Report
by the Comptroller
and Auditor General
HM Revenue & Customs, HM Treasury
The management
oftaxexpenditures
HC 46 SESSION 2019-20 14 FEBRUARY 2020
A picture of the National Audit Office logo
Our vision is to help the nation spend wisely.
Our public audit perspective helps Parliament hold
government to account and improve publicservices.
The National Audit Office (NAO) helps Parliament hold government to account for the
way it spends public money. It is independent of government and the civil service.
TheComptroller and Auditor General (C&AG), Gareth Davies, is an Officer of the
House of Commons and leads the NAO. The C&AG certifies the accounts of all
government departments and many other public sector bodies. He has statutory
authority to examine and report to Parliament on whether government isdelivering
value for money on behalf of the public, concluding on whether resources have been
used efficiently, effectively and with economy. The NAO identifies ways that government
can make better use of public money to improve people’s lives. Itmeasures this impact
annually. In 2018 the NAO’s work led to a positive financial impact through reduced
costs, improved service delivery, or other benefits to citizens, of £539 million.
Report by the Comptroller and Auditor General
Ordered by the House of Commons
to be printed on 12 February 2020
This report has been prepared under Section 6 of the
National Audit Act 1983 for presentation to the House of
Commons in accordance with Section 9 of the Act
Gareth Davies
Comptroller and Auditor General
National Audit Office
11 February 2020
HC 46 | £10.00
HM Revenue & Customs, HM Treasury
The management
oftaxexpenditures
This report examines the economy, efficiency and
effectiveness of how the exchequer departments used
their resources with regard to the design, administration,
monitoring, evaluation and management of tax expenditures.
© National Audit Office 2020
The material featured in this document is subject to
National Audit Office (NAO) copyright. The material
may be copied or reproduced for non-commercial
purposes only, namely reproduction for research,
private study or for limited internal circulation within
an organisation for the purpose of review.
Copying for non-commercial purposes is subject
to the material being accompanied by a sufficient
acknowledgement, reproduced accurately, and not
being used in a misleading context. To reproduce
NAO copyright material for any other use, you must
contact [email protected]. Please tell us who you
are, the organisation you represent (if any) and how
and why you wish to use our material. Please include
your full contact details: name, address, telephone
number and email.
Please note that the material featured in this
document may not be reproduced for commercial
gain without the NAO’s express and direct
permission and that the NAO reserves its right to
pursue copyright infringement proceedings against
individuals or companies who reproduce material for
commercial gain without our permission.
Links to external websites were valid at the time of
publication of this report. The National Audit Office
isnot responsible for the future validity of the links.
006585 02/20 NAO
The National Audit Office study team
consisted of:
Matthew Wilkins, Tim Bryant,
TraceyPayne and Ronan Smyth,
underthe direction of Andy Morrison.
This report can be found on the
National Audit Office website at
www.nao.org.uk
For further information about the
National Audit Office please contact:
National Audit Office
Press Office
157–197 Buckingham Palace Road
Victoria
London
SW1W 9SP
Tel: 020 7798 7400
Enquiries: www.nao.org.uk/contact-us
Website: www.nao.org.uk
Twitter: @NAOorguk
Contents
Key facts 4
Summary 5
Part One
The number and cost
oftaxexpenditures 14
Par t Two
The design and monitoring
oftaxexpenditures 24
Part Three
The evaluation and review
oftaxexpenditures 38
Appendix One
Our audit approach 46
Appendix Two
Our evidence base 48
Appendix Three
Key reports covering tax reliefs and
HMRC andHM Treasury’s response 51
If you are reading this document with a screen reader you may wish to use the bookmarks option to navigate through the parts. If
you require any of the graphics in another format, we can provide this on request. Please email us at www.nao.org.uk/contact-us
4 Key facts The management of tax expenditures
Key facts
£155bn
sum of the estimated
costs of ‘tax expenditures’
in 2018-19 (tax reliefs
supporting government
objectives)
5%
real increase in summed
estimated cost of tax
expenditures, 2014-15
to2018-19
£11bn
estimated 2018-19 cost
of tax expenditures with
published evaluations
since 2015
362
number of tax expenditures (tax reliefs supporting
governmenteconomic and social objectives)
111
number of tax expenditures that HM Revenue & Customs has costed
23
number of tax expenditures with a forecast cost of more
than£1billion in 2018-19
63
tax reliefs HM Treasury assessed for value for money as
part of a monitoring exercise by 2019
15
number of tax expenditures with published evaluations since 2015
The management of tax expenditures Summary 5
Summary
Introduction
1 The UK tax system had 1,190 tax reliefs as at October 2019. A tax relief reduces
the tax an individual or business owes. There are two broad categories of tax reliefs:
structural tax reliefs that are largely integral parts of the tax system and define the scope
and structure of tax (such as the personal tax allowance); and non-structural tax reliefs
where government opts not to collect tax to pursue social or economic objectives.
