1          

Executive Summary

1.1    

The Chartered Institute of Taxation (CIOT) is the leading professional body in the UK for advisers dealing with all aspects of taxation. We are a charity and our primary purpose is to promote education in taxation with a key aim of achieving a more efficient and less complex tax system for all. We draw on the experience of our 19,000 members, and extensive volunteer network, in providing our response.

1.2    

The Inquiry asks a wide range of questions around broad themes such as value for money, behavioural impacts, and international comparisons, as well as proposals for the addition or removal of particular reliefs. Many of these themes require economic analysis, which is outside our area of expertise, or represent political considerations which, as a non-party-political organisation, make it inappropriate for us to comment.

1.3    

In undertaking its Inquiry, we urge the Committee to recognise the important distinction between structural and non-structural reliefs, because they serve different purposes. A structural relief should be evaluated in the light of the overall tax system and its operation, whereas a non-structural relief should be evaluated in the light of its particular objectives.

1.4    

Some reliefs exist in large part for administrative purposes for example, the property and trading allowances. There may be merit in recognising reliefs which exist for purely for administrative convenience either as a separate category of relief, or specifically recognising this additional characteristic when evaluating them.

1.5    

The main purpose of the tax system is to collect the money that pays for the UK’s public services and other government spending. Its design should demonstrate the characteristics of simplicity, clarity and certainty. Tax reliefs represent something of a departure from these principles because they can introduce complexity in the forms of the scope of the relief, boundary issues, and their practical application. These issues can be particularly acute for non-structural reliefs which are designed to encourage certain behaviours.

1.6    

With this in mind. We consider that tax reliefs, particularly non-structural tax reliefs, should be ‘SMART’. In this sense they should display the following characteristics:

Specific – Be clear as to their scope and purpose, specify who is intended to benefit from the relief, and meet a defined objective. For example, the VAT zero rate for food is said to be to ‘reduce the cost for most food and drink which is meant for human consumption.’ But it is not clear whether the relief is intended to support those on low incomes, to ensure that taxation does not make foodstuffs unaffordable, or to benefit everyone including those who are better off who buy more.

Measurable – It should be possible to estimate the cost of a tax relief to an adequate level of accuracy. We are pleased to note that of the 339 non-structural tax reliefs, less than one-quarter remain uncosted. However, forecast costs of reliefs are typically for a finite period and the forecast cost of two significant non-structural tax reliefs, Employment Allowance and Patent Box, finish at 2017-18 and 2016-17 respectively. Currently around two thirds of structural reliefs are uncosted due to lack of data or lack of centralised data.

Achievable – Be readily accessible to those who they are intended to benefit, straight-forward to claim and administer, and without unintended consequences. A lack of awareness is often a factor in low take up of a relief, for example those claiming the Marriage Allowance remain below expectations.

Reviewed – Reliefs should be subject to a systematic process of regular, scheduled reviews, to ensure they are achieving their objectives at an appropriate cost, with the results of those reviews published on a timely basis to identify unintended consequences. For example first time buyers relief for stamp duty land tax (SDLT), estimated to cost £430m in 2021-22, is intended to ‘support home ownership by reducing the upfront cost of buying a home for first time buyers’. Historical evidence suggests that this and similar reliefs can actually cause an increase house prices, thus potentially benefiting sellers more than purchasers.

Timeframe - They should be predictable over time and not subject to frequent tinkering. The Annual Investment Allowance for example, has changed six times since its introduction in 2008.

2          

About us

2.1    

The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation.

2.2    

The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

2.3    

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries.

2.4    

Our members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

3          

Introduction

3.1    

The Inquiry asks a wide range of questions around broad themes such as value for money, behavioural impacts, and international comparisons, as well as proposals for the addition or removal of particular reliefs.

