A bonfire of the tax reliefs?

A bonfire of the tax reliefs?

Richard Asquith, VP of global indirect tax at Avalara, joins Accountancy Age as a new monthly columnist, bringing you expert insights from the world of tax and more

Richard Asquith, Avalara

Short of £20 billion? ‘Spreadsheet Phil’ Hammond, the UK Chancellor, is. And with the Brexit dividend funding source melting away at the prospect of stuttering negotiations, a fresh look at a number of questionable tax reliefs is timely. But a lack of HRMC data, erratic forecasting and management will put billions of potential savings beyond his reach.

£400bn tax reliefs overdue scrapping

HMRC says the UK provides £400bn in tax reliefs each year – that’s 50 percent of the UK’s annual tax revenues. The top ten reliefs account for 94% of this; mostly income tax and NIC thresholds (38%), and reduced VAT reliefs. These are probably going to stay untouched given the Conservative party’s desperation to cling onto its low-tax credentials as Brexit risks a new general election.

So what else is lurking in the pot of over 1,100 tax reliefs that could cover the promised health care funding deficit?  Three stick out particularly as ineffective and failing to meet the criteria for an effective relief – creating positive behaviours to engender wealth creation, and curb profligacy.

A relief deserving retirement

Everyone likes to forecast the end of higher tax rate relief on pension contributions. But the £24 billion relief has never looked more past its sell-by-date – almost 70 percent of the relief goes to higher and additional rate payers. A progressive reform would end a tax break for the middle class that has never been particularly efficient at encouraging widespread retirement savings. It’s time to end, or at least curb it, and redirect the savings to boost pensions for the lowed income tax payers, and fund healthcare needs.

Entrepreneurs rewarded after crossing the finishing line

Entrepreneurs’ Relief, costing the Exchequer £2.7 billion, is a reduced Capital Gains Tax of ten percent on the first £10 million gain (the standard CGT rate is 18 percent or 28 percent) for small business owners when they sell up. Most of us would agree start-ups are a key foundation for innovation and thriving economy, particularly as the economy pivots to the self-employed ‘gig’ model. But providing a tax break after the business is sold-up seems a perverse point to try incentivize any owner, and unlikely to be an incentive for someone considering creating a new business.

The relief was initially expected to cost less than £500m per annum. So the sums and rational look poor enough to withdraw it.

Cheering on the low-skilled economy to subsidise Corporation Tax cuts

Not all reliefs are poorly directed. Research & Development credits are good value – studies show for every £1 of R&D tax credit, UK firms spend an additional £1.53 to £2.35 on innovation. Yet the UK only grants £2.5 billion in credits compared to France’s £5.5m or Germany’s £4.5m (grants). The outcome is the UK significantly lagging all other EU countries in productivity due to lack of investment. In the first quarter of 2018, UK productivity actually fell by 0.4 percent, and continues to rely on a low-skill and poorly-paid workers to maintain its international competitiveness.

With this lack of reliable inputs to comprehensively evaluate the £400bn in tax relief, the government is more likely to put most of the worst offenders on the bonfire.

So why do we have such a dysfunctional innovation relief? Well. it’s largely to fund the headline-grabbing Corporation Tax cuts from 28 percent in 2010 to 17 percent in 2020.  These reductions did not fund themselves as often claimed by supporters pointing to unchanged revenues. Instead, they were flattered by the reductions to capital allowances.

Again, a rethink is called for to stop the wasted investment in innovation. This will become particularly important as the government tries to redefine what the UK is post-Brexit – an offshore low-cost manufacturer, and a technology-driven global exporter.

HMRC culpable of incomplete evaluation puts shroud over further £14bn reliefs

There are many more such poor designed reliefs which probably need pairing back, from Agricultural Property Relief through to VAT relief on new constructions. But the necessary inputs for evaluation are inadequate, and it is unclear if their objectives are being met. The way HMRC looks at reliefs is to consider the tax they generate and the administrative burden they create for tax payers. But there is not enough focus on the costs incurred, and much of what exists is estimated, so comparisons are difficult. This is a major reason why there are so many poorly evaluated reliefs.

With this lack of reliable inputs to comprehensively evaluate the £400bn in tax relief, the government is more likely to put most of the worst offenders on the bonfire.

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