Non-structural tax reliefs are often referred to as ‘tax expenditures’ and we use this
description in this report. Examples include tax credits for companies’ research and
development (R&D) costs and income tax relief on pension contributions. Some tax
expenditures simply reflect a policy choice by ministers to support particular groups
or sectors (for example the housing market), while others are designed to incentivise
behaviour. Some tax reliefs can be difficult to classify because they have more than
oneobjective and include elements of both tax expenditures and structural reliefs.
2 Tax expenditures are an important part of public policy design. They cover most
areas of government activity, including welfare, housing, business, food, education,
health and transport. They can also make the tax system more complicated and less
transparent, and they could pose risks to public finances because their costs can rise
beyond expectations. Tax expenditures differ from public spending in that they reduce
the amount of tax collected, rather than consume resources after tax is collected.
However, they are similar in that both affect the public purse and can be used to
pursuediscrete policy objectives.
3 The UK had 362 tax expenditures in October 2019, with HM Revenue & Customs
(HMRC) reporting the cost of 111. These tax expenditures had a combined estimated
cost of £155 billion in 2018-19. Aggregating the cost of tax expenditures gives a sense
of their scale, but it does not reflect the amount of tax that would be generated if tax
expenditures were removed because some taxpayers would change their behaviour
andthere may be wider economic impacts.
4 Ministers propose policy changes to introduce or amend tax expenditures as part
of the Budget. Parliament undertakes scrutiny of tax policy including tax expenditures
as part of the Budget process and through the work of the Treasury Select Committee.
HM Treasury and HMRC (the exchequer departments) are responsible for all aspects
of the effective working of the UK tax system including tax expenditures. HM Treasury
is responsible for strategic oversight of the tax system and HMRC is responsible for
administering the system. The Accounting Officers of HM Treasury and HMRC are
accountable to the Committee of Public Accounts for the economy, efficiencyand
effectiveness of the resources they use to discharge their responsibilities, including
thework they carry out to manage tax expenditures.
6 Summary The management of tax expenditures
5 Along with the Committee of Public Accounts, we have repeatedly raised concerns
about the departments’ management of tax reliefs. In our 2014 report, Theeffective
management of tax reliefs, we found that neither department had frameworks or
principles to guide their administration of tax reliefs. In 2016, we reported that while HMRC
had developed internal guidelines for managing reliefs, staff did not understand they were
compulsory. In 2018, the Committee of Public Accounts concluded that HMRC did not
know whether a large number of tax reliefs were delivering value for money. HMRC and
HM Treasury have responded to our recommendations by increasing their oversight of
taxexpenditures and actively considering their value for money. In 2019, HMRC informed
the Committee that, whilst both HM Treasury and HMRC are responsible for advising
ministers, the prime responsibility for advising ministers on the value for money of tax
reliefs lies with HM Treasury.
6 In July 2019, the Office for Budget Responsibility (OBR) identified the costs of tax
reliefs as one of four new fiscal risks to the public finances. The OBR was concerned
that: the government did not know the full cost of tax reliefs; that tax reliefs lacked
transparency and scrutiny; and added complexity to the tax system.
Scope of this report
7 This report examines the effectiveness of HM Treasury’s and HMRC’s use
of their resources in the management of tax expenditures. Government spending
is governed by HM Treasury’s Managing Public Money but there is no equivalent
guidance for tax expenditures. The rules governing the tax system are set out in
legislation which Parliament scrutinises through the Finance Bill process. The exchequer
departments provide information needed to support decision-making. How the
exchequer departments monitor and evaluate tax expenditures informs government’s
understanding of the value for money of tax expenditures. In this report we examine
howHM Treasury and HMRC manage tax expenditures overall and examine their
oversight and administration across the lifecycle of tax expenditures, specifically:
•
the number and cost of tax expenditures (Part One);
•
design and monitoring of tax expenditures (Part Two); and
•
the evaluation and review of tax expenditures (Part Three).
8 Under section 6 of the National Audit Act 1983, the Comptroller and Auditor
General (C&AG) examines the economy, efficiency and effectiveness of the way that
government departments use their resources in discharging their functions, including
themanagement of tax expenditures. Our assessment is informed by deeper dives
intohow the departments used their resources to administer and oversee nine
established tax expenditures and design three that were new or recently amended
(Figure 1 on pages 7 and 8). We have not setout to conclude on the value for money
of specific tax expenditures. Our audit approach is set out in Appendix One and our
evidence base in Appendix Two.
The management of tax expenditures Summary 7
Figure 1 shows Case study tax expenditures covered in this report
Figure 1
Case study tax expenditures covered in this report
We looked at tax expenditures which supported a range of objectives and had differing ages and cost
Description
Objective When introduced Cost 2018-19
1
(£m)
1
Zero rating of VAT on the construction and sale of
new dwellings (residential and charitable buildings).
Support housing construction Long-standing
(40+ years)
14,800
2
Relief from inheritance tax on agricultural property. Support continuity of
farmingbusiness
315
Research and Development (R&D) reliefs:
Support research and
development activity
Established
(6 to 39 years)
3
Small- and medium-sized enterprises 2,515
4
R&D expenditure credit
2
2,340
R&D reliefs provide an extra deduction from
companies’taxable income for R&D expenditure.
Loss-making companies can receive a tax credit.