3.2    

Many of these themes require economic analysis which it outside our area of expertise, or represent political considerations which, as a non-party-political organisation, make it inappropriate for us to comment. With this in mind, we have focused our substantive comments on identifying the characteristics of ‘good’ tax reliefs ie features which reflect our stated objectives for the tax system:

• A legislative process that translates policy intentions into statute accurately and effectively, without unintended consequences.
• Greater simplicity and clarity, so people can understand how much tax they should be paying and why.
• Greater certainty, so businesses and individuals can plan ahead with confidence.
• A fair balance between the powers of tax collectors and the rights of taxpayers (both represented and unrepresented).
• Responsive and competent tax administration, with a minimum of bureaucracy.

3.3    

We note that our objectives for the tax system have similarities with the Committee’s own principles of tax policy.[1]

3.4    

In undertaking its Inquiry, we urge the Committee to recognise the important difference between structural and non-structural reliefs. In our substantive comments we have used a ‘SMART’ acronym as a recommended basis for evaluating reliefs – especially non-structural reliefs - to reflect the qualities that they should display. We have used existing tax reliefs to illustrate these points, where appropriate. But prior to doing that, we have also set out some background comments to ‘set the scene’.

3.5    

We draw the Committee’s attention to the Office of Tax Simplification’s ‘Business Lifecycle Report: Simplifying the taxation of key events in the life of a business’, which provides insightful commentary on a variety of reliefs questioning whether reliefs in the tax system to encourage business growth are appropriately targeted.

4          

Background

4.1    

The main purpose of the tax system is to collect the money that pays for the UK’s public services and other government spending. It should display the characteristics outlined in paragraph 3.2; from a design perspective in particular the characteristics of simplicity, clarity and certainty are important.

4.2    

Tax reliefs therefore represent something of a departure from these principles. They can introduce complexity, in terms of understanding the scope of the relief, boundary issues, as well as their practical application. This is often for good reason and indeed such reasons have been given the following broad categorisations:[2]

• Structural – reliefs which form an integral part of the tax system, and have various purposes including: to define the scope of the tax, calculate income or profits correctly.

• Non-structural – to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives.

4.3    

It is vital to recognise these differences because they serve different purposes. So, when reviewing reliefs (see later), its categorisation should provide the context in which it is reviewed; a structural relief should be evaluated in the light of the overall tax system and its operation, whereas a non-structural relief should be evaluated in the light of its particular objectives (our ‘SMART’ approach below).

4.4    

In this regard, we are pleased to see that HMRC have published a stated policy objective for each non-structural relief.[3] However, there is no equivalent (yet) for structural reliefs. We recommend that a similar exercise is undertaken for structural reliefs, as this will form the baseline against which they can be evaluated.

4.5    

Some reliefs exist in large part for administrative purposes. For example, the VAT registration threshold provides exception from compulsory registration for VAT for traders with taxable supplies below the registration threshold, and the Personal Savings Allowance applies a 0% tax rate to low levels of savings income. Both reliefs are (perhaps surprisingly) classified as non-structural. Other smaller administrative reliefs include the trading and property allowances. We believe there is merit in recognising reliefs which exist for administrative convenience; either as a separate category of relief, or specifically recognising this additional characteristic when evaluating them.

4.6    

It is also important to assess whether what is identified as a tax relief should properly be considered a ‘relief’ in the first place. Take capital allowances for example. HMRC state that ‘capital allowances can provide relief for commercial depreciation as well as an element of accelerated relief. While the former can be regarded as a structural part of the tax system, the latter element is non-structural as it provides additional benefit to business’.[4] We agree that any acceleration of a tax deduction might be considered a (non-structural) ‘relief’ from tax, but should the deduction of an actual business cost (broadly the equivalent depreciation cost) be considered a tax relief? Other business costs such as materials purchases and wages are relieved from tax, but are not considered to be tax reliefs.

4.7    

Treating capital allowances as a tax relief (rather than simply giving a deduction for the relevant business costs) allows the rate and level of deductibility to be changed – sometimes with particular assets favoured and others not, for various reasons. Whilst this is often more generous than it would be simply to recognise the commercial cost, in some circumstances it can fall short of the actual cost to the business. While tax measures can incentivise (or deter) particular investment activity, should the ‘core’ relief be considered a relief at all?

4.8    

We now turn to our substantive ‘SMART’ comments.

