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Thu, 22 October 2020

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The Government must get a grip on the UK’s exceptionally expensive tax breaks that it doesn’t understand

The Government must get a grip on the UK’s exceptionally expensive tax breaks that it doesn’t understand

“Tax breaks are not freebies” - The Public Accounts Committee calls on Government to account for tax giveaways | PA Images

5 min read

The Government knows too little about the extremely expensive tax reliefs it provides: whether they work, or offer value for money, or even how much they actually cost, according to the new Public Accounts Committee report

Every year, the UK spends an estimated £159bn on tax reliefs. This is no small sum. For context, the Treasury puts the current cost of fighting Covid-19 at around £190bn. Despite the huge numbers involved, the Public Accounts Committee (PAC) was staggered to hear how little understanding the Government really has of the cost and value for money of this enormous “giveaway”.

In fact, the full cost of these reliefs is not actually known. There has been a failure to assess the most significant tax reliefs, despite the hundreds of billions involved. The ten biggest reliefs cost a total of £117 bn every year, accounting for around 5% of GDP, and yet none have been formally evaluated.

The system has seen spiralling costs and unchecked abuse, with some reliefs costing double what the Government originally forecast. The PAC originally questioned the value for money of entrepreneur’s relief – dubbed “the worst tax break” in the UK by the Resolution Foundation – in 2015. At that time, it cost £2bn more than originally forecast. Due in part to a failure to address increasing costs, the relief actually cost £11bn between 2015 and 2019. But in the scant evaluations it does do, HMRC does not compare the real cost of tax reliefs to their original forecasts – so there is no feedback or learning to improve the value of tax breaks or planning for future ones.

There’s also a worrying lack of understanding as to who actually benefits from many tax reliefs

HMRC and Treasury are too slow to respond to instances of abuse. An issue with abuse of the flagship research and development relief, by companies with minimal UK presence, identified in 2018 is expected to just continue for at least the next two years, due to the time it takes to tackle it. HMRC must accelerate its speed of response in instances of abuse or escalating costs, to ensure that taxpayers do not stump up time and time again.

There’s also a worrying lack of understanding as to who actually benefits from many tax reliefs. Perhaps the best example of this is the case of pensions. Relief on pensions are one of our largest tax reliefs, costing £38bn last year alone. The Government says this relief encourages people to save, but the hard data on who benefits is limited. Royal London have reported that 1.75 million low-paid or part-time workers do not receive any relief on their pensions. A huge three-quarters of these workers are women.

HMRC told us that “virtually no stone was left unturned” during a 2015 evaluation of pensions relief, and yet five years later we know far too little about its impact and effectiveness. Opening up the world of pensions to proper transparency and analysis is long overdue. Whether it’s the former steelworkers targeted by rogue advisers or the WASPI generation of women who were short-changed by a shift in the retirement age, pensions are significant issue in my South Wales constituency of Blaenau Gwent. It’s a sector which many find complex and where financial sharks too often feed on a lack of transparency and consumer understanding.

The committee has called for the Government to commission an external evaluation of pensions relief, as well as publishing data by income, gender, age, ethnicity and sector, to reveal who is really benefitting and who is missing out. It is time we shone a light on this opaque issue, allowing people to see and understand how the world of pensions and government support really works. This is key to the desperately needed increase in engagement with retirement savings that we need to see in this country.

Now the Government’s latest shiny budget bauble is a stamp duty holiday on properties up to £500,000, aiming to, in the chancellor’s words, “catalyse the housing market”. We all want the housing market and wider economy to recover, but property agents have already reported that the relief is overwhelmingly benefitting wealthy families, usually seeking to buy a second home outside of cities. In their evidence to the committee, the Chartered Institute of Taxation emphasised “the almost total lack of attention, at least so far as is visible to the outside world, as to how effective those measures prove over time”.  Our job is to point out where these political baubles lose their shine and continue to enrich the wrong folk.

It is clear that the system of tax reliefs is in desperate need of an overhaul. These hundreds of billions of pounds come from the taxpayer’s purse, and the public has been left in the dark for too long. Tax reliefs need to be properly assessed and analysed so that we know where our money is going. The Government must step up to improve transparency on this issue so we can all see that its best intentions for our money are met.

 

Nick Smith MP is Labour MP for Blaenau Gwent, and a member of the House of Commons Public Accounts Committee

 

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