5
Entrepreneurs’ relief – reduces capital gains tax
to10% for sales of certain assets (for example,
sellinga business or shares in a business).
Encourage enterprise 2,200
6
Patent box – reduces the corporation tax rate to
10%for profi ts from patented inventions.
Support commercialisation
of innovation, and attract and
retain intellectual property
1,150
7
Film tax relief – fi lm production companies can
claim additional corporation tax relief for fi lm
production expenditure in the UK.
3
Loss-making
companies can receive a tax credit.
Support UK film industry 550
8
Relief on employer National Insurance
Contributions for employees under 21.
Encourage employment
ofunder-21s
Recently established
(3 to 5 years)
610
9
Relief on employer National Insurance
Contributions for apprentices under 25.
Encourage apprenticeships 160
10
Enterprise investment scheme – a venture capital
scheme that grants income and capital gains tax
reliefs to individuals investing in small companies.
Encourage investment
in companies with high
potentialgrowth
New or
recentlyamended
720
4
11
Relief on stamp duty land tax for fi rst-timebuyers
(noduty or reduced rates on homes up to £500,000).
Support home ownership
andfirst-time buyers
520
12
Structures and buildings capital allowance
– companies carrying out capital works on
non-residential buildings can make a deduction
fromprofi ts over a 50-year period.
5
Support business investment –
6
8 Summary The management of tax expenditures
Figure 1 shows Case study tax expenditures covered in this report
Key findings
The number and cost of tax expenditures
9 Tax expenditures represent a large and growing cost to the Exchequer.
InJuly 2019, the OBR reported that the known cost of tax expenditures had risen in
thepast decade. Our analysis of latest data published by HMRC in October 2019 shows
that, between 2014-15 and 2018-19, the cost of tax expenditures increased by 5% in
realterms, from £147 billion to £155 billion (forecast). Twenty-three tax expenditures
each costing more than £1 billion accounted for 92% of the total forecast cost in
2018-19. The largest tax expenditures were the reliefs on pension contributions, the
reliefs from VAT on food and new dwellings, and the relief from capital gains tax on
people’s main homes (paragraphs 1.5, 1.15 to 1.17 and Figure 3).
10 HMRC has committed to publishing more information on the cost of tax
expenditures. HMRC has calculated the cost of 111 of 362 tax expenditures. It plans
toestimate the costs for more tax expenditures between 2020 and 2022, prioritising
those tax expenditures it regards as higher risk (paragraphs 1.5, and 1.18 to 1.19).
11 The number of tax expenditures presents government with a significant
oversight challenge. The International Monetary Fund states that tax expenditures
require the same amount of government oversight as public spending. The scale of tax
expenditures in the UK is larger than most other countries and it will be challenging to
give tax expenditures the same amount of attention as spending. HMRC is improving
its understanding of the different types of tax expenditures by categorising tax
expenditures by purpose. Its initial work indicates that many are intended to incentivise
behaviour. While HMRC’s new categorisation is useful in understanding the broad
types of tax expenditures, it is not sufficiently detailed to group those targeted at similar
sectors or those with similar social or economic objectives (paragraphs 1.6, 1.7, 1.13,
1.14, 1.20 to 1.21 and Figure 4).
Notes
1 Most 2018-19 costs are projections based on previous years’ actual data. Projections are shown in italics
todistinguishfrom actuals.
2 R&D expenditure credit is mainly claimed by large companies, although it is available to small- and medium-sized
enterprises in certain circumstances.
3 Expenditure must be on goods and services used or consumed in the UK to qualify for fi lm tax relief.
4 Cost is the total of the income tax (£600 million) and capital gains (£120 million) elements of the tax expenditure.
5 Some capital allowances have elements of both structural reliefs (that is, they help defi ne the boundaries and
thresholds ofthe tax system) and tax expenditures. Tax expenditures are tax reliefs which government uses
toencourage particular groups, activities or products in order to achieve economic or social objectives.
6 HM Revenue & Customs reports the total cost of all capital allowances rather than the cost of each allowance
suchasstructures andbuildings.
Source: National Audit Offi ce
Figure 1 continued
Case study tax expenditures covered in this report
The management of tax expenditures Summary 9
The design and monitoring of tax expenditures
12 The exchequer departments are improving their oversight of tax
expenditures. In 2016 HMRC set up a central team to oversee its management of tax
reliefs. The team identified the officials responsible for specific reliefs and established
compulsory guidance. It introduced a framework to record information on reliefs in a
consistent manner across the Department. In 2017, HM Treasury piloted monitoring
of tax expenditures, prioritising those with specific policy objectives worth more than
£40million a year. By 2019 it had informally assessed whether 63 tax reliefs werevalue
for money, as part of its policy-making process. The exchequer departments’ monitoring
processes are still in development, and not yet integrated with oneanother. They plan to
develop a single framework for administering and reviewing tax expenditures, drawing on
relevant UK and international good practice (paragraphs 2.9 to 2.14).
