The effective management of tax reliefs
HM Treasury and HMRC have not established a framework or principles to guide the administration of tax reliefs, according to today’s report from the National Audit Office.
This reflects the Exchequer Departments’ view that tax reliefs do not have administrative implications that differentiate them from other parts of the tax system. The NAO concludes that the Departments’ defence of this principle, coupled with the desire not to be more accountable for reliefs, is costing the exchequer money.
Tax reliefs are diverse in nature, serving a variety of needs. Some are structural parts of the tax system, to improve ‘progressivity’ or to ensure the correct calculation of profits. Other reliefs, sometimes described as ‘tax expenditures’, are designed to encourage a particular behaviour towards a social or economic policy objective.
The NAO today reveals that HM Treasury and HMRC have not identified which tax reliefs are intended to change behaviour in order to deliver targeted policy objectives. They also do not monitor or report their costs and benefits in a way that would allow wider government, Parliament or the public to know if such reliefs are working as intended. Not all reliefs lend themselves to such analysis, but some do. The NAO believes this creates a significant gap in accountability to Parliament for administrating public finances effectively.
This also means that significant risks can go undetected: that tax reliefs cost more than expected; that they are used in ways not intended by Parliament; or that they do not bring about intended behaviour change.
The spending watchdog looked specifically at how HMRC administers 10 tax reliefs, and found that in three of those cases the Department responded with varying degrees of urgency to the evidence of abuse.
HMRC detected large-scale abuse of share loss relief in 2006-07 but did not check the total amount of claims in 2006-07 or subsequent years to check whether there were other unexplained surges. In 2006-07, the cost of claims against income tax for share loss relief rose from £385 million to £1,206 million in real terms. HMRC is investigating 80% of the 2006-07 claims by value (£964 million). Avoidance activity has continued and HMRC has detected 20 undisclosed schemes between 2005-06 and 2011-12. It has opened investigations into 60% of all claims. The amount of relief that HMRC is considering in tax terms over that period is £780 million.
HMRC has carried out only limited analysis to investigate why the cost of entrepreneurs’ relief has significantly outstripped its forecast, increasing over 500% from £500 million in 2008–09, to an estimated £2.9 billion in 2013-14 and whether the cost increase might be influenced by misuse of the relief.
“HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money.”
Amyas Morse, head of the National Audit Office
Notes for Editors
Tax reliefs listed on HMRC’s website
Reliefs we identified that might support a particular group or activity towards economic or social objectives
‘Tax expenditures’ that cost more than £50 million a year, according to HMRC
Reliefs we identified with possible social or economic objectives where HMRC has not estimated costs
Reliefs we identified with possible social or economic objectives where tax return data is collected but costs are not published
From £385 million to £1.2 Billion
Spike in value of losses for which share loss relief (before tax) was claimed in 2006-07, not identified by HMRC until 2013
Total value of share loss relief claims in 2006-07 that HMRC is currently investigating for suspected marketed avoidance
Cost of entrepreneurs’ relief in 2013-14, around three times more than HMRC original forecasts suggested
- In March 2014, the NAO published a review of tax reliefs in the UK. It considered the opportunities and risks they present, and the way their design and implementation is managed by HM Treasury and HM Revenue & Customs. The Committee of Public Accounts took evidence on the report and concluded there was a strong case for the exchequer departments - HM Treasury and HMRC to monitor reliefs which seek to influence taxpayers' behaviour to achieve social or economic objectives. It said the Departments should assess whether a relief is meeting its objectives, and report back to Parliament on the results. It encouraged the departments to develop a clear framework to improve the management and accountability of tax reliefs.
- Tax reliefs are an important part of public policy design, covering most aspects of government activity including welfare, housing, business, food, education, health and transport. They can also make the tax system more complex and less transparent, and pose risks to the exchequer because costs can rise unabated. Some have been the focus of tax avoidance. Decision makers and Parliament therefore need information about how tax reliefs are working and which reliefs require their attention. Making information available about the costs and uses of reliefs also provides transparency and accountability, thereby increasing confidence in the tax system.
- Press notices and reports are available from the date of publication on the NAO website, which is at www.nao.org.uk. Hard copies can be obtained by using the relevant links on our website.
- The National Audit Office scrutinises public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 820 employees. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of £1.1 billion in 2013.