The Treasury Committee’s examination of the costs of various tax reliefs and how they are monitored
At the start of 2023, HMRC issued its latest estimates for the costs of various tax reliefs. This divides tax reliefs into two parts:
- ‘Structural’ tax reliefs, which HMRC defines as being ‘largely integral parts of the tax structure’. The category covers reliefs which have various purposes within the tax system, e.g. to define the scope of the tax, calculate income or profits correctly, and make the tax progressive or to simplify. For instance, the personal allowance (estimated cost £119bn in 2022/23) counts as structural.
- ‘Non-structural’ tax reliefs are, by contrast, reliefs that HMRC says are designed ‘to help or encourage particular types of individuals, activities or products in order to achieve economic or social objectives’. Examples includes the private residence relief (estimated cost £35.2bn in 2022/23).
HMRC’s latest estimate is that there are 1,180 tax reliefs in force, of which 841 are structural and 339 are non-structural. The top five in each category with their estimated 2022/23 costs are:
| Structural relief | Cost £m |
| Personal allowance | 119,200 |
| Primary Threshold | 37,200 |
| Secondary Threshold | 34,100 |
| Inheritance tax Nil Rate Band | 24,800 |
| Finance and insurance VAT exemption | 16,300 |
| Total | 254,400 |
| Non-structural relief | Cost £m |
| Private Residence Relief | 35,200 |
| Contributions to, and benefits from, registered pension schemes (NICs) | 27,800 |
| Registered pension schemes (income tax) | 27,000 |
| Food VAT exemption | 22,500 |
| Construction/sale of dwellings | 16,900 |
| Total | 129,400 |
Such large numbers inevitably attract the attention of the Treasury Committee, which has just published a report on tax reliefs. It makes a range of recommendations, including:
- The Treasury’s commitment to simplifying the tax system (following the demise of the Office of Tax Simplification) ‘cannot merely focus on proposed new policies’.
- The Government should undertake a comprehensive and systematic review of existing tax reliefs to look for opportunities for simplification. In doing so, they should focus on ways of making it easier for taxpayers to adhere to the rules.
- There are 1,180 tax reliefs, but HMRC only publishes estimated cost data for 365, leaving 815 uncosted. Tax reliefs require adequate data to be collected and published to inform proper policymaking or accountability. To bridge this gap, HMRC should publish cost data for all tax reliefs from the 2025/26 tax year onwards.
- The Treasury should reclassify tax reliefs as Government expenditure, thereby subjecting them to established value for money assessments, which should lead to improved scrutiny and ultimately better policy.
- The Government should consider how to ensure that the relevant delivery department accepts greater responsibility for the budgeting for each non-structural tax relief, those designed to promote particular behaviours, in conjunction with the Treasury.
- The Government should monitor tax relief for indications of abuse as part of an ongoing review process. It should also seek and favour external consultation on potential abuse at both policy design and post-implementation monitoring phases.
- Tax reliefs long detached from their original policy purpose clutter up the tax system (e.g. the inheritance tax £250 small gifts exemption). There should be a mechanism within Government to identify and clean them from the statute book.
- A formal, structured system of five-yearly reviews would provide enough time to judge the effectiveness of a tax relief and allow an opportunity to remove or reform those reliefs no longer meeting their objectives.
Comment
The Committee’s ideas are hard to argue against, but their technocratic approach is likely to clash with any Chancellor’s wish to spring a few surprises on Budget Day.