MPs call for closer monitoring of tax reliefs

The Public Accounts Committee (PAC) is calling for much closer and more systematic monitoring and evaluation of tax reliefs, claiming that the government does not know enough about their cost, whether they work, or if they offer value for money

Meg Hillier, PAC chair, said: ‘Every Budget we get tax breaks announced like baubles hung on a tree and they generate great headlines but the truth is the government has little clue about the value of an enormous cost to the public purse.

‘It sometimes fails to predict with any accuracy what tax breaks will cost, and there is often too little interest in whether it delivers what it intended to.

‘Tax breaks are not freebies – they cost the public purse hundreds of billions of pounds in lost income. The government must know who they benefit and to what end.’

PAC’s report points out that the ten most expensive UK tax reliefs cost the public purse £117bn a year, but government evaluation suggests that only one of the four reliefs costing more than £1bn a year has the intended effect on economic behaviour.

It states that pension reliefs was forecast to cost £38bn in 2018–19, but says the government has not made any assessment of whether this tax relief actually encourages saving for retirement or reduces dependence on state retirement benefits.

It is similarly critical of the £15bn cost of VAT relief on the construction of new dwellings, claiming there has been no analysis to show whether this encourages the development of  affordable homes, in line with government policy.

PAC is also concerned about the lack of analysis of the impact of some key tax reliefs on different groups, highlighting that when recent reforms to entrepreneur’s tax relief were announced, it was revealed that nearly three quarters of the £2bn a year cost benefits just 5,000 individuals.

Amongst its recommendations, the committee wants the Treasury to establish and publish the criteria it will use to determine which reliefs to evaluate, and to do so within the next three months. It should have evaluated the impact of pension tax reliefs within the next 12 months.

HMRC should assess the groups and sectors benefiting from all significant reliefs and publicly report the results during 2021. For pension reliefs, HMRC should publish data showing who is benefiting, split by income; groups with protected characteristics such as gender, age, ethnicity; people working in the public and private sectors; and people in defined contribution and defined benefit schemes.

HMRC should, within three months, publish a list of all new and existing reliefs with objectives that include changing behaviour and specify the objectives of each, and how the government will measure whether that objective has been met.

PAC also wants the tax authority to identify all significant cost variances within tax reliefs and report the reasons for those variances, explaining whether variations in cost are proportionate to the impact of the relief.

John Cullinane, CIOT tax policy director, said: ‘We share the committee’s alarm that it remains far from clear as to whether tax reliefs ever deliver their economic and social aims despite their enormous impact on tax revenue. 

‘The frustrating lack of regular reviews of tax reliefs to gauge their success is also true for new taxes, major tax increases and frequently experienced expansions of the tax base.

‘There is no formal framework governing the administration or oversight of tax expenditures. 

‘The lack of scrutiny is not helped by many tax reliefs being the result of “rabbit out of a hat” announcements by Chancellors on Budget Day with little or no prior consultation.’

Cullinane cited pensions relief, also highlighted in the PAC report, as an example of the lack of systematic monitoring.

‘Following the financial crisis, governments pared back on the previously generous system of relief, but did so by tinkering, and by surprise announcements, rather than by comprehensive public review.

‘The recent Budget partially rowed back on one such change in order to address the specific problems faced by NHS consultants over their pension contributions, but this was an expensive, untargeted and again unconsulted-on way of dealing with the issue.

‘And left the complexities resulting from the last decade of unexpected changes and restrictions largely intact,’ he said.

Management of tax reliefs is here.

By Pat Sweet

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