‘Our tax system is too complicated’ concludes Treasury Committee report on tax reliefs

The Treasury Select Committee (TSC) today published a report¹ about the complicated world of tax reliefs. Last year TaxWatch provided written evidence to the Committee on this enquiry and in December last year, TaxWatch’s then acting director, Alex Dunnagan, gave oral evidence.

The report calls on the Government to regularly review tax reliefs and removal of those that no longer fit their policy objectives, cost significantly more than expected or are vulnerable to abuse.

It focuses on concerns about the number and complexity of tax reliefs, along with lack of scrutiny of their cost and effectiveness. They recognise that part of the problem arises due to governments introducing new reliefs, often following lobbying from interested parties, which then prove difficult to remove even if there are known problems with their operation. The scale of this issue is demonstrated by the fact that 105 of the 339 identified non-structural reliefs (i.e. those designed to promote certain behaviour) were estimated to cost £195bn in 2021-22. This equates to 72% of the health and social care budget (£272bn) in the same year.

Tax reliefs were also identified as creating opportunities for abuse, most clearly highlighted by evidence around R&D tax reliefs. Recent data (published since the TSC report was compiled) has suggested that levels of fraud and error in these reliefs are, in fact, much greater than previously estimated. Alex pointed out that, in addition to poor tax policy design issues, HMRC did not have sufficient resources to police the potential abuse of reliefs. In particular he referred to issues dealing with tens of thousands of R&D relief claims submitted every year.

The report refers to the closure of the Office for Tax Simplification (OTS) and the difference between their remit, which was to review the existing tax system, and a new focus by the Treasury and HMRC on tax policy design, which will only consider new tax policies.

The TSC call for a number of actions, including designating non-structural reliefs as public spending so they can be properly scrutinised as such. They also recommend five year reviews of each relief with a view to removing those that no longer serve policy requirements. While we support all of the recommendations, the volume and nature of the work involved would require significant resources and political commitment. Bearing in mind the closure of the OTS, it seems likely that this is not going to be top of anybody’s priority list.

TaxWatch have identified that it is not just in the area of reliefs where old tax policies linger without review of their purpose or effectiveness. We will shortly be publishing an analysis of issues around property taxation that we believe should be substantially reformed.