Hodge: More thorough accounting required for tax reliefs

GREATER and more thorough accountability is required over the tax relief system, Public Accounts Committee chairwoman Margaret Hodge told HM Revenue & Customs in this year’s first hearing.

In November, a National Audit Office report found the Treasury and HMRC “lack the framework” to adequately guide the administration of tax reliefs, which the government estimates costs the public purse around £100bn per year.

Some reliefs are structural parts of the tax system, or to ensure the correct calculation of profits. Other reliefs, sometimes described as ‘tax expenditures’, are designed to encourage a particular behaviour towards a social or economic policy objective.

“Treasury chooses through the introduction [of a particular relief] and it’s a real expenditure – over £100bn – and one is accountable and the other [HMRC] is hidden,” Hodge (pictured) said. “Some tax reliefs are brought in to have a specific purpose – theatre tax reliefs were brought in to encourage more regional productions; film tax relief was brought in to encourage British production of films.

“What we’re doing here, as a country is we’re giving money to [an area of concern] in part through a grant and in part through a relief. They should be taken together and accountable together. At the moment, only the budget is accountable, and not the tax relief.”

The NAO report found that the Treasury and HMRC have failed to identify which tax reliefs are intended to change behaviour in order to deliver targeted policy objectives. Moreover, they do not monitor or report on the costs and benefits of the reliefs, and as such the government and public at large cannot hold them to account.

HMRC detected large-scale abuse of share loss relief in 2006/07 but did not check the total amount of claims in 2006/07 or subsequent years to check whether there were other unexplained surges. In 2006/07, the cost of claims against income tax for share loss relief rose from £385m to £1.3bn in real terms. HMRC is investigating 80% of the 2006/07 claims by value (£964m).

“There are a variety of influences on costs,” HMRC chief executive Lin Homer said at the hearing. “We should be held accountable for watching these things.

“It is entirely acceptable for you to ask me whether we [at HMRC] are implementing policy in a way that is efficient, and effective, and value for money. It is me who is accountable for that.

“But the first question [of] whether the costs had increased, not the implementation of them, but the costs, is something different, and that may be a policy question,” she explained.

Related reading

tax dictionary