13 When designing tax expenditures, HM Treasury has not given enough
consideration to how it will measure impact. When designing a new tax expenditure
HM Treasury undertakes many of the activities that we would expect at this stage
including consulting with relevant stakeholders. However, we did not find any cases
among tax expenditures introduced since 2013 where government had set out plans
for their evaluation at design stage, or triggers for evaluation if costs or benefits differed
significantly from their forecasts (paragraphs 2.3 to 2.6 and Figure 9).
14 Some tax expenditures cost far more than government’s published forecasts
indicated. HMRC does not compare the actual costs of tax expenditures to the
government’s original published forecasts available to Parliament. HMRC told us that
published forecasts are made on a different basis to the actual costs and a number of
factors make meaningful comparison difficult. For example, the forecasts can include
the impact on public finances of other changes to the tax system, other elements of
tax revenue or wider economic impacts, which may not be directly comparable to the
full cost of the tax expenditure. Even so, HMRC could take these factors into account
to make meaningful comparisons, which would help it better understand costs. We
compared forecast and actual costs for 10 tax expenditures, adjusting for differences
as far as possible with the data available. The comparison indicated large differences
forsome tax expenditures:
•
For five tax expenditures introduced since 2013, including three of the four largest,
data indicated costs were generally in line with original forecasts.
•
For the R&D expenditure credit, and four smaller tax expenditures introduced
since2013, data indicated costs exceeded forecasts by50% or more.
It was more difficult to compare forecasts and actual costs for tax expenditures
introduced before 2013. However, we found that the costs of three of our case study
taxexpenditures had grown from around £1 billion in 2008-09 to around £5 billion in
2017-18, much faster than the trends indicated in published forecasts (paragraphs 2.16
to 2.20 and Figures 10 to 12).
10 Summary The management of tax expenditures
15 HMRC has not fully investigated some large changes in costs. Cost increases
may indicate that a tax expenditure is working well, or that it is being used in ways not
intended. However, this can be difficult to determine without a substantive assessment.
HMRC had identified reasons for large changes in cost for all the established case study
tax expenditures we looked at. However, it did not normally test how far the reasons
explained cost movements, or compare its costs estimates with other data. Of the nine
cases we looked at, HMRC checked cost changes against independent data for only
agricultural property relief and R&D reliefs. For R&D reliefs, HMRC compared the total
R&D companies had claimed in tax returns for UK and overseas activity, with national
statistics on total UK (only) R&D activity. This comparison revealed that the R&D activity
companies had claimed was rising more quickly, and in 2016-17 exceeded all UK R&D
activity by 43%. HMRC is in the process of investigating the reasons for trends in data
(paragraphs 2.17, 2.21 to 2.24 and Figure 13).
16 R&D tax reliefs have been subject to increased levels of abuse. HMRC does
not hold data on tax lost from abuse and error for all tax expenditures. However, it has
developed a single view of the 63 main compliance risks it faces. Six of these risks
are specific to tax reliefs. Some of the other risks partly arise from tax reliefs, although
HMRC’s data do not show the significance of reliefs. Of the six tax relief-specific risks
it has identified, the risks were increasing for three. The risk arising from the R&D tax
expenditures was increasing the most. In 2017 and 2018 HMRC identified more tax
at risk from poor-quality R&D claims, and from abuse by companies with a limited UK
presence. In 2018 HMRC substantially increased its estimate oftax at risk from the R&D
tax expenditures to a level which indicated further action wasrequired. The time needed
to train new staff and develop new systems has affectedthe pace of HMRC’s response
(paragraphs 2.25 to 2.27).
The evaluation and review of tax expenditures
17 HMRC has formally evaluated only a minority of tax expenditures. HMRC
commissions and undertakes evaluations of few tax expenditures. Since 2015, HMRC
has published evaluations of 15 tax expenditures, representing just 7% (£11 billion) of
theaggregate forecast cost of tax expenditures in 2018-19. HMRC has evaluated only
five of 23 tax expenditures costing more than £1 billion, and less than half of the large
tax expenditures experiencing the fastest cost growth (paragraphs 3.2 to 3.4).
18 HMRC’s evaluations of tax expenditures suggest that their effectiveness
varies widely. Evaluations published since 2015 by HMRC have assessed the impact
of 13 of the 15 tax expenditures covered. These evaluations found that seven of these
tax expenditures (costing £3.6 billion in 2018-19) were having a positive impact on
behaviour,and one (costing £1.4 billion) had had a mixed impact. However, five tax
expenditures costing £5.2 billion had only a limited impact. Notably, a 2017 evaluation
found that only 8% of people claiming entrepreneurs’ relief in the previous five years
saidit had influenced their investment decision-making. The relief costs the Exchequer
more than £2 billion a year (paragraph 3.6 and Figure 14).
The management of tax expenditures Summary 11
19 HM Treasury has developed internal, informal processes for assessing the
value for money of tax expenditures. HM Treasury reviews the tax system annually,
including tax expenditures, as part of the Budget. In addition to this HM Treasury started
a monitoring exercise in 2017 as a tool for collecting information and officials’ views
to help inform advice to ministers. HM Treasury’s monitoring assessments have rated
the value for money of 63 tax reliefs. HM Treasury told us these are internal, informal
assessments that do not represent the formal view of the Department and should
not be published because they are part of policy advice to ministers. We looked at
monitoring templates for eight case studies and found that the assessments ask many
of the questions we would expect, but that the quality of information underpinning the
assessments was variable. HM Treasury was better placed to assess tax expenditures
when it had information available from recent HMRC evaluations. In the case of the R&D
expenditure credit HM Treasury based its assessment on an evaluation of the previous
scheme aimed at large companies. HM Treasury undertakes limited quality assurance
ofits value-for-money assessments (paragraphs 1.22, 2.13, 3.7 to 3.12 and Figure 15).
