The question of whether tax reliefs represent good value for money is one that has been attracting attention over recent years. HMRC publishes an annual summary of the estimated costs of the main tax reliefs, and The Guardian analysed them to claim that ‘Tax relief “giveaways” to the wealthy cost Britain at least £4bn’.
So what are these reliefs, and why don’t we just abolish them? The Office of Tax Simplification published a report as long ago as March 2011 setting out a total of an astonishing 1,042 reliefs and analysing 155 of them in more detail. Of that total, it suggested abolishing a mere 47 and simplifying a further 17, but it is fair to say that the system does not seem to be much simpler, almost eight years later.
Business tax reliefs were the topic of a CIOT/IFS debate in March 2018, and as usual Helen Miller provided a clear and concise summary of the issues. The first issue is that the question of what we mean by a tax relief is not clearly defined. HMRC categorises reliefs into ‘structural’ reliefs, which are seen as an integral part of the tax system, and ‘tax expenditure’ reliefs, which are intended to encourage particular behaviours or activities.
Three of the biggest reliefs are VAT zero-rating (£53bn, including reduced VAT on energy), capital gains tax exemption for a person’s home (principal private residence relief (PPR) at £27bn) and pensions tax relief (£26bn). Abolishing or significantly restricting any of these reliefs could raise significant sums of money, but would be fraught with political difficulties.
Abolishing zero-rating for VAT would remove a lot of complexity: for example, a gingerbread man with chocolate spots for eyes will be zero-rated, but if it also has chocolate buttons, it will be standard-rated! The money raised could be reallocated to those who can only afford baked beans rather than avocado on toast, and so reform could be progressive. But the huge fuss about VAT on sanitary products (worth an estimated £5 – yes, five pounds – per year on the cheapest products) gives some idea of how difficult that would be in practice.
Removing PPR relief would raise far less than £27bn, as many people would simply not move house if the cost of doing so would include a 20% tax bill. There is, however, an argument for charging CGT on the PPR at death, rather than inheritance tax (IHT). The recent extra IHT allowance on the main residence, which allows those with expensive houses (mostly in the South East) to pass on up to £1m without an IHT charge, is particular complex and seems poorly targeted.
And then there’s pensions. The relief here, however, is mainly a timing difference. Contributions are tax deductible, but pension income is taxable, and so over an individual’s lifetime it (mostly) balances out. It is, however, becoming increasingly difficult to justify giving relief at an individual’s highest marginal rate, so that the benefit of the relief goes disproportionately to the highest earners. Rumours of restricting pensions relief to a single rate – perhaps 20%, or 25%, or 30% – have been circulating for some years now, but changes to pensions tax rules have been made far too frequently over recent years, and the system is now hugely complex. There have recently been a number of press reports about the unintended consequences for doctors, many of whom are retiring early rather than face significant tax bills. If further changes are to be made, they need to be part of coherent reform which is followed by a period of stability – it is hard for people to make long-term savings decisions when the system is constantly changing.
All of those ‘big three’ reliefs are best described as structural reliefs. What about those which are intended to change behaviour, such as R&D tax credits or entrepreneurs’ relief? Here, there is a strong argument for more robust cost benefit analysis, and ongoing monitoring to ensure that reliefs continue to achieve their original objectives. Sometimes, reliefs persist long after they have outlived their original purpose: tax relief for the costs of keeping and maintaining a horse, for the purposes of enabling an employee to perform his duties, was only abolished in 1998!
Some have suggested that there should be an automatic ‘sunset’ clause, so that from the outset a relief is only available for a specific period of time. However, the abolition of MIRAS (mortgage interest relief at source) in 2000 led to a rush by many people to take out a loan while relief was still available, arguably adding fuel to the house price boom and the subsequent crash. For a relief which attracted huge attention at the time, it is notable that the average benefit was all of £17.37 per month. So announcing significant changes needs to be well managed, and part of a coherent policy agenda. The corporate tax road map from 2010 was a good example of a government setting out its strategy and direction of travel, whether or not you agreed with its objectives.
In summary, more work could be done to establish more clearly the costs and benefits of tax reliefs, and whether it is time for any to be abolished. But reforms need to be part of a clearly articulated policy agenda, and will inevitably be unpopular with those who are losing tax benefits. Politicians need to be prepared for this, and to set out their case for change. Experience shows that major changes to the tax system tend to happen early in the life of a government with a large majority (Lawson in 1984, and Brown in 1997), so it will probably be some time before we see significant reforms to tax reliefs.
