Government told to stop unfair tax breaks

Government told to stop unfair tax breaks

The government is being urged to radically reform all tax reliefs to ease the intergenerational unfairness resulting from government spending.

In a research report published yesterday (25 February) think tank Bright Blue argued for the introduction of a new Office for Fiscal Responsibility (OFR) to pursue a tax simplification agenda.

Bright Blue stated there are more than 1,100 tax reliefs, with HM Revenue & Customs expecting these reliefs to cost a total of over £425bn in 2018 to 2019, the equivalent of 52 per cent of expected tax revenues of £810bn for 2019 to 2020.

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The report proposes that after five years, each and every tax relief should automatically cease.

It would then be for politicians and policymakers to periodically remake the case for the tax breaks.

For some of the structural reliefs, this should be a purely perfunctory exercise, the report stated.

The report also proposes the introduction of intergenerational impact assessments (IIAs), an evidence-based document designed to highlight prospective legislation's cost, efficiency and fairness for future generations.

These assessments would be prepared by the OFR. 

Blue Bright warned parliament has little insight as to whether tax reliefs are working as intended and questioned whether HMRC is best placed to oversee the effectiveness of tax reliefs.

The research stated decisions on tax policy and legislation should remain a matter for the chancellor, with the new OFR providing the chancellor with supporting material, including IIAs and recommendations.

The research also recommended departmental budgets should be set both gross and net of expenditure on tax reliefs and exemptions, to ensure transparency as to the true level of financial support to each area of public policy.

It stated departmental annual budgets are set without taking into account the cost of relevant tax reliefs.

Blue Bright believes this disconnection is 'extraordinary', and would lead to resource misallocation plus rendering any value for money exercises as meaningless.

The research argued the nation's financial health is better assessed using HM Treasury's 'whole government accounts' rather than the 'national accounts', since it includes several unfunded promises.

In the whole government accounts, the nation's net liability more than doubled in the six years to the end of March in 2017 to £2,421bn; this figure is equivalent to 120 per cent of GDP and £89,000 per household, according to the research.

However, this net liability figure excludes the state pension.

When included, and the UK's net liability would have leapt to more than £6,600bn at the end of March 2017, some £243,000 per household.

Bright Blue is pushing for the UK's whole of government accounts balance sheet to include a liability to represent future state pension payments, based upon a realistic expectation of the future cash outflow, discounted using gilt yields.

Michael Johnson, associate fellow of Bright Blue and author of the report, said if the UK were accounted for as a public company, it would be bankrupt.

He said: "We need to put a brake on deferring costs that millennials in particular will otherwise have to meet.