20 There is no formal documentation specifying explicitly the departments’
accountabilities for the value for money of tax expenditures. In 2014, HMTreasury
set out its view on accountability for tax reliefs but it did not specifically consider
accountability for value for money. In 2019, HMRC informed the Committee of
Public Accounts that the broader question of the value for money of tax reliefs is the
responsibility of HM Treasury, with HMRC providing relevant advice as part of the tax
policy partnership in the normal way. Policy decisions on the value for money of tax
expenditures are for Treasury ministers, who are ultimately accountable to Parliament
for the tax system and policy. HM Treasury officials are accountable for providing
ministers with high quality advice to make those decisions. HMRC officials also carry
out administrative functions which influence the cost and impact of tax expenditures.
For example, clear guidance, promoting take-up to target groups, action to tackle
abuseand timely reporting can all help to improve value for money (paragraphs 1.8
to1.13, 2.25 to 2.27 and 3.13 to 3.16).
21 Public reporting has improved but does not yet provide the information
necessary to assess the value for money of tax expenditures. HM Treasury
ministers are accountable to Parliament for the value for money of tax expenditures.
Aspart of the legislative process the government publishes costings and ‘tax
information and impact notes’ and ministers outline their aims to Parliament. However,
government does not publish the information necessary for scrutiny of the value for
money of existing tax expenditures. HMRC’s statistical bulletin is much improved but
still contains very limited information on the benefits achieved by tax expenditures, only
limited commentary on their cost trends, and although HMRC included estimates for
the number of claimants for the first time in January 2019, there is no trend data on the
number of claimants. The bulletin does not explain how costs and benefits differ from
the original published forecasts. Other countries have more comprehensive evaluation
and reporting despite most having comparatively lower levels of tax expenditures
(paragraphs 1.8, 2.5 to 2.7, 3.15, 3.17 to 3.20 and Figure 16).
12 Summary The management of tax expenditures
Conclusion
22 At a forecast cost of £155 billion in 2018-19, tax expenditures represent an
important means by which government pursues economic and social objectives.
Evaluations show that their impact is not guaranteed, and many require careful
monitoring. We have previously raised concerns about how effectively government
is managing tax expenditures. Both HMRC and HM Treasury have responded to
our recommendations by increasing their oversight of tax expenditures and actively
considering their value for money.
23 While these steps are welcome, they are very much still in development.
Thelargenumber of tax expenditures means it will take time to identify and embed
goodpractices. Both departments need to make substantial progress and ensure
sufficient coverage and rigour in the work they undertake on this matter.
24 On their own these improvements will not be sufficient to address value-for-money
concerns unless the departments formally establish their accountabilities for tax
expenditures and enable greater transparency. Lessons can be learned from other
countries that have established clear arrangements for evaluating and reporting on tax
expenditures. We look to HM Treasury and HMRC to follow suit by clarifying arrangements
for value for money and improving the evaluation and public reporting of tax expenditures.
Recommendations
25 As the custodians of the tax system HMRC and HM Treasury are responsible
for assessing the cost and impact of tax expenditures and communicating this to
decision-makers. We recommend that:
HM Treasury should:
a establish a framework for designing and administering tax expenditures
that is commensurate with the large number of UK tax expenditures.
Theframework should draw on ‘Green Book’ principles, international good
practiceand stakeholder views;
b develop a robust methodology for assessing the value for money of different
types of tax expenditures, ensuring that assessments are quality-assured;
c consider specifying time-periods or triggers for evaluation and review when
designing each tax expenditure;
d each year review whether the objectives of tax expenditures still align with
government objectives; and
e establish and document clear requirements for officials to report concerns
about the value for money of tax expenditures to ministers, for example
byspecifying accountability arrangements.
The management of tax expenditures Summary 13
HMRC should:
f further develop categorisation of tax expenditures according to, for example,
their objectives, scale, age and risks, in order to inform the allocation of administrative
resources in proportion to the cost and impact that tax expenditures are intended
to achieve;
g identify and use independent data sources, where available, to further test
reasons for movements in the cost of high-priority tax expenditures;
h develop a more systematic approach to the evaluation of tax expenditures to
provide greater coverage. We estimate that the external cost of commissioning
evaluations of six tax expenditures a year would likely be between £1 million and
£1.5 million. This estimate does not include the cost of HMRC’s own internal costs,
which could be significant;
i develop an approach so that it understands and can report the differences
between actual and forecast cost for tax expenditures it regards as
high-priority in its published analysis. In cases where it is not feasible to make
acomparison for a high-priority tax expenditure, HMRC should explain why; and
j include trend data on the number of beneficiaries of tax expenditures in
published analysis, where possible, and take account of this within commentaries.
