Analysis: The PAC and the merits of tax reliefs

ON MONDAY, the PAC began its inquiry into “the variety of tax reliefs used in the UK and how they are administered” by questioning HMRC chief executive Lin Homer and Sir Nicholas Macpherson, permanent secretary at the Treasury.

The committee says on the Parliament website that it does not consider the formulation or merits of policy. Margaret Hodge, its chairman, said its role was to “test the effectiveness” of policies. She began by asking Homer: “How many tax expenditures are there?”

The National Audit Office had noted that tax expenditures provided “behavioural incentives to achieve economic and social objectives”. They were often an alternative to public expenditure and had similar effects.

What a relief

But the number of tax expenditures – among the 1,128 reliefs identified by the NAO – was not a headline figure in the NAO report. The authors had highlighted instead the cost of tax expenditures, and that was estimated at £101bn.

Homer began her response by saying there were “about £101bn worth” and she referred to an Office of Tax Simplification report that looked at about 159 reliefs. Hodge had interrupted Homer five times by the time Homer suggested that, if you looked at all reliefs, “about 150” would be tax expenditures.

In fact, the NAO reported that HMRC had identified 46 reliefs as tax expenditures, and it noted that HMRC had established five dedicated units to oversee nine of those. There was “limited monitoring” of changes in the cost of particular reliefs.

Asked to clarify the numbers, an HMRC spokesperson said: “In her response Lin Homer was referring to the reliefs that the OTS examined. HMRC publishes tables showing tax expenditures and structural reliefs. A number of minor reliefs are not classified in those tables, and, as you can see from the data we publish, many reliefs have both structural and expenditure components. The NAO identified 46 of these reliefs for the purpose of its study.”

How would Homer have responded during the hearing if she was given more time to think about the question? That first exchange was not typical of Monday’s hearing but Hodge’s confrontational approach has irritated some tax professionals, who point to the Treasury Committee’s more constructive approach.

Positive vibes

On the other hand, there was a good deal to be positive about on Monday, and by the end of the hearing Hodge was congratulating HMRC on recent successes in avoidance cases. “We are really pleased to see that there are more cases going to court, Lin. That is brilliant,” she said.

Homer and Macpherson faced questions on a range of issues from tax relief for interest paid by the big multinationals, to tax relief for luncheon vouchers. Hodge said she had looked at the OTS’s review on tax reliefs (published in 2011), and declared that “there are some idiotic things in there”.

She added: “I cannot understand why you carry on [with the 15p exemption for meal vouchers] … Why on earth is that still around?” Macpherson reminded her that Parliament abolished that exemption in 2012.

A more worthwhile discussion followed on late-night taxis and the importance of helping employees to get home safely. Hodge said the relief was “inequitable”. Homer noted that it was not available to everyone and was one of the reliefs that the OTS argued should be abolished. “I almost thought you were arguing to extend it, Chair, which I am sure was not your intention,” she said.

Was the PAC straying into the merits of tax policy? “Either make it fair or get rid of it,” Hodge added. Homer observed that “tax relief is, at its heart, a policy decision”.

Hodge did distinguish between tax expenditures and other reliefs such as the personal allowance, which was “a policy saying ‘we don’t want you guys to pay [tax on income of less than] £10,000′”. Similarly, HMRC had objected to the NAO’s inclusion of the personal allowance, and other reliefs that “simply help define the tax base”, in an illustration of the total cost of tax reliefs compared to GDP.

Tax on film

Much of the discussion concerned film tax relief. A significant backlog of disputes related to the old relief in place before 2007, Homer pointed out. Macpherson said the whole structure of the relief was changed in that year, and “we seem to have ended this as an avoidance opportunity”.

But when Austin Mitchell asked how much of the relief for interest on multinationals’ borrowings went on borrowed money that was spent overseas, Hodge said the record of corporation tax paid by the 800 largest companies was “pretty shocking”. Corporation tax was “a tax that is not meeting the intent that was set by Parliament,” she claimed.

There was some avoidance relating to interest relief, Homer replied, but “it is not predominantly large corporations – it is a much wider risk”. She was content that “we are applying those rules as they are intended to be applied”.

Interest reliefs are being reviewed as part of the OECD’s project to tackle “base erosion and profit shifting”, of course. But the OECD warranted only one mention, during a discussion of the patent box regime that began with Hodge asking Homer what it was for.

Patently fair

Homer said the patent box was introduced to “encourage more innovative R&D”. Glaxo had “invested at least £700m specifically as a result of the patent box and suggested that that has led to the creation of 1,000 jobs”. Hodge was surprised: “In the UK?” she asked. Homer replied: “Yes, and 1,000 jobs in the UK.”

The NAO report was intended to describe the tax reliefs landscape and “put Parliament in a position to consider whether the major elements in the management and responsiveness of the system are working adequately”.

Macpherson said his role was to advise ministers on tax “and then, with Lin’s help, to seek to implement [their] decisions”. There were “quite good feedback loops in terms of whether an allowance or relief is costing as much as we expect”. Homer told the committee: “We do a great deal of monitoring.”

Homer and Macpherson gave a clear and confident account of their work in this respect. It will be interesting to see whether the PAC shares their confidence at the conclusion of this inquiry, which should be relatively short if the committee resists the temptation to use it as a platform to criticise policy.

Andrew Goodall is a freelance tax writer