A committee of MPs have launched an inquiry into the government’s management of tax reliefs and whether they represent value for money.
The inquiry, launched by the Public Accounts committee yesterday (May 27), will look into whether the government has appropriate oversight of the UK’s tax relief system, which costs billions each year, and whether the reliefs are performing as intended.
The inquiry follows a review by the National Audit Office (NAO) into the management of tax reliefs earlier this year, which 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 that are part of the tax system and define the scope and structure of a tax, for example the personal allowance; and non-structural reliefs that 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 often referred to as tax expenditure, of which pensions tax relief is one of the largest.
The UK tax system has more than 300 of this kind of tax relief, which together cost the government an estimated £155bn in 2018-19. But evaluations have shown that the impact of applying different tax reliefs is not guaranteed and many require careful monitoring to ensure they are “money well spent”.
Rachael Griffin, financial planning expert at Quilter, said tax reliefs were “critical” to incentivise positive behaviours such as long-term saving and should be handled with care.
Ms Griffin said: “Pension tax relief, for instance, is a highly effective mechanism for incentivising people to save for the future.
“By providing tax relief on money paid into a pension the system offers a tax deferral mechanism. This creates a clear incentive for people to save for the future, while the income tax they pay on withdrawals from their pension means they are discouraged from withdrawing at an unsustainable rate in retirement.”
But she agreed where they are not operating as expected and encouraging the right behaviours they need to be reviewed.
Ms Griffin added: “It is right that MPs scrutinise carefully the value of tax reliefs to ensure they offer good value for money. Where they are found to be failing to encourage the right behaviours they ought to be reconsidered, but we also need to exercise caution about the message this sends out and take a balanced approach.
“Entrepreneurs Relief is a good example of this. It was cut dramatically at the last budget on the basis that it wasn’t deemed particularly effective at encouraging people to launch start-up companies.
“However, in cutting the relief government also risked sending a negative message to the entrepreneurs of tomorrow. This may be why the chancellor settled on a compromise solution of capping relief, rather than cutting it entirely.”