A tax system with 1,190 tax reliefs is difficult to hold accountable
2 March 2020: a recent report by the National Audit Office (NAO) highlighted that there were 1,190 tax reliefs as of October 2019, confirming just how complicated the British tax system is.
The NAO is the independent audit body responsible for scrutinising public spending on behalf of parliament. In a report on how HM Treasury and HMRC manage tax expenditures (tax reliefs that are used to pursue social or economic objectives), the NAO focused on the 362 tax reliefs that fall into this category. HMRC has reported that 111 of these reliefs had a combined annual cost of £155bn in 2018-19.
The NAO was critical of both HM Treasury and HMRC in how they monitor tax expenditures, following on from previous criticism by the Public Accounts Committee in 2018 that HMRC did not know whether a large number of tax reliefs were delivering value for money.
The report highlights how some tax reliefs significantly exceeded their original cost estimates, with HMRC not fully investigating large changes in costs. While HMRC has started to assess tax reliefs, only 15 formal evaluations have been completed since 2015, representing just 7% of the total value. In particular, HMRC has only evaluated five of the 23 tax expenditures estimated to individually cost in excess of £1bn a year.
A major issue highlighted by the report is a lack of sufficient assessments of whether the behavioural changes or other benefits intended by changes to the tax system are being achieved. Guidance from the IMF states that tax expenditures require the same amount of government oversight as public spending and this is not currently the case in the UK.
Poorly designed tax reliefs can skew behaviour in ways that were not originally intended or create opportunities for exploitation or abuse. One example is intangibles relief, which was meant to support innovation. Instead it created multiple opportunities for tax avoidance where taxes were reduced with no true benefit in innovation.
There can also be unintended consequences for the accuracy of company accounts, with financial statement disclosures distorted by the desire to meet the requirements to obtain a particular tax relief.
While the NAO comments that HM Treasury and HMRC have started to improve, it recommends the development of a formal framework for designing and administering tax expenditures, and the introduction of a robust methodology for assessing value for money on a regular basis.
This call echoes the Barber Review on Public Value in 2017, which called for delivery of better outcomes for citizens, noting that the Treasury has historically placed greater emphasis on inputs rather than outcomes. It commented that a public service is more valuable if taxpayers and citizens believe in it, are willing to fund it, and commit to supporting its outcomes more widely.
Alison Ring, Director, Public Sector for ICAEW, comments: “Although this is a fairly technical report from the NAO, it goes right to the heart of the compact between citizens and government. How can we build trust in the tax system if the tax authorities are unable to fully justify the benefits of tax expenditures and confirm that intended outcomes are being delivered?”
Responding to the report, a government spokesperson said: “We want tax reliefs which deliver value for taxpayers and minimise the risk of any avoidance and evasion activity.
“We will consider the NAO’s recommendations so that we can continue to improve our management of reliefs.”
The NAO report is publicly available here.