5          

Specific

5.1    

Tax reliefs should be clear as to their scope and purpose at the outset, specify who is intended to benefit from the relief, and meet a defined objective. The objective needs to be considered within the wider context of the tax system and government policy; a tax relief should not conflict with or undermine other tax reliefs, and other non-tax policy objectives such as levelling up and net zero. For example, is the purpose of the IHT relief, Agricultural Property Relief (APR) on tenanted land to encourage landlords to retain tenant farmers; if so, how does this fit into environmental objectives if that tenant farmer engages in rewilding and ceases to farm potentially jeopardising the relief for the landlord?

5.2    

We are pleased that, following recommendations from the PAC’s inquiry, for each of the non-structural tax reliefs, HMRC have recently published a description of the relief, and its purpose.[5] It is helpful to have these explanations, which may not previously have been published, as they allow the relief to be evaluated against its stated purpose. Having undertaken a sample review of the most recently introduced reliefs, we believe that those looked at in our sample accurately mirror the rationale outlined in the relevant policy papers (TIINs). This must have been a substantial exercise and helps explain the purpose of each of the reliefs, and who is intended to be in scope, in a single document.

5.3    

HMRC should consider undertaking a similar exercise in relation to the structural tax reliefs, to assist public understanding and the consideration of whether they remain an appropriate part of the tax system.

5.4    

HMRC should better publicise the purpose of reliefs within its published guidance, to help taxpayers understand for themselves whether their circumstances fall within its scope. For example, the stated purpose of Business Asset Disposal Relief (BADR) is ‘to encourage genuine risk takers and entrepreneurs to start up or invest in their own personal company over the long term.’ However, GOV.UK guidance on BADR is unhelpfully silent as to its purpose.[6] 

5.5    

Some evidence suggests that BADR (formerly Entrepreneurs’ Relief) has primarily benefited a small number of very affluent taxpayers at the point of sale and done little to generate additional entrepreneurial activity in encouraging people to start up businesses in the first place. In terms of design, BADR provides relief only on disposal pointing to a focus on maximising a return rather than growing a business. By contrast Enterprise Investment Relief (EIS) provides income tax relief at the point of investment (as well as on disposal) suggesting greater focus on growth. The timing of the point of relief may be a factor in the behaviours motivated by the reliefs.

5.6    

The existence of tax reliefs creates incentives to bring oneself within the scope of the relief to benefit from it. This is demonstrated in the case of the IHT reliefs, Agricultural Property Relief and Business Property Relief (BPR) where for example complex structures may be adopted to ring fence the qualifying activity from non-qualifying activities for BPR purposes. Historically, we have seen that this can lead to tax avoidance activity, which takes considerable time and expense to resolve through the courts. For example, there have been several cases involving film partnerships that have been litigated over the last 10 -15 years. We are currently seeing a considerable increase in claims for Research and Development (R&D) tax relief, many of which do not meet the legal definition of R&D.[7] While the incidence of such avoidance behaviour is already within the government’s sights, a more accessible explanation of a relief’s scope and purpose should help ensure that it is only claimed by those intended to benefit.

5.7    

Clarity of scope and purpose of reliefs from introduction is important in relation to the application of the General Anti-Abuse Rule. It also provides certainty for taxpayers at the point the investment is made given that guidance and HMRC practice can change over time.

5.8    

It is also necessary to ensure that the scope and purpose of the relief is adequately explained. For example, the stated purpose of the VAT zero rate for food is to ‘reduce the cost for most food and drink which is meant for human consumption.’ This is odd for several reasons. Firstly, to describe the purpose of a tax charged pro rata to retail cost as being for the purpose of ‘reducing the cost’ of the thing relieved is almost tautologous: it seems designed to preclude scrutiny of the effectiveness of the relief by defining its purpose in terms of its inevitable effect. Surely there is some unstated purpose behind that: why reduce the cost of something except to make it more affordable? But then it is not clear whether the relief is intended to support those on low incomes, to ensure that taxation does not make foodstuffs unaffordable, or to benefit everyone including those who are better off and can and do buy more, and will likely do so, with or without the VAT. The former is a more plausible objective, but the latter (which the stated purpose of reducing the cost seems more naturally to imply) again seems designed to preclude scrutiny. It is also somewhat imprecise to define a purpose in terms of its impact on ‘most [our emphasis] food and drink’, without including anything in the purpose to help judge whether the boundaries for inclusion are appropriately drawn.

