What is the cost of tax relief?

In the realm of tax relief, the government faces mounting calls – for the sixth time in thirteen years – to quantify the expenditures associated with the multitude of tax reliefs and allowances that clutter the UK tax framework.

While HMRC remains diligent in reporting its annual tax collections, fulfilling its mission to secure the “right amount of tax” from each taxpayer, it appears less enthusiastic about gauging the yearly tax foregone due to tax reliefs and allowances. The efficacy and potential abuse of these reliefs often go unmeasured.

Back in 2010, the Office of Tax Simplification (OTS) undertook the task of listing all prevailing tax reliefs, allowances, and exemptions (totaling 1,042), aiming to identify those that warrant repeal or simplification to advance toward a more streamlined tax system.

Though the vast number of reliefs made a comprehensive assessment unfeasible, the OTS meticulously reviewed 155 of them. In its final report on tax reliefs, the OTS recommended abolishing 47 reliefs, subjecting 37 to closer scrutiny, keeping 54 unchanged, and simplifying 17. Among the latter group were the enterprise investment scheme (EIS) and venture capital trusts (VCT), topics explored in a distinct Treasury committee report in 2023.

Interestingly, the OTS revisited the tax relief list in 2014, finding the count had escalated to 1,140.

In 2014, the National Audit Office (NAO) published a report titled “The Effective Management of Tax Reliefs,” revealing that “HM Treasury and HMRC have not pinpointed the tax reliefs designed to induce behavioral changes for targeted policy goals. Furthermore, they fail to monitor or report the costs and benefits in a manner that would enable the broader government, Parliament, or public to assess the effectiveness of these reliefs.”

The House of Commons Public Accounts Committee (PAC) has also scrutinized tax reliefs on multiple occasions: 2014, 2015, and 2020.

The 2014 PAC report on “Tax Reliefs and Their Administration” concluded that transparency and accountability were lacking for tax reliefs, highlighting a deficient system of control post-implementation. One recommendation called for HMRC to furnish Parliament with proportional feedback and analysis on the costs of principal tax reliefs annually, including substantial cost changes.

In 2015, PAC assessed the effective management of tax reliefs, observing that HMRC’s yearly list of current tax reliefs, with estimated costs, was vague, incomplete, and inaccurate. The committee advised HMRC to publish an up-to-date list of tax reliefs, aligning with the Office of Tax Simplification’s definition, outlining each relief’s purpose and cost to the Exchequer.

By 2020, PAC’s frustration with inaction was evident. The “Management of Tax Reliefs” report referred back to the 2015 review, noting that HMRC hadn’t evaluated any of the ten major tax reliefs supporting government economic and social objectives over the past five years.

Fast forward to July 2023, the Parliamentary Treasury Committee issued a report on tax relief operations within the UK tax system, affording the government two months to respond.

A key recommendation was for HMRC to “publish cost data for all tax reliefs starting from the 2025/26 tax year.”

Additionally, the committee proposed categorizing tax reliefs as government expenditures, subjecting them to established value-for-money assessments, thus enhancing scrutiny and ultimately refining policy.

As we ponder whether the government will take action, the tension between simplicity and fairness persists in the tax relief landscape. While a straightforward flat tax is administratively convenient, it may unjustly burden specific taxpayers, leading to the inclusion of reliefs to ease their plight.

Amidst this, cost evaluation and benefit assessment remain absent, contributing to the growing complexity of the tax system, counter to the government’s goal of simplification, as articulated by the Treasury Committee: “Tax reliefs contribute to taxpayer confusion and provide openings for misuse. Although new reliefs are often introduced, redundant ones are rarely eliminated, exacerbating these challenges. This runs counter to the Government’s professed aim of streamlining the tax system.”

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