The question of whether tax reliefs represent good value for money is one that has been attracting attention over recent years. HMRC publishes an annual summary of the estimated costs of the main tax reliefs, and The Guardian analysed them to claim that ‘Tax relief “giveaways” to the wealthy cost Britain at least £4bn’.
So what are these reliefs, and why don’t we just abolish them? The Office of Tax Simplification published a report as long ago as March 2011 setting out a total of an astonishing 1,042 reliefs and analysing 155 of them in more detail. Of that total, it suggested abolishing a mere 47 and simplifying a further 17, but it is fair to say that the system does not seem to be much simpler, almost eight years later.
Business tax reliefs were the topic of a CIOT/IFS debate in March 2018, and as usual Helen Miller provided a clear and concise summary of the issues. The first issue is that the question of what we mean by a tax relief is not clearly defined. HMRC categorises reliefs into ‘structural’ reliefs, which are seen as an integral part of the tax system, and ‘tax expenditure’ reliefs, which are intended to encourage particular behaviours or activities.
Three of the biggest reliefs are VAT zero-rating (£53bn, including reduced VAT on energy), capital gains tax exemption for a person’s home (principal private residence relief (PPR) at £27bn) and pensions tax relief (£26bn). Abolishing or significantly restricting any of these reliefs could raise significant sums of money, but would be fraught with political difficulties.
Abolishing zero-rating for VAT would remove a lot of complexity: for example, a gingerbread man with chocolate spots for eyes will be zero-rated, but if it also has chocolate buttons, it will be standard-rated! The money raised could be reallocated to those who can only afford baked beans rather than avocado on toast, and so reform could be progressive. But the huge fuss about VAT on sanitary products (worth an estimated £5 – yes, five pounds – per year on the cheapest products) gives some idea of how difficult that would be in practice.
Removing PPR relief would raise far less than £27bn, as many people would simply not move house if the cost of doing so would include a 20% tax bill. There is, however, an argument for charging CGT on the PPR at death, rather than inheritance tax (IHT). The recent extra IHT allowance on the main residence, which allows those with expensive houses (mostly in the South East) to pass on up to £1m without an IHT charge, is particular complex and seems poorly targeted.
And then there’s pensions. The relief here, however, is mainly a timing difference. Contributions are tax deductible, but pension income is taxable, and so over an individual’s lifetime it (mostly) balances out. It is, however, becoming increasingly difficult to justify giving relief at an individual’s highest marginal rate, so that the benefit of the relief goes disproportionately to the highest earners. Rumours of restricting pensions relief to a single rate – perhaps 20%, or 25%, or 30% – have been circulating for some years now, but changes to pensions tax rules have been made far too frequently over recent years, and the system is now hugely complex. There have recently been a number of press reports about the unintended consequences for doctors, many of whom are retiring early rather than face significant tax bills. If further changes are to be made, they need to be part of coherent reform which is followed by a period of stability – it is hard for people to make long-term savings decisions when the system is constantly changing.
All of those ‘big three’ reliefs are best described as structural reliefs. What about those which are intended to change behaviour, such as R&D tax credits or entrepreneurs’ relief? Here, there is a strong argument for more robust cost benefit analysis, and ongoing monitoring to ensure that reliefs continue to achieve their original objectives. Sometimes, reliefs persist long after they have outlived their original purpose: tax relief for the costs of keeping and maintaining a horse, for the purposes of enabling an employee to perform his duties, was only abolished in 1998!
Some have suggested that there should be an automatic ‘sunset’ clause, so that from the outset a relief is only available for a specific period of time. However, the abolition of MIRAS (mortgage interest relief at source) in 2000 led to a rush by many people to take out a loan while relief was still available, arguably adding fuel to the house price boom and the subsequent crash. For a relief which attracted huge attention at the time, it is notable that the average benefit was all of £17.37 per month. So announcing significant changes needs to be well managed, and part of a coherent policy agenda. The corporate tax road map from 2010 was a good example of a government setting out its strategy and direction of travel, whether or not you agreed with its objectives.
In summary, more work could be done to establish more clearly the costs and benefits of tax reliefs, and whether it is time for any to be abolished. But reforms need to be part of a clearly articulated policy agenda, and will inevitably be unpopular with those who are losing tax benefits. Politicians need to be prepared for this, and to set out their case for change. Experience shows that major changes to the tax system tend to happen early in the life of a government with a large majority (Lawson in 1984, and Brown in 1997), so it will probably be some time before we see significant reforms to tax reliefs.
