The government can use tax measures to encourage economic growth by providing tax relief to incentivise certain sectors or activities. Tax reliefs reduce the tax an individual or business owes, and some reliefs make payments back to taxpayers.
Some ‘non-structural’ tax reliefs reflect specific policy choices by ministers to support particular groups or sectors (for example the housing market), while others are designed to incentivise behaviour.
As at December 2023, the UK had 341 non-structural tax reliefs intended to achieve social or economic objectives.
This report focuses on reliefs intended to promote economic growth, within the wider system of tax reliefs.
We examined whether HM Treasury and HM Revenue and Customs (HMRC) have an effective system in place to manage and respond to risks affecting tax reliefs with economic objectives in a timely and proportionate way.
The report considers:
Tax reliefs remain an important policy tool for the government to achieve its economic and social objectives.
However, the number and cost of these reliefs makes administration a significant task, and there are too many examples where these reliefs either do not achieve their economic objectives or are subject to significant error and fraud, costing the Exchequer billions of pounds.
HM Treasury and HMRC have increased the monitoring, evaluation and reporting of non-structural reliefs, but there is still some way to go. Large reliefs, particularly those aimed at economic or behavioural change, require close attention. We have seen examples of tax reliefs where the costs have increased quickly, and far beyond expectations, but it has taken a number of years to identify this, understand why, and then to make changes where there are concerns.
Cost increases are not necessarily a sign of failure, as they could be the result of genuine increased uptake and delivery of benefits. However, the government cannot know the cause if it has not carried out adequate compliance work to ensure only legitimate claimants received the relief, and evaluation activity to establish that the relief secures the desired outcome. It is important that the government investigates and responds to increases in costs of reliefs and evaluations promptly.
It is encouraging that there are now more examples of changes where evaluations have found that tax reliefs are not achieving their economic objectives. HMRC has made important commitments to improve how it evaluates non-structural tax reliefs, but it still needs to achieve greater and more timely coverage.
HM Treasury and HMRC must ensure that hard lessons are learned from the Research and Development (R&D) small and medium-sized enterprise (SME) relief, and that they take the steps needed to prevent such a large failure arising again.
]]>Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2013-14 accounts of HM Revenue & Customs. The report describes how HMRC deploys its compliance resources and measures and reports the impact of its compliance work. It also covers HMRC’s progress in operating the PAYE service and its implementation of its new Real Time Information service and its performance in tax collection and in reducing error and fraud in personal tax credits.
Performance in 2013-14
HMRC received total tax revenue of £506 billion, £30 billion (6.3 per cent) more than in 2012-13. The taxes that contributed most of this increase are income tax and national insurance which increased by £16.2 billion (6.4 per cent), VAT by £7.2 billion (7.1 per cent) and stamp taxes which have significantly increased by £3.4 billion (35.8 per cent). The value of debt either written off or ‘remitted’ (not pursued by HMRC for reasons such as hardship or value for money) during the year was £5.1 billion.
Compliance yield
HMRC reported compliance yield (the additional revenue it generates through its compliance activities) of £23.9 billion in 2013-14 – its highest yield to date. The Department has improved its measurement of compliance yield since 2010-11. However, in response to the NAO’s review, HMRC found that, when it agreed performance targets with the Treasury for the spending review period, it had made errors that led it to set its baseline £1.9 billion too low. This made the targets easier to achieve and led HMRC to report that it had exceeded its performance targets by £1.9 billion in 2011-12 and £2 billion in 2012-13 when in fact it had achieved almost exactly the level of performance anticipated.
It also led to HMRC inadvertently overstating the extent of the improvement in its performance when comparing the years up to 2010-11 with the compliance yield it has generated since. It has explained the implications of its error in this year’s annual report and recognized that changes in its measurement methodology prevent direct comparisons of the data over the long term. It has also accepted the principle that there should be external scrutiny before it publishes data on its compliance performance in future, and has invited the National Audit Office to undertake this work.
Progress in performance of tax systems since last year
HMRC continues to modernize PAYE by rolling out its Real Time Information (RTI) system for all employers. HMRC has announced a package of support for some smaller employers who have experienced problems as they struggled to adapt their systems in time.
The Department’s ‘tax debt’ has increased to £13.3 billion (from £12.2 billion last year); but it collected £39.6 billion in 2013-14 and focused on clearing debt older than one year, resulting in the balance of this debt falling to £3.7 billion (£4.2 billion last year).
