New Chancellor of the Exchequer Rishi Sunak has been urged to do more to monitor the growing cost of the UK’s tax reliefs after a report criticised the government for failing to assess whether these reliefs were working as intended.
A review by the National Audit Office (NAO) into the management of tax reliefs found the government needs to make “substantial progress” in improving how these are managed and called for a “proper and systematic review” of tax changes including the growth in tax reliefs.
There are two categories of tax relief: structural tax reliefs are part of the tax system and define the scope and structure of a tax, for example the personal allowance; whereas non-structural reliefs are when the government opts to forego tax to pursue social or economic objectives, for example income tax relief on pension contributions.
Non structural tax relief is also often referred to as tax expenditures.
The 57-page report found there were 362 ‘tax expenditures’ costing £155bn in 2018-19.
But the independent parliamentary body found HM Revenue and Customs had only costed a third (111) of these reliefs.
The tax authority plans to estimate the costs for more tax expenditures between 2020 and 2022, prioritising those tax expenditures it regards as higher risk, such as the relief on pension contributions.
The report found the largest tax expenditures were the reliefs on pension contributions, the reliefs from VAT on food and new dwellings, and the relief from capital gains tax on people’s homes.
The NAO said the Treasury should establish a framework for designing and administering these reliefs as well as develop a methodology to assess the value for money.
It should also review on a yearly basis whether the objectives of tax expenditures still align with government objectives.
In addition it has called on HMRC to develop a categorisation of tax reliefs and a more systematic approach to the evaluation of reliefs.
The report stated: “Both departments need to make substantial progress and ensure sufficient coverage and rigour in the work they undertake on this matter.
"On their own these improvements will not be sufficient to address value-for-money concerns unless the departments formally establish their accountabilities for tax expenditures and enable greater transparency.
“Lessons can be learned from other countries that have established clear arrangements for evaluating and reporting on tax expenditures. We look to HM Treasury and HMRC to follow suit by clarifying arrangements for value for money and improving the evaluation and public reporting of tax expenditures.”
John Cullinane, tax policy director at the Chartered Institute of Taxation (Ciot), said: “Neither the Treasury nor HMRC keep track systematically of tax reliefs intended to change behaviour, or adequately report to parliament and the public on whether tax reliefs are expensive or even work as expected. Departments generally do not test whether their aims for the reliefs are being achieved.
“Unless they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be assumed to be value for money.
“We hope the Public Accounts Committee, once it is up and running in this parliament, will take up this important issue.”
Last week (February 10), it was reported that former Chancellor Sajid Javid was considering cutting high earner's pension tax relief to 20 per cent.
Under current rules tax relief is paid on savers' pension contributions at the highest rate of income tax they pay.
This system costs the Treasury almost £40bn a year in lost income tax revenue. Cutting it could help raise £10bn a year.
It is not known whether this reform will still appear in the Budget on March 11 now that a new chancellor has taken over.
amy.austin@ft.com
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