6          

Measurable

6.1    

It should be possible to estimate the cost of a tax relief to an adequate level of accuracy.

6.2    

If accurate cost data is not available, it is simply not possible to properly evaluate the relief, and see whether it is achieving its intended purpose or providing value for money, or whether it remains an appropriate part of the tax system.

6.3    

We are pleased that, of the 339 non-structural tax reliefs, less than one-quarter remain uncosted.[8] We note however that the costings are not always accurate. For example the cost of BPR and APR does not include the cost of lifetime giving into trusts or saving of ten-year charges.

6.4    

However, the position is somewhat different for structural tax reliefs, where out of around 250 such reliefs, nearly two-thirds are uncosted.[9]

6.5    

Looking closer at the reasons why it is not possible to calculate the cost of a relief, the greatest hurdle appears to be the availability and accuracy of relevant data.

6.6    

By way of illustration, of the uncosted structural reliefs, around two-thirds of those reliefs cannot be quantified because information on the usage of the relief is not required in tax returns and cannot be reliably estimated from other data sources, and the cost of collection for statistical purposes is disproportionate (category ‘A’). The next highest reason (around one quarter) is that HMRC do hold the data, but not in a centralised form, and the cost of gathering for statistical purposes is disproportionate (category ‘B’). 

6.7    

Of the uncosted non-structural reliefs, again there is a high proportion of category A reliefs (around one quarter), and a similar proportion which similarly cannot be quantified due to a lack of data.[10]

6.8    

When a relief is introduced, there should be a mechanism to obtain sufficient data to monitor its cost. In many instances, taxpayers will be willing to provide a reasonable level of additional data if the quid-pro-quo is entitlement to a relief. It is important, then, that HMRC’s systems can easily capture and interpret that data. We are pleased that no recently introduced reliefs appear to be uncosted due to lack of data.[11] For proposed tax reliefs, we suggest that determining the data provision requirements could represent a mandatory part of the tax consultation process. This would ensure that the means of evaluating the relief are also explored, alongside the pros and cons of the relief itself, as well as the potential administrative burdens and costs of the taxpayer providing the additional information.

6.9    

HMRC has recently launched a consultation ‘Improving the data HMRC collects from its customers’.[12] The consultation ‘proposes a number of potential options for improving the range of data HM Revenue and Customs (HMRC) collects, uses and responsibly and safely shares across government’. In the consultation, HMRC identifies six areas where HMRC’s data could be improved, along with specific implementation options. These are:

• the business sector of the self-employed   
• the occupations of employees and the self-employed
• the location of an employment or a business
• the hours employees work 
• dividends paid to shareholders in owner managed businesses     
• the start and end dates of self-employment

6.10            

In the light of our earlier comments, in our response to this consultation we will be recommending that HMRC considers how it might also close the ‘information gap’ in relation to tax reliefs (ie category A), while also emphasising that any data provided to HMRC must be in a form they are able to use (ie category B).

6.11            

We also note that forecast costs of reliefs are typically for a finite period. A TIIN will typically estimate the exchequer impact for a six-year period. After that period, while estimates of actual costs might be produced (see above), there is little evidence that the initial cost estimate is extended. It is therefore difficult to judge whether the cost of the relief is still ‘on budget’.

6.12            

This is illustrated in section 8 of ‘Tax relief statistics’,[13] which seeks to compare the actual costs of tax reliefs against their forecast cost when they were announced, and focuses on non-structural tax reliefs which have been announced since the introduction of the Office for Budget Responsibility (OBR) in 2010. Only two of the thirteen reliefs covered in that section include costings as recently as 2021-22. The forecast cost of the two most expensive tax reliefs, Employment Allowance and Patent Box, finish at 2017-18 and 2016-17 respectively.

