PAC slam ‘weak’ tax relief system

25 Jun 14
The Public Accounts Committee has called on the government to do more to justify the £100bn spent on tax breaks every year after warning that the poorly-managed system of reliefs created opportunities for avoidance and evasion.

By Richard Johnstone | 26 June 2014

The Public Accounts Committee has called on the government to do more to justify the £100bn spent on tax breaks every year after warning that the poorly-managed system of reliefs created opportunities for avoidance and evasion.

Examining the current system, MPs said there were 1,128 tax breaks currently operating in the UK, which made impossible for Revenue and Customs to be vigilant against abuse.

Committee chair Margaret Hodge said at least £100bn is spent on an estimated 150 reliefs designed to encourage behavioural change, such as promoting jobs and growth, or investment in the arts.

These reliefs, which are classed as tax expenditures, are often used as alternatives to direct public spending but are not managed or evaluated as closely, she said.

Ministers must ensure that use of reliefs in the future is based on clear objectives. Examples of reliefs for the film industry being used for tax avoidance show loopholes in legislation can be exploited, Hodge added, and reforms were needed.

Among the changes recommended was the creation of a framework for effective assessment, management and reporting of tax reliefs.

Today’s Tax reliefs report highlighted that HMRC and Treasury share responsibility for management of reliefs, but there is no accounting officer responsible for their overall stewardship, as there is for public spending.

‘The government made a commitment to simplify the tax system and established the very welcome Office for Tax Simplification,’ Hodge said.

‘However, whilst the government has so far abolished 43 tax reliefs, another 134 have been introduced since 2011. Much more radical simplification of the tax system is required if we are to get to grips with aggressive tax avoidance.

‘If government chooses to spend £100bn on tax reliefs, at a time of austerity, this expenditure should be considered in the same way as spending programmes.’

Among its recommendations, the committee said departments should do more to demonstrate the case for introducing new reliefs, as opposed to other options such as direct grants. The Treasury should also monitor their use more systematically to ensure they are achieving government’s stated objectives, as the parliamentary approval process – which occurs through passing the government’s Budget in the Finance Bill – was not sufficiently robust.

For example, there must be more feedback to Parliament on the costs of principal tax reliefs each year, including significant changes in costs, after the National Audit Office identified 26 tax reliefs which had increased in cost by more than 50% in real terms in the past ten years.

Responding to the report, a Treasury spokeswoman said it was ‘extraordinary’ that the committee was criticising tax reliefs that help millions of families. ‘Around 80% of the money they have identified are for things such as ensuring people don’t pay tax on the income they put into their pension, the food they buy for their families, the clothes they buy for their children, the income they get from their savings, the savings they are investing in their business and the money they give to charity,’ she said.

‘The government simply doesn’t agree these things don’t have “clear objectives”. Quite the reverse. They are an important part of the government’s long-term economic plan that is giving people greater security and supporting businesses. Of course, the effectiveness of reliefs is continuously monitored and where a relief is being exploited the government acts, closing down loopholes and amending the law as necessary.’

 

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