14 Part One The management of tax expenditures
Part One
The number and cost oftaxexpenditures
1.1 The UK had 1,190 tax reliefs as at October 2019. This part of the report examines:
•
the different types of tax reliefs;
•
oversight of tax expenditures and stakeholder concerns;
•
how the number and cost of tax expenditures has changed over time; and
•
understanding of the tax expenditures government needs to administer.
1.2 Part Two considers the design and monitoring of tax expenditures. Part Three
considers their evaluation and review.
Structural reliefs and tax expenditures
1.3 Tax reliefs reduce the tax an individual or business owes. Some can also lead
to apayment. There are two broad categories of tax reliefs: structural tax reliefs and
non-structural tax reliefs, normally referred to as tax expenditures. Structural tax reliefs
are largely integral parts of the tax system. These reliefs have various purposes including
defining the scope of taxes and making taxes more progressive (such as the personal
tax allowance).
1
Tax expenditures are reliefs where government opts not to collect tax
topursue social or economic objectives (Figure 2).
1.4 Tax expenditures are a diverse group, and can be large (such as tax relief on
pension contributions), complex (such as some corporation tax reliefs) or small tax reliefs
intended to recognise certain taxpayers (such as relief on war disablement benefits).
Some tax reliefs can be difficult to classify because they have features of bothtax
expenditures and structural reliefs. The nature of tax reliefs means that they canhave
more than one objective, some incentivise behaviour, while others simply reflect
agovernment policy choice to reduce the tax burden on particular groups or sectors.
1 A progressive tax is a tax that imposes a lower tax rate on low-income earners compared with those with a higher income.
The management of tax expenditures Part One 15
Figure 2 shows Types of tax relief in the UK tax system
1.5 The UK had 362 tax expenditures in October 2019, with HM Revenue & Customs
(HMRC) reporting the cost of 111. The combined cost of these was forecast to be
£155billion in 2018-19.
2
The combined cost does not represent the gain to the exchequer
should tax expenditures be abolished. Revenue generated from abolishing a relief is
likely to be lower as taxpayers change their behaviour and there may be wider economic
impacts. Twenty-three large tax expenditures – each forecast to cost more than £1billion
in 2018-19 – accounted for 92% of the total forecast cost (Figure3 overleaf). The list
in Figure3 is dominated by tax expenditures that provide relief from capital gains on
people’s homes,relief on pension contributions, relief from VAT for certain goods and
services, and reliefs to encourage saving and investment.
2 HM Revenue & Customs, Estimated Costs of Tax Reliefs, October 2019, available at https://assets.publishing.service.
gov.uk/government/uploads/system/uploads/attachment_data/file/837766/191009_Bulletin_FINAL.pdf.
Figure 2
Types of tax relief in the UK tax system
There are two main types of tax relief. HM Revenue & Customs (HMRC) reports costs for a minority of reliefs
Type
Definition Example Number Number where
HMRC reports
cost estimates
2
Aggregate 2018-19 cost
of reliefs where HMRC
reports estimates
(£bn)
1
Structural reliefs Define the boundaries
and thresholds of the
taxsystem.
Income tax
personal allowance.
828 85 271
2
Tax expenditures Encourage particular
groups, activities or
products in order to
achieve economic or
social objectives.
Relief on
contributions to
pension schemes.
362 111 155
Total
1,190 196 426
Notes
1
Costs are the value of the relief to the taxpayer. Costs will therefore change if tax rates are altered. The amount of tax revenue gained if reliefs were
to be removed is likely to be lower than costs as taxpayers would change their behaviour in response and there may be wider economic impacts.
2
Most cost estimates for 2018-19 are projections based on previous years’ actual data.
3
A relief may have tax expenditure and structural elements (that is, it can support government objectives and defi ne the tax system). For example,
mostcapital allowances are structural reliefs in that they replace company estimates of capital depreciation costs when calculating taxable profi t, but the
rates can be preferential where government wants to incentivise capital investment (for example investment in some oil and gas plant and machinery).
HMRC allocates reliefs to the type (that is, tax expenditure or structural) it deems most dominant.
Source: National Audit Offi ce and HM Revenue & Customs,
Estimated Costs of Tax Reliefs, October 2019, and HM Revenue & Customs,
Estimated cost of structural tax reliefs
, October 2019
16 Part One The management of tax expenditures
Figure 3 shows Cost of the largest tax expenditures in 2018-19 for which estimates are available
Figu
re 3
Cost
of the largest tax expenditures in 2018-19 for which estimates are available
The 23 largest tax expenditur
es had a forecast cost of £143 billion, 92% of the forecast cost of all tax expenditures.
The top five cost £98 billion (63%)
1
No
tes
1
This Figure shows all tax expenditures with a cost of more than £1 billion for 2018-19. Most cost estimates for 2018-19 are forecasts as they are projections
based on previous years’ actual data. The exceptions are rebated rate from hydrocarbon oils duty for gas oil (“red diesel”) and Employment Allowance where
actuals are available. Projected values are italicised to distinguish from actuals.
