The Public Accounts Committee (PAC) has recently opened an inquiry into the UK's management of ‘tax expenditures’ and tax reliefs provided for certain activities or goods, an area it has kept under review for the last ten years.

Tax reliefs in the UK can be split into two categories:

  • Structural reliefs that are integral to the tax system such as basic rate Income Tax relief.
  • Non-structural reliefs or tax expenditures where the government decides to not collect tax for social or economic reasons like R&D tax credits or tax relief for pension contributions. There are 362 of these in the UK although most are small in terms of cost to the exchequer.

The committee identified that the biggest tax expenditures in the UK, which are often also the most difficult to evaluate, are:

Following a National Audit Office report in February 2020, the Committee found there is no formal framework governing the administration of tax expenditures. They expressed concern about whether tax reliefs represent value for money and are being sufficiently evaluated to see if they continue to deliver what was intended when they were first introduced.

With this in mind, the PAC invited evidence from the public about accountability and value for money in tax expenditures, the submission deadline for which was 5 June. At a meeting of the PAC on 10 June, the Committee questioned officials from HM Treasury and HMRC on these points.

HMRC reported to the committee that:

  • One of the risks with non-structural tax reliefs is that they try to create an incentive for people to behave differently to how they would normally behave. This brings an inherent uncertainty about how people will respond. They may behave as the government intends them to or they may take the incentive but still not change their behaviour.
  • The evaluation of tax reliefs considers their cost as a key factor, however not all decisions to change tax reliefs are based on cost. Many factors are considered including simplification, fairness, revenue-raising and what is happening in the economy. In the case of pensions relief, one factor is a reduction in the requirement for benefits to be provided in the future if people save for their own retirement.
  • Research and Development (R&D) relief is a high-risk relief which requires much policing and administration as taxpayers often test the boundaries and there are agents producing poor quality relief claims.
  • Some tax reliefs are intended to just apply to a certain group and reflect what politicians want, for example, the marriage allowance. Others do not have an objective such as a zero rate VAT on food.
  • Entrepreneurs' Relief is an example where a relief was under review for several years and then changes were made on the basis that it was not value for money.

HMRC commented that to make a change to a relief stick, it sometimes required a bit of careful preparation in advance as otherwise the changes may be challenged. Sometimes this results in the change being quickly reversed.

A full report is now expected from the PAC following the inquiry.

External links

Management of tax reliefs 

Public accounts committee Oral evidence on management of tax reliefs of 10 June 2020 

 

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