in assessing the economy, efficiency and effectiveness of reliefs, or considering their cost effectiveness alongside that of alternative policy instruments such as spending programmes. HMRC does not generally assess the effectiveness of reliefs with specific objectives although in a few instances it does consider their impact on taxpayer behaviour. HMRC’s failure to articulate a set of principles to guide its management and reporting of tax reliefs is a serious omission which it now needs to rectify.

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.