7          

Achievable

7.1    

In this sense tax reliefs should be readily accessible to those who they are intended to benefit, straight-forward to claim and administer, and without unintended consequences. This aligns to the Committee’s principles of simplicity and being practicable.

7.2    

The advantage of clearly defined processes for claiming reliefs accrue to both taxpayers and to HMRC. For example, the lack of a dedicated designatory code for making the claim for CGT relief for the disposal of shares to an Employee Ownership Trust (EOT) on the self-assessment tax return hinders HMRC in tracking claims and numbers of EOTs.

7.3    

Unfortunately, the process for claiming the relief, uncertainty around eligibility, or simply a lack of awareness (or a combination of these) often mean that take up of a relief is below expectations.

7.4    

Indeed, across the whole tax system, HMRC needs to do more to educate taxpayers of their rights and obligations. We have seen good examples of this, such as one-to-one communications with businesses within the scope of Making Tax Digital for VAT. But in other areas, such as the requirement to report residential property gains within 60 days, communications with (potentially) affected taxpayers have been inadequate, leading to high levels of non-compliance. More innovative communications messages and ‘nudges’ should be considered, such as through the Single Customer Account, or via commercial software.

7.5    

The Marriage Allowance is perhaps an example of these issues. Its purpose is ‘to recognise marriage and civil partnerships in the income tax system by providing a financial benefit where one spouse or civil partner has an income less than their Personal Allowance’.[14] It was introduced in April 2015, with over 4m married couples standing to gain from the allowance.[15] In practice, take up was originally, and continues to be, below expectations;[16] so much so that HMRC recently issued a press release to encourage take-up.[17]

7.6    

Anecdotally, we hear that awareness of the relief remains low, and the process for making a claim (predominantly online requiring a Government Gateway ID), can put people off claiming. Further, Marriage Allowance claims can cause delays in the processing of Self-Assessment Tax Returns by HMRC, even though it was introduced over seven years ago.

7.7    

While it is important that reliefs are only claimed by those entitled to them complexity creates bear traps for the unwary. For example:

• Wrong form denies SEIS relief - In X-Wind Power[18] a company engaged in the design and manufacture of small and medium-sized wind turbine generators inadvertently submitted the wrong compliance form (EIS1 instead of the SEIS form) leading to a denial of SEIS relief. It was common ground that the investors would have been otherwise entitled to relief, and found as a fact that X-Wind had intended to submit a compliance statement for the SEIS and that the use of the wrong form was attributable to an inadvertent and innocent mistake.
• Administrative mechanism denies relief - In Robert Ames[19] the tribunal dismissed the taxpayer’s appeal against HMRC’s decision not to allow his EIS relief claim. Mr Ames had invested in shares eligible for EIS relief, but had not, however, claimed the relief because he had no taxable income in the relevant year. He had then sold the shares at a profit and explicitly included details of the gain in his return including attachment of his EIS3 form. The tribunal noted that Parliament has set out the scope of the statutory machinery in a prescriptive manner and it was not possible to grant relief outside those conditions.

It has previously been noted that the rules for SEIS (both for investors and investee companies), which were modelled on the EIS rules, are too administratively burdensome because SEIS schemes are limited to much smaller amounts of money, potentially rendering the relief ineffective.[20] A statutory discretion to prevent the denial of reliefs due to minor administrative oversights, when it is apparent that they otherwise fall within the policy objective for the relief, might help to reinforce confidence in reliefs and that they will not be denied through ‘technicalities’.

8          

Reviewed

8.1    

In this sense we mean that the reliefs should be subject to a scheduled systematic review, to ensure they are achieving their objectives at an appropriate cost, with the results of those reviews published on a timely basis.

8.2    

Whether a tax relief or wider tax policy, there has historically been a remarkable lack of the type of post-implementation review envisaged by stage 5 of the Tax consultation framework,[21] to which the government recommitted in 2017,[22] ie ‘reviewing and evaluating the change’.

8.3    

In our ‘Better Budgets’ report,[23] the CIOT, the Institute for Fiscal Studies (IFS) and the Institute for Government, jointly called for effective and routine post-legislative review of whether measures are achieving their objectives at an acceptable cost.