The UK-Swiss Tax Agreement, which came into force in January 2013, had brought in £1 billion by 31 March 2014, compared with the £5 billion HMRC had originally forecast it would collect by March 2016, but in line with its updated forecast of £1.7 billion.
Tax credits error and fraud
The C&AG has qualified his audit opinion on HMRC’s 2013-14 resource accounts because of material levels of error and fraud in the payments of personal tax credits. This is the third consecutive year he has qualified the accounts on these grounds. The 2012-13 error and fraud percentages (the last year available) equate to payments of between £1.8 billion and £2.2 billion being made to claimants incorrectly because of error or fraud and a further £70 million to £320 million not being paid to claimants because of error. The overall levels of error and fraud in finalised awards are significant within the context of the £29 billion spent on personal tax credits in 2013-14.
Tax credits debts rose to £5.5 billion at 31 March 2014 (up £0.7 billion from a year earlier). HMRC has undertaken a detailed analysis of its success in pursuing debts and believes that only 34 per cent of the balance is likely to be recovered (31 per cent at 31 March 2013). HMRC is making increased use of private sector debt collection agencies to recover tax credits debt and is on target to achieve a return of £90 million, though recovery rates to date of 18 per cent are well below the 30 per cent it originally forecast.
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Amyas Morse, the Comptroller and Auditor General, has today issued a report on the 2011-12 accounts of HM Revenue & Customs. The report details progress by the Department in stabilising the PAYE service since the serious problems that emerged when it introduced the new National Insurance and PAYE service (NPS) in 2009. The report also covers HMRC’s performance in managing tax debt; and its progress in tackling fraud and error and in managing debt in respect of tax credits.
In 2011-12, the Department received total revenue of £474.2 billion, an increase of £4.5 billion (0.96 per cent) more than in 2010-11. Tax revenue has continued to recover from the effects of the recession in 2008-09 and 2009-10. VAT revenue has increased by £9.3 billion, largely because of the VAT rate increase and increases in revenue from the oil, gas and business services sectors. Revenue from corporation tax has decreased through turbulence in the financial sector, offset by increased revenue from offshore companies because of higher oil and gas prices.
The Department is part way through its plan to stabilise the administration of PAYE. It has met its target to process 6.7 million end-of-year reconciliations relating to the 2008-09 and 2009-10 tax years. In addition, it is on track to reconcile the 2010-11 and 2011-12 tax years by March 2013; and, by December 2012, to clear outstanding reconciliations predating the introduction of NPS relating to 2003-04 to 2007-08.
Today’s report points out, however, that stabilising PAYE has come at a cost, in terms of the amounts of tax the Department has decided to forgo to keep workloads manageable. In 2011-12, it remitted an additional £12.7 million relating to claims from taxpayers, bringing the total of those claims to £53.7 million.
The NAO recommends that, as a step towards forecasting its overall work load and the operational resources required, the Department complete its review of its PAYE operating model, taking account of the findings from the pilot for testing its new ‘real time information’ (RTI) system.
The value of tax debt at 31 March 2012 under active management stood at £13.3 billion, compared with £15 billion in the previous year. The Department has made progress in implementing its debt strategy through tailoring its approach based on the characteristics of the debt. The Department’s records show a large increase over the last two years in the amount of tax which the Department has decided not to pursue, especially for income tax which was £756 million in 2011-12. This is in part owing to PAYE stabilisation work but also as a result of improvements in the recording of remissions.
The NAO recommends that the Department identify the full cost and evaluate the cost-effectiveness of each of its debt collection activities. It should also accelerate its work to undertake full risk profiling and customer segmentation of its debt balance, as recommended by the Public Accounts Committee in 2004 and 2008.
In 2010-11 (the latest year for which figures are available), the Department overpaid between £2.08 billion and £2.46 billion to claimants as a result of error and fraud and underpaid between £0.17 billion and £0.29 billion to claimants because of error. The Department has not met its target to reduce the level of tax credits error and fraud to no more than 5 per cent of entitlements.
The Department met its target to reduce tax credit debt to £4 billion at 31 March 2012 (down from £4.7 billion a year earlier), but only after writing off old debts of £1.7 billion during 2011-12. It estimates that £2.3 billion of the £4 billion is unlikely to be recovered. The Department’s campaign approach, aimed at collecting tax credits debts more promptly, has had limited success.
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