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Management of tax reliefs

Inquiry

The Committee has opened an inquiry into the UK’s management of “tax expenditures”: tax reliefs which are granted on certain activities or goods.

There are two broad categories of tax reliefs: structural tax reliefs that are integral parts of the tax system - like the basic rate of income tax relief - and non-structural tax reliefs or “tax expenditures” where the government opts not to collect a portion of tax for social or economic objectives -  like tax credits for companies’ research and development costs, or income tax relief on pension contributions.

Some tax expenditures simply reflect a policy choice by ministers to support particular groups or sectors, like the housing market, while others are designed to incentivise behaviour by making a choice more or less expensive. 

In the UK the largest tax expenditures are the reliefs on pension contributions, not charging VAT on food and new dwellings, and not charging capital gains tax on people’s main home. Tax “expenditures” reduce the amount of tax collected, rather than allocating tax resources after they’re collected as in the traditional idea of public spending.

The UK tax system has over 300 of this kind of tax reliefs, which cost the Government an estimated £155 billion of foregone tax revenues in 2018-19, but National Audit Office evaluations have shown that the impact of applying different tax reliefs is not guaranteed, and many require careful monitoring to ensure the tax expenditure, the tax revenue given up, is “money well spent”.

In a report published in February this year the NAO repeated previous concerns about the effectiveness of HM Treasury’s and HM Revenue & Customs management of tax expenditures. It found that there is no formal framework governing the administration or oversight of tax expenditures, and that while HMRC and HM Treasury have begun welcome steps to increase their oversight of tax expenditures and more actively consider their value for money, these will not be sufficient on their own to address value-for-money concerns.

To do that, the NAO found that the departments must formally establish their accountabilities for tax expenditures and enable greater transparency, pointing to lessons that can be learned from other countries that have established clear arrangements for evaluating and reporting on tax expenditures, and calling on HM Treasury and HMRC to follow suit by clarifying arrangements for value for money and improving the evaluation and public reporting of tax expenditures.

Later in June the Committee will question officials from HM Treasury, and Her Majesty’s Revenue and Customs, on management of tax reliefs, the number of reliefs and the Government’s understanding of whether they represent value for money. 

The Committee is now inviting evidence on the questions of accountability and value for money in tax expenditures raised by the NAO report: please make your submissions here before close of Friday 5 June 2020