8.4    

Tax reliefs have come under close scrutiny in recent years. Most recently, in its inquiry ‘Management of tax reliefs’,[24] the Public Accounts Committee (PAC) concluded that the Government knows too little about the tax reliefs it provides.

8.5    

Since then, more efforts have been made to report on, and review, tax reliefs. HMRC’s most recent tax relief statistics[25] provide more information than previously, including headline statistics on the largest tax reliefs, a detailed analysis for the most ‘significant’ tax reliefs, and a comparison of the forecast cost of reliefs with the latest estimates of their actual cost.

8.6    

We are pleased to see that HMRC has recently published an evaluation framework,[26] which in their view goes beyond the PAC’s recommendations. HMRC has also published its approach to evaluating tax reliefs.[27]

8.7    

It is still early days and we have not seen significant further progress in this area, but we would like to see:

• A more systematic approach to evaluation activity, highlighting which reliefs will be reviewed and by when.
• Initial focus on the more ‘expensive’ reliefs, and those costing more than forecast.
• A commitment to publishing the results of the reviews (rather than ‘subject to Ministerial approval’ as currently stated), and on a timely basis.
• The inclusion of structural reliefs in the review process; not just non-structural reliefs.
• Specific and adequate funding for HMRC, to enable them to undertake this program of reviews effectively.

8.8    

Regarding publication of research, we note that there is a Government Social Research Publication Protocol on publishing research and analysis in government.[28] This seems to include the type of review and evaluation we are considering ie ‘research and analysis to clarify or quantify a policy problem or to evaluate a policy and/or its delivery at pilot or full roll out stage’. Historically, many research reports are published years after the research has taken place, rendering them almost useless. We would expect to see publication within the 12-week time period specified in the protocol.

8.9    

Further, HMRC’s approach to increased transparency does, in some respects, make the information more difficult to analyse. For example, there appears to be no total figure for the cost of structural and non-structural reliefs. Rather, the statistics provided are at an individual tax relief level, per tax, ie the estimated costs of non-structural tax reliefs[29] is a spreadsheet with eighteen different tabs representing different taxes, each containing numerous individual reliefs. None of these spreadsheets are added up, nor is there a summary page showing totals of each. This can be contrasted with earlier years’ publications, which provided a list of non-structural (‘Tax Expenditures’) and structural reliefs, and their total costs over a five-year period, in the same document.[30] We would encourage future publications to report at a ‘macro’ as well as a ‘micro’ level.

8.10            

The following examples illustrate the need to review whether reliefs achieve their objectives at an appropriate cost that is, the cost in terms of tax forgone should be appropriate to the benefits in terms of the behaviour it intends to encourage.

• The VAT zero rate for food was estimated to cost £20.7bn in 2021-22.[31] Because the actual application of the relief can be complicated, there is a long history of disputes and litigation between retailers and manufacturers, and HMRC, as to whether the relief applies to particular product lines. Retailers inevitably take a view as to the likely outcome of these disputes (which can take many years to resolve) at the outset and charge the customer accordingly – often simply the price that the market will bear. In such cases it is not clear that the customer, the intended beneficiary of the relief, does indeed benefit.
• Private residence relief (PRR) was estimated to cost £30.2bn in 2021-22, and is intended to ‘encourage home ownership and mobility of labour’. Home ownership varies quite significantly amongst ethnic groups, and while over two-thirds of White British and nearly three-quarters of Indian households own their own home, just one-fifth of Black African and one-sixth of Arab households are homeowners.[32] Regular reviews, even of what might be considered ‘untouchable’ reliefs, will help identify whether particular groups are (albeit unintentionally) advantaged or disadvantaged.
• Tax relief on pension contributions was estimated to cost £22.5bn in 2021-22, and is intended to ‘support individuals to save for later life by allowing contributions to a pension to be made tax-free (subject to certain limits), providing them with an income in retirement’. In its recent report, the PAC recommended that ‘HMRC should within 12 months, have evaluated the impact of pension tax reliefs’. However, the Government disagreed with the Committee’s recommendation, pointing to previous consultations in recent years, in particular the responses to the 2015 wide-ranging consultation on pensions tax relief[33] which indicated there was no clear consensus for reform at that time. But much has happened since 2015; a pandemic and a cost-of-living crisis, and it remains necessary to ascertain that it is the tax relief (rather than simple financial planning) that is incentivising pension saving to an extent sufficient to justify its price tag.
• First time buyers relief for stamp duty land tax (SDLT), estimated to cost £430m in 2021-22,[34] is intended to ‘support home ownership by reducing the upfront cost of buying a home for first time buyers’.[35] Historic evidence suggests that this and similar reliefs can actually cause an increase house prices, thus potentially benefiting sellers more than purchasers, and we would encourage a further review of such incentives.[36]
• Economic theory suggests that business rates reliefs (which do not form part of the tax relief statistics, but included here for the purposes of illustration) flow in large part to the property owner in the form of increased rents,[37] so the retailer / occupier, the intended beneficiary, does not in fact obtain the full benefit of the relief.