2
Research and development expenditure credit is mainly claimed by large companies, although available to small- and medium-sized enterprises
in certain circumstances.
3
Income of charities includes but is not limited to individual and company Gift Aid.
4
As shown in Figure 2, HM Revenue & Customs reports cost estimates for 111 of the 362 tax expenditures.
5
Tax expenditures are tax reliefs which government uses to encourage particular groups, activities or products in order to achieve economic
or social objectives.
6
Individual values do not sum to the total due to rounding.
Sour
ce: National Audit Office analysis of data from HM Revenue & Customs, Estimated Costs of Tax Reliefs, October 2019
Exemption of gains arising on disposal of only or main residence
Employee contributions to registered pension schemes
Food zero-rated for VAT
Employer contributions to registered pension schemes
Construction of new dwellings zero-rated for VAT
Domestic passenger transport zero-rated for VAT
Domestic fuel and power at reduced rated for VAT
Individual savings accounts
Annual investment allowance
Drugs and supplies on prescription zero-rated for VAT
Research and development for small- and
medium-sized enterprises
Children’s clothing zero-rated for VAT
Exemption from inheritance tax of transfers on
death to surviving spouses
Ring-fence oil and gas trade, first-year capital
allowances for plant and machinery
Books, newspapers and magazines zero-rated for VAT
Patent box
Water and sewerage services zero-rated for VAT
Rebated rate from hydrocarbon oils duty for gas oil (‘red diesel’)
Research and development expenditure credit
2
Relief from capital gains tax for
entrepreneurs’ qualifying business disposals
Employment Allowance
Small traders below the turnover limit for VAT registration
Income of charities
0510 15 20 25 30
£ billion
2018-19 cost
14.8
5.4
4.7
3.3
3.1
3.1
2.5
2.5
2.4
2.3
2.2
2.2
2.2
2.0
2.0
1.9
1.6
1.5
1.2
26.7
20.4
18.3
17.4
The management of tax expenditures Part One 17
1.6 HMRC does not report the cost of 251 tax expenditures as it does not have
sufficient information on their use. The amount of data HMRC collects on usage of
tax expenditures varies. Taxpayers must specifically claim for some tax expenditures
– including some that can result in payments, such as the research and development
(R&D) reliefs. For others, such as VAT tax expenditures, data collected through tax
returns are not sufficient to estimate costs with certainty and HMRC estimates the
costsusing sources such as national statistics. Additionally, some reliefs are designed
so that people who do not owe any tax are not required to engage with the tax system
to claim their relief.
1.7 The best available data indicate that the cost of UK tax expenditures is relatively
high by international standards. Comparing the scale of UK tax expenditures with other
countries is difficult because of differences in tax regimes, variations in definitions of
what is a tax expenditure, and the absence of up-to-date data. However, in 2016, the
International Monetary Fund reported data indicating the cost of tax expenditures in
theUK was higher than most of 25 comparator countries (Figure 4 overleaf).
3
The scale
and large number of tax expenditures therefore presents a challenge to HM Treasury
and HMRC (the exchequer departments) in terms of oversight.
The oversight of tax expenditures and stakeholder concerns
1.8 Ministers account to Parliament for tax policy decisions and policy objectives
they seek to achieve by forgoing tax revenue. Parliamentary oversight of tax policy
is exercised during the passage of the Finance Bill (the Budget), and the work of the
Treasury Select Committee.
1.9 Ministers depend on the exchequer departments tooversee the tax system and
provide technical advice and feedback. In practice:
•
HM Treasury is responsible for strategic oversight of the tax system and seeks to
design sustainable taxes, deliver responsive tax policy and business tax reforms,
consistent with sound public finances. HM Treasury officials (explicitly theprincipal
accounting officer) are responsible for considering the effectiveness of tax policies
and providing evidence-based advice to ministers;
•
HMRC is responsible for delivering tax policies and maintaining the tax system,
alongside its duties to collect revenue due and tackling the tax gap; and
•
the two departments work in a policy partnership. They share an analysis function,
whose responsibilities include predicting the impact of changes to tax reliefs
proposed inthe Budget and producing statistics on tax reliefs and taxes in general.
1.10 The Accounting Officers of HM Treasury and HMRC are accountable to the
Committee of Public Accounts for the economic, efficient and effective use of their
resources in discharging their responsibilities. The roles and responsibilities of the
respective departments and thatofministers and Parliament are set out in Figure 5
onpage 19.
3 International Monetary Fund, United Kingdom Fiscal Transparency Evaluation, November 2016, page 24.
18 Part One The management of tax expenditures
Fi g ure 4 s hows Cost of tax e xpendit ure s as a perc ent age o f g r oss domesti c p r oduct (GDP ) i n selecte d c oun t ries a s r epo rt ed by th e Inte rnati o nal Monet ary Fund (I MF ) in 2016
Figu
re 4
Cost
of tax expenditures as a percentage of gross domestic product (GDP) in
select
ed countries as reported by the International Monetary Fund (IMF) in 2016
Estimates pr
esented by IMF indicate that revenue forgone in the UK from tax expenditures
is high compar
ed with other countries
No
tes
1
Estimates are for 2010 unless otherwise stated.
