The House of Common's Treasury Committee has published 'Tax Reliefs' which calls for a systematic review into the cost of over a thousand tax reliefs which complicate the tax system and are open to abuse.
The report from the cross-party Committee of MPs, concludes that the tax system is too complex and the scrutiny of existing reliefs is inadequate. This has contributed to the abuse of some tax reliefs, and in certain cases, fraud. The report highlighted R&D Relief and IHT as being two reliefs especially open to abuse.
Tax relief is simply defined as the reduction in the amount of tax an individual or company pays when they meet certain conditions.
The recommendations from the Committee included:
- A review of reliefs for the purpose of simplification.
- Tax reliefs should be reclassified as government expenditure.
- Better monitoring to combat abuse.
- Five-yearly reviews should be used to judge the effectiveness of a tax relief.
HMRC told the Committee that there are currently 1,180 tax reliefs in force, of which 841 are structural and 339 are non-structural. HMRC define structural tax reliefs as those that are integral parts of the tax system with various purposes, such as defining the scope of the tax or calculating income or profits correctly.
Other reliefs are actively designed to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives are classified as ‘non-structural’ tax reliefs.
Top Five Structural Tax Reliefs by estimated cost, 2022–23
|
Name |
Tax | £ millions |
| Personal Allowance | Income Tax | 119,000 |
| Primary Threshold | National Insurance | 37,200 |
| Secondary Threshold | National Insurance | 34,100 |
| Capital allowances | Income Tax/Corp. Tax | 24,800 |
| Nil Rate Band for Transfers for Estates on Death |
Inheritance Tax | 23,000 |
| Finance and Insurance | VAT | 16,300 |
| Total Cost for Top Five Structural Reliefs | 254,400 |
Top Five Non-Structural Tax Reliefs by estimated cost, 2022–23
| Name | Tax | £ million |
| Private Residence Relief | Capital Gains Tax | 35,200 |
| Contributions to, and Benefits from, Registered Pension Schemes |
National Insurance | 27,800 |
| Registered Pension Schemes | Income Tax | 27,000 |
| Food | VAT | 22,500 |
| Construction/sale new dwellings | VAT | 16,900 |
| Total Cost for Top Five Non-Structural Reliefs | 129,400 |
The Committee pointed out that in 2021-2022, HMRC estimate that 105 of the 339 non-structural tax reliefs cost a combined total of £195bn which compares to the total spending on health and social care of £271.6bn in the same year.
Conclusions and recommendations
Tax reliefs and simplification of the tax system
- Conclusions: The tax system is too complicated. The huge and seemingly ever-expanding suite of tax reliefs is an important factor in that complexity. The Treasury Committee said it would continue to monitor, the Treasury’s commitment to simplifying the tax system, especially after the abolition of the Office of Tax Simplification and that simplification cannot merely focus on proposed new policies.
- Recommendation: The MPs recommend that the government undertake a comprehensive and systematic review of existing tax reliefs to look for opportunities for simplification. In doing so, they should in particular look for ways of making it easier for taxpayers to adhere to the rules.
- Conclusions: Tax reliefs account for a considerable reduction in tax revenue. They require adequate data to be collected and published to inform proper policymaking or accountability. However, the evidence shows that this is not happening. The disparity between scrutiny of tax reliefs and that of equivalent direct public expenditure is stark.
- There are 1,180 tax reliefs, but HMRC only publishes estimated cost data for 365, leaving 815 uncosted. We recommend HMRC publish cost data for all tax reliefs from the 2025/26 tax year onwards.
- Recommendation: The Treasury should reclassify tax reliefs as government expenditure. This would subject reliefs to the established value for money assessment, leading to improved scrutiny and ultimately better policy.
- The government should consider how to ensure that the relevant delivery department takes more responsibility for the budgeting for each non-structural tax relief, those designed to promote particular behaviours, in conjunction with the Treasury. This would be intended to promote increased Ministerial accountability and subject such reliefs to levels of Treasury oversight and spending control characteristic of departmental spending.
Abuse of Tax Reliefs
- Conclusions: Tax reliefs have been abused. The most straightforward way to reduce opportunities for such abuse is to simplify the tax system.
- Recommendation: Where tax reliefs are maintained, we recommend the government monitor them for indications of abuse as part of ongoing review processes. The government should seek and favour external consultation on potential abuse at both policy design and post-implementation monitoring phases.
Removing reliefs from the statute book
- Conclusions: Political pressure, including through lobbying, tends to promote both the creation of new tax reliefs and the retention of existing reliefs. Tax reliefs long detached from their original policy purpose clutter an ever more complex tax system. The Committee was concerned that there is no routine within government to identify and clean them from the statute book.
- The Committee took evidence on several options for seeking to remove outdated tax reliefs from the statute book.
- A 'one in, one out' rule for tax reliefs would be a blunt instrument which could reduce flexibility in policy-making.
- Sunset clauses have their place, but tax relief expiry dates can act against the certainty important to promoting long-term investment.
- Recommendation: A formal, structured system of five-yearly reviews would provide enough time to judge the effectiveness of a tax relief and allow an opportunity to remove those reliefs no longer meeting their objectives.
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External links
Treasury Committee: Tax Reliefs, Twentieth Report of Session 2022–23
National Audit Office: The management of tax expenditures (2020)
Policy paper: ‘OTS Review of tax simplification’
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