ICAS ICAS logo

Quicklinks

  1. About Us

    Find out about who we are and what we do here at ICAS.

  2. Find a CA

    Search our directory of individual CAs and Member organisations by name, location and professional criteria.

  3. CA Magazine

    View the latest issues of the dedicated magazine for ICAS Chartered Accountants.

  4. Contact Us

    Get in touch with ICAS by phone, email or post, with dedicated contacts for Members, Students and firms.

Login
  • Annual renewal
  • About us
  • Contact us
  • Find a CA
  1. About us
    1. Governance
  2. Members
    1. Become a member
    2. Newly qualified
    3. Manage my membership
    4. Benefits of membership
    5. Careers support
    6. Mentoring
    7. CA Wellbeing
    8. More for Members
    9. Area networks
    10. International communities
    11. Get involved
    12. Top Young CAs
    13. Career breaks
    14. ICAS podcast
    15. Newly admitted members 2022
    16. Newly admitted members 2023
  3. CA Students
    1. Student information
    2. Student resources
    3. Learning requirements
    4. Learning updates
    5. Learning blog
    6. Totum Pro | Student discount card
    7. CA Student wellbeing
  4. Become a CA
    1. How to become a CA
    2. Routes to becoming a CA
    3. CA Stories
    4. Find a training agreement
    5. Why become a CA
    6. Qualification information
    7. University exemptions
  5. Employers
    1. Become an Authorised Training Office
    2. Resources for Authorised Training Offices
    3. Professional entry
    4. Apprenticeships
  6. Find a CA
  7. ICAS events
    1. CA Summit
  8. CA magazine
  9. Insight
    1. Finance + Trust
    2. Finance + Technology
    3. Finance + EDI
    4. Finance + Mental Fitness
    5. Finance + Leadership
    6. Finance + Sustainability
  10. Professional resources
    1. Anti-money laundering
    2. Audit and assurance
    3. Brexit
    4. Business and governance
    5. Charities
    6. Coronavirus
    7. Corporate and financial reporting
    8. Cyber security
    9. Ethics
    10. Insolvency
    11. ICAS Research
    12. Pensions
    13. Practice
    14. Public sector
    15. Sustainability
    16. Tax
  11. CPD - professional development
    1. CPD courses and qualifications
    2. CPD news and updates
    3. CPD support and advice
  12. Regulation
    1. Complaints and sanctions
    2. Regulatory authorisations
    3. Guidance and help sheets
    4. Regulatory monitoring
  13. CA jobs
    1. CA jobs partner: Rutherford Cross
    2. Resources for your job search
    3. Advertise with CA jobs
    4. Hays | A Trusted ICAS CA Jobs Partner
    5. Azets | What's your ambition?
  14. Work at ICAS
    1. Business centres
    2. Meet our team
    3. Benefits
    4. Vacancies
    5. Imagine your career at ICAS
  15. Contact us
    1. Technical and regulation queries
    2. ICAS logo request

What do tax reliefs really cost?

  • LinkedIn (opens new window)
  • Twitter (opens new window)
Donald-Drysdale By Donald Drysdale for ICAS

28 February 2019

Main Points:

  • The Public Accounts Committee describes the costs of tax reliefs as ‘eye-watering’.

  • Do existing tax reliefs provide value for money?

  • Whether particular tax reliefs are a ‘good thing’ is open to debate.

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.

Political perceptions

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 2018/19Cost £bn
Personal Allowance107
NICs primary and secondary thresholds and lower profits limit59
VAT zero-rating (food, construction, transport, books, etc)48
Registered pension schemes and contributions to them44
Capital gains tax exemption for principal private residence27
Capital allowances (income tax and corporation tax)18
VAT refunds to central and local government-type bodies17
Inheritance tax nil rate band17
VAT reduced-rate for domestic fuel, power etc5
Research and development reliefs for companies4
Capital gains tax entrepreneurs' relief2
Inheritance tax agricultural property and business reliefs1
Inheritance tax reliefs for transfers to charities on death1

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.

Should we understand our taxes?

By Donald Drysdale for ICAS

14 February 2019

Relief for structures and buildings

2-23-marsh 2-23-marsh
ICAS logo

Footer links

  • Contact us
  • Terms and conditions
  • Modern slavery statement
  • Privacy notice
  • CA magazine

Connect with ICAS

  • Facebook (opens new window) Facebook Icon
  • Twitter (opens new window) Twitter Icon
  • LinkedIn (opens new window) LinkedIn Icon
  • Instagram (opens new window) Instagram Icon

ICAS is a member of the following bodies

  • Consultative Committee of Accountancy Bodies (opens new window) Consultative Committee of Accountancy Bodies logo
  • Chartered Accountants Worldwide (opens new window) Chartered Accountants Worldwide logo
  • Global Accounting Alliance (opens new window) Global Accounting Alliance
  • International Federation of Accountants (opens new window) IFAC
  • Access Accountancy (opens new window) Access Acountancy

Charities

  • ICAS Foundation (opens new window) ICAS Foundation
  • SCABA (opens new window) scaba

Accreditations

  • ISO 9001 - RGB (opens new window)
© ICAS 2022

The mark and designation “CA” is a registered trade mark of The Institute of Chartered Accountants of Scotland (ICAS), and is available for use in the UK and EU only to members of ICAS. If you are not a member of ICAS, you should not use the “CA” mark and designation in the UK or EU in relation to accountancy, tax or insolvency services. The mark and designation “Chartered Accountant” is a registered trade mark of ICAS, the Institute of Chartered Accountants of England and Wales and Chartered Accountants Ireland. If you are not a member of one of these organisations, you should not use the “Chartered Accountant” mark and designation in the UK or EU in relation to these services. Further restrictions on the use of these marks also apply where you are a member.

ICAS logo

Our cookie policy

ICAS.com uses cookies which are essential for our website to work. We would also like to use analytical cookies to help us improve our website and your user experience. Any data collected is anonymised. Please have a look at the further information in our cookie policy and confirm if you are happy for us to use analytical cookies: