The tax system is becoming more complex with over 1,100 tax reliefs creating more compliance risks, HMRC official tells MPs
Members of the Treasury Committee grilled three senior executives from HMRC about the effectiveness of the tax relief system, questioning whether HMRC conducted in-depth analysis of the plethora of tax reliefs to see whether they offered value for money and the right incentives to encourage growth.
There are 1,180 tax reliefs, made up of 841 structural tax reliefs and 339 non-structural tax reliefs, which are designed to encourage a particular behaviour and the number changes at Budget and fiscal events, HMRC told MPs. The biggest tax reliefs are zero rating of food, NIC contributions to pensions, pensions tax relief and the capital gains tax exemption for principal homes.
HMRC said it did conduct some analysis of the effectiveness of reliefs, but this work was limited to primarily looking at particular challenges of the overall tax system. If it is an area subject to compliance risk then HMRC said it would scrutinise it more closely, and also if feedback from taxpayers showed that claims were overly complex.
‘At the moment we are rather more focused on evaluating the most sizeable reliefs,’ said Jane Whittaker, director of knowledge, analysis and intelligence. ‘Another criterion is just how technically feasible it is to analyse the tax relief. It not always straightforward to get a quantifiable impact of the tax relief, for example in pension tax relief.’
‘Because of the scale and number of reliefs they are all administered differently – HMRC tailor our response depending on the scale and complexity of reliefs,’ said Philippa Madelin, director of wealthy and mid-sized business compliance.
One of the downsides of the number of tax reliefs is the increasing complexity of tax rules.
Jonathan Athow, director general, customer strategy & tax design, HMRC, said: ‘Our tax system has become more complex; it is the cumulative effect of the tax reliefs, the number of taxes and the overall tax system that over time has become more complex.
‘The challenges of simplifying the tax system – it might cost money to simplify the tax system, it might create losers or winners who you don’t intend, or conflict with wider policy objectives.’
‘There are burdens of complying with tax systems but sometimes burdens come from applying for something that is beneficial, and have to be aware of distortive measures of bunching when people avoid going into a system, the amount of error, and the more errors we see the more likely it is indicative of complexity, and there is also sheer criminality.
‘Litigation can be helpful but often there are substantial costs for the government and the litigant.
‘Sometimes when rules affect a very small number of people then when system changes a tax rule may capture more people and then it becomes more complex – it is the inadvertent growth of complexity.’
Athow pointed to the pensions lifetime allowance and savings allowance as significant simplifications of the tax system. In terms of abuse of the tax relief system, research and development (R&D) reliefs were seen as one of highest risk areas.
MPs questioned whether the abolition of the Office of Tax Simplification would have a negative impact on the tax system.
‘There have been successes but often challenges with simplifying the tax system and simplifications often comes up against other challenges – changes could conflict with wider policy initiatives and they could benefit people that were not intended to gain advantage,’ Athow said.
Athow added that one focus for HMRC is to simplify the guidance for small businesses to make it easier for them to comply with their tax responsibilities. As the main contributors to the tax gap, small business is seen as an area where there are high levels of non-compliance.
However, MPs questioned HMRC about whether the tax reliefs tended to benefit a small segment of taxpayers.
Athow admitted the income shifting high earners were most likely to use tax reliefs.
‘Those on higher income are more responsive and the benefits of entering these arrangements are more beneficial and sometimes people have more options,’ said Athow. ‘If you are an employee you have less options in how benefits are offered to you, compared to people with other arrangements.’
There was concern that HMRC was under-resourced and was unable to hire more staff due to budget restraints, which has contributed to a £9bn shortfall in recovering unpaid tax. But HMRC said that it was still looking to recover as much of the tax debt as possible, with staff who had been moved to a special covid fraud taskforce now being reallocated to business as usual compliance activities.