What do tax reliefs really cost?
Donald Drysdale finds that the costs of various tax reliefs have attracted much political debate, fuelled by information over the years from the OTS and HMRC.
OTS review of tax reliefs
A few years ago the Office of Tax Simplification (OTS) carried out a review of tax reliefs. Its remit was to identify those reliefs that should be repealed or simplified to support the government’s objective for a simpler tax system.
The resulting interim report from the OTS in 2010 listed 1,042 separate reliefs. Then in 2011 their final report on the review looked at 155 of these in depth. It recommended that 54 of them remain unchanged, 37 be looked at in more detail, and 47 be abolished.
In 2014 the OTS produced an update which listed 1,140 reliefs then in existence, suggesting that efforts to simplify the tax regime were proving unsuccessful.
The costs of tax reliefs
In January HMRC published their latest annual estimates of the costs of tax reliefs. The House of Commons Public Accounts Committee (PAC), here, starting at question 96, had previously described the costs of tax reliefs as ‘eye-watering’.
The HMRC estimates list some 424 reliefs in aggregate. These include 105 main tax reliefs which HMRC have been able to cost – with varying degrees of accuracy – and 80 reliefs which involve nil or negligible costs.
HMRC have been unable to assess the costs of the remaining 239 reliefs listed. The PAC has questioned how HMRC can tell whether those reliefs give value for money if their cost is unknown. Quite simply, they can’t. For 179 of the reliefs, no entry is required on a tax return and HMRC believe that the cost of collecting the data would be disproportionate.
As an example which HMRC put to the PAC, a life assurance pay-out following a death is not generally subject to tax. HMRC don’t collect information to enable them to cost that relief, and they haven’t costed it. They say that it would be disproportionate for them to do so.
Even this explanation is confusing. For example, HMRC told the PAC that there is no need to report an exempt gain on selling a principal private residence so they don’t collect such data. However, they’ve costed that exemption at £27bn for 2018/19.
As good accountants will have noticed, more than half of the 1,000 or more tax reliefs previously identified by the OTS haven’t appeared at all on HMRC cost estimates. This discrepancy hasn’t been adequately explained in the estimates or (apparently) to the PAC.
HMRC confirmed to the PAC that, in spite of general agreement that the number of tax reliefs should be reduced, successive governments add more reliefs than they take away, so “the reality is that the list of reliefs grows faster than it reduces”.
The purpose of costing reliefs
Where a relief is supposed to achieve a policy objective, there are specific questions which HMRC say they (and apparently not only HM Treasury) have to consider. Does the relief give value for money by reference to the policy objective? Are HMRC sure that only people entitled to the relief are getting it? And do any changes in tax receipts signify non-compliance?
Some tax reliefs are ‘structural’ and exist to help define the tax base rather than achieve some policy outcome, so the question of whether they give value for money does not necessarily arise. The personal allowance is an example of such a structural relief.
Other reliefs are regarded as ‘tax costs’, intended to achieve particular (often political) outcomes. HMRC therefore regard it as relevant that they should try to measure whether the reliefs are delivering value for money, and evaluate the priorities and risks involved in ensuring they work.
In some cases, cost data held by HMRC may not be robust enough to feature as statistics, but might still be able to inform Ministers’ policy thinking. Sometimes HMRC may collect such data on a sample basis. They don’t have the resources to do that every year for every relief.
Forecasts are prepared to show how much some of the principal reliefs and key policy changes are likely to cost. HMRC monitor variances against these forecasts to detect compliance concerns, and to spot when value for money should be re-evaluated.
With the impending Brexit still ill-defined, I’m sure any UK Chancellor must fantasise about how he could reset the nation's finances if only he could claw back the costs of some of the principal tax reliefs. But life isn’t so easy.
Those of diverse political persuasions see existing tax reliefs in dramatically different lights. In arriving at total projected tax receipts of £736bn for 2018/19, estimated costs of tax reliefs include the following sums which may be of particular interest:
|Selected principal tax reliefs for 2018/19
|NICs primary and secondary thresholds and lower profits limit
|VAT zero-rating (food, construction, transport, books, etc)
|Registered pension schemes and contributions to them
|Capital gains tax exemption for principal private residence
|Capital allowances (income tax and corporation tax)
|VAT refunds to central and local government-type bodies
|Inheritance tax nil rate band
|VAT reduced-rate for domestic fuel, power etc
|Research and development reliefs for companies
|Capital gains tax entrepreneurs' relief
|Inheritance tax agricultural property and business reliefs
|Inheritance tax reliefs for transfers to charities on death
Inheritance tax agricultural property and business reliefs have been described in some quarters as “bungs for the rich”. Capital gains tax entrepreneurs’ relief has been criticised in similar terms. However, it seems that abolishing these would save relatively little.
Some see the capital gains tax exemption on principal private residences as a longstanding mainstay of our property-owning society, while others regard it as a subsidy to wealthy homeowners at the expense of those who can’t get onto the housing ladder.
The reduced rate of VAT for domestic fuel and power is seen by some as a successful way of holding down costs for hard-working families. Others see it as an inappropriate subsidy for fossil fuels, frustrating crucial efforts to save the planet.
There have been suggestions that tax relief on pensions ought to be cut. Such a move could be politically sensitive given the increases in auto-enrolment contributions coming this April. Some would think it fairer if contributions were to continue to qualify for income tax relief, but not above the basic rate.
The possibilities are endless. The only thing that seems fairly certain is that governments will persist in making tax reliefs more and more complicated.