Ministers do not know whether tax reliefs that cost the public purse £117bn a year have the effect they are supposed to or are just “freebies”, MPs have said.
In a new report, the Public Accounts Committee said the UK’s ten most expensive tax reliefs cost the equivalent of 5% of GDP in foregone revenue.
But they say the government’s “scant” evaluation of the breaks can only demonstrate that one of the four reliefs costing more than £1bn a year does what it is intended to do.
“Among the most expensive, pension reliefs, was forecast to cost £38bn in 2018-19 – but the government has not made any assessment of whether that huge cost actually encourages saving for retirement or reduces dependence on state retirement benefits, or whether it just enables those already saving comfortably to save more,” the cross-party group of MPs said.
They added: “The £15bn cost of VAT relief on the construction of new dwellings may subsidise new luxury properties, or affordable homes: the government doesn’t know.”
The committee is warning that HM Revenue and Customs still does not “systematically” measure whether tax reliefs change behaviour in the way they are intended, despite MPs demanding they do so back in 2015.
They are giving the tax authority three months to start spelling out how they will measure the effectiveness of the policies, and set the government a one-year deadline to review whether pension tax reliefs do what they are intended to do.
Committee chair Meg Hillier said: “Tax breaks are not freebies – they cost the public purse hundreds of billions of pounds in lost income.
“The government must know who they benefit and to what end. It’s all still taxpayers’ money and government must account for it.”
Writing for CSW's sister publication The House Live, fellow committee member Nick Smith said it was “clear that the system of tax reliefs is in desperate need of an overhaul”.
He added: “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.”
But a government spokesperson said: “HMRC and [the Treasury] are constantly working to improve the transparency of reliefs and the National Audit Office has recognised the improvements in increasing oversight.”
They added: “HMRC has further committed to expanding the coverage of the cost estimates we publish to provide more information on the cost of reliefs while strengthening the approach to evaluations.”
Tax probe
The warning from MPs came as the separate Treasury Committee launched an inquiry into how the tax system may need to change in the wake of the coronavirus pandemic, which has seen a sharp rise in government borrowing.
Committee chair Mel Stride said: “The UK economy, like many economies around the world, has been placed under extraordinary stress due to coronavirus, with the worst of the economic fallout perhaps yet to come.
“Tax will play a major role in the years ahead in restoring the public finances and ensuring that we have a recovery which is balanced across the UK and fair to all.”
Matt Honeycombe-Foster is acting editor of CSW's sister title PoliticsHome, where this article first appeared.