9          

Timeframe

9.1    

By this we mean that, if tax reliefs are to achieve their intended purpose, they should be predictable over time and not subject to regular tinkering. This aligns to the Committee’s principles of certainty and stability.

9.2    

Constant tinkering with the level of the reliefs can have a disruptive impact, undermining the constancy and predictability that taxpayers and businesses crave – and even risks reducing the international competitiveness of the UK’s tax system. The seemingly constant chopping and changing of reliefs relating to capital allowances brings additional complexity and uncertainty to the UK tax system, so that reliefs intended to incentivise investment risk harming it.

9.3    

For example, the Annual Investment Allowance (AIA) is intended to reduce the administrative burdens of calculating capital allowances, and incentivise investment by providing a 100% relief on qualifying capital expenditure.[38] However, its level has changed six times since its introduction in 2008, ranging from just £25,000, to its current level of £1m. These fluctuations can have some harsh, counter-intuitive consequences, as the examples on GOV.UK illustrate.[39]

9.4    

The government has also tinkered with BADR numerous times, most recently to reduce the lifetime limit from £10 million to £1 million from March 2020, rather than undertaking a thorough evaluation of the relief to see whether it is meeting its objectives. Moreover it has become increasingly complicated.

9.5    

Businesses require consistent levels of relief to help them plan and grow. The overwhelming feedback that we receive is that stability and certainty is more important to businesses than any particular rate of relief.[40]

10      

Other comments

10.1            

While tax reliefs should be SMART, we recognise that there may need to be trade-off between individual elements. We have highlighted that the VAT zero rate for food is not well targeted in terms of its beneficiaries, but it does benefit from it being readily accessible (ie it doesn’t have a strict claim process which needs to be followed, or rely on awareness by customers). Some reliefs are the opposite, being much more clearly targeted, but are let down by a strict or (for some, eg the digitally excluded) inaccessible claims process. Such reliefs provide a fruitful feeding ground for high volume repayment agents.

10.2            

We remain concerned about the lack of clarity on where accountability lies for the value for money of tax reliefs and the position of the NAO with regard to their scrutiny. Historically the Treasury’s position was that tax reliefs reflected policy decisions about the incidence of taxation and distribution of the tax burden, taken by ministers and agreed by Parliament, and therefore outside of the NAO’s remit. This represented a major difference between the treatment of tax and spending measures (eg grants) in other departments. NAO disputed that view and their determination to subject tax reliefs to scrutiny for their value for money does seem to have prevailed in principle. But if the purpose of reliefs is defined very carefully to minimise the scope for such scrutiny (see para 5.8 above) this difference will persist in practice.

10.3            

This contrast can be very significant in terms of cost to the exchequer. For example, spending on film tax relief in 2015–16[41] was forecast to be £335 million.[42] This is significantly higher than the £18.67 million spent on film-related grants-in-aid in 2014–15.[43]  

10.4            

It is vital that accountability for the value for money of tax reliefs is confirmed in practice as well as in principle and that the purpose of reliefs is not defined so as to avoid scrutiny.