The National Audit Office (NAO) says HMRC needs to do more to monitor the introduction and operation of tax reliefs as currently there is inadequate information about the effectiveness, cost and unintended consequences of particular reliefs, including potential for tax avoidance
The NAO’s report on tax reliefs identifies that there are currently 1,129 reliefs in operation and estimates they are worth more than £100bn annually. It claims that ‘the value of tax at risk from the abuse of reliefs is unknown but likely to be significant’, and says HMRC’s own analysis of the tax gap suggests some £4bn is lost through tax avoidance schemes which exploit reliefs.
The NAO said there are signs HMRC is addressing abuse of tax rules, for example by adding 100 more investigators and extra risk and intelligence staff to identify and deal with avoidance and evasion by the wealthiest individuals, but it needed to do more to evaluate the effect and interaction of tax reliefs more systematically.
Margaret Hodge, chair of the Public Accounts Committee, was critical of the report findings. She said: ‘Despite good intentions, every one of these reliefs is an opportunity for abuse or fraud. Six of the 19 types of tax avoidance schemes that HMRC specifically warns people not to use exploit tax reliefs.
‘It is shocking that HMRC knows this and yet there is still no systematic evaluation or monitoring of whether reliefs are working as intended.’
‘There are signs that HMRC is getting better at tackling abuse where it is detected, but the absence of timely data means it remains on the back foot. Investigations are still taking too long, allowing those who benefit from tax avoidance schemes to string them out for longer. HMRC and the Treasury need a much tighter grip on the use of reliefs in the tax system.’
HMRC and the Treasury are due to appear before the PAC on 7 April.
The NAO’s research found there is no documented framework specifically governing the introduction or modification of tax reliefs, and monitoring arrangements for reliefs vary across HMRC. Few evaluations of their impact have been commissioned. There is also limited monitoring of changes in the cost of particular reliefs, while HMRC only knew the costs of 108 reliefs in detail. Around a quarter of 92 principal reliefs examined by the NAO had experienced significant changes in value.
HMRC acknowledged that its categorisation of tax reliefs is crude and that it lacks the data for more detailed analysis of how they perform.
Amyas Morse, NAO head, said: ‘Tax reliefs are a powerful, important and long-standing element in our public finance system. However, their implementation is subject to less independent scrutiny than that of other instruments of public policy.’
The full report is available here https://www.nao.org.uk/report/hm-revenue-customs-customer-service-performance/