2
Comparisons between countries should be treated with caution due to the different approaches taken
by different countries when reporting tax expenditures.
Sour
ce: International Monetary Fund, United Kingdom Fiscal Transparency Evaluation, 2016
Portugal
Switzerland
Turkey
Germany
Korea
Netherlands
Canada
Argentina
Peru
France
Norway
Denmark
Austria
Brazil
Greece
Spain
Mexico
Poland
Uruguay
Chile
Dominican Republic
United Kingdom 2014-15
United States
Guatemala 2009
Italy
Australia
012345678
Percentage of GDP
9
The management of tax expenditures Part One 19
Figure 5 shows Tax expenditures: roles and responsibilities
1.11 Accountability mechanisms and the way that Parliament checks and approves
government spending and taxation differ. Tax rules must be enshrined in legislation
to ensure taxpayers are obligated to comply. Parliament debates and approves all tax
policies, including tax expenditures before they can take effect. Changes can only be
achieved through legislation and there are no budget constraints, as the conditions to
qualify for a tax relief are set out in law and must be applied equally to all taxpayers.
In contrast Parliament considers government’s spending plans twice a year, and a
department has flexibility to transfer resources between its different activities without
Parliament’s approval.
Figure 5
Tax expenditures: roles and responsibilities
Ministers
Ministers’ decisions determine
thedesign of a new tax
expenditure oranychanges
to an existing tax expenditure
putforward in legislation.
Propose
changes to tax
expenditures
in the Budget/
Finance Bill
‘Policy
partnership’
for tax system,
including tax
expenditures
Provides advice to ministers on tax
expenditures in line with ministerial
and departmental objectives
HM Treasury
Oversees tax with aim of
delivering ministerial and
departmental objectives for
thetax system.
As part of this, leads on the
design of tax expenditures and
monitors their value for money
and relevance.
Parliament
Parliament debates Budget and
scrutinises Finance Bill and can
make changes before it is passed.
Treasury Select Committee
and Lords Economic Affairs
Committeescrutinise the Budget
and Finance Bill.
Committee of Public Accounts
scrutinises HM Revenue &
Customs’ and HM Treasury’s
useof resources (for example,
their staff).
HM Revenue & Customs
Provides technical advice
ontaxdesign.
Implements tax expenditures.
Monitors the use of
taxexpenditures.
Evaluates tax expenditures.
Source: National Audit Offi ce
Parliament has an opportunity to consider all new tax expenditures
20 Part One The management of tax expenditures
1.12 There is no formal guidance for how tax expenditures should be administered.
Managing public money guidance sets out accounting officers’ responsibilities for
their departments’ use of resources, and how to dispense these responsibilities.
4
Theguidance does not apply to tax expenditures as tax revenue forgone is not a
resource of a department but a decision to forgo tax made by a minister. The rules
governing the tax system are set out in legislation which is scrutinised through the
Finance Bill process.
1.13 Since 2014, both the National Audit Office and the Committee of Public Accounts
have reported several times on the management of tax reliefs by HMRC andHMTreasury.
In our November 2014 report, The effective management of tax reliefs, we found that
neither HM Treasury nor HMRC had established frameworks or principles to guide their
management of tax reliefs.
5
In 2016, we reported that HMRC had developed guidelines for
managing reliefs but HMRC staff we spoke to did not understand they were compulsory.
6
Most recently, in 2018, the Committee of Public Accounts concluded that HMRC did
not know whether a large number of tax reliefs delivered value for money.
7
HMRC and
HMTreasury have responded to our recommendations by increasing their oversight of
taxexpenditures and actively considering their value for money. In 2019, HMRC informed
the Committee that, whilst both HM Treasury and HMRC are responsible for advising
ministers, the prime responsibility for advising ministers on the value for money of tax
reliefs lies with HM Treasury.
1.14 A range of stakeholders, including the International Monetary Fund (IMF) and the Office
for Budget Responsibility (OBR), have expressed concerns about the large number of tax
expenditures and their impact upon the UK’s public finances. In 2019, the OBR identified
the cost of tax reliefs as one of four new fiscal risks to the UK.
8
TheOBRexpressed
concern that the government did not know the full cost of tax reliefs; that tax reliefs lack
transparency and adequate scrutiny; and add complexity to the tax system. The IMF
states that governments should give tax expenditures the same amount of attention as
public spending.
9
Appendix 3 sets out a timeline summarising stakeholder concerns and
HMTreasury and HMRC’s actions to improve management and transparency.
4 HM Treasury, Managing public money, July 2013, available at https://assets.publishing.service.gov.uk/government/
uploads/system/uploads/attachment_data/file/742188/Managing_Public_Money__MPM__2018.pdf.
5 Comptroller and Auditor General, The effective management of tax reliefs, Session2014-15, HC 785,
NationalAuditOffice, November 2014.
6 Comptroller and Auditor General, HM Revenue & Customs 2015-16 Accounts, Report by the Comptroller and
AuditorGeneral, July 2016.
7 HC Committee of Public Accounts, HMRC’s performance in 2017-18, Sixty-Sixth Report of Session 2017–2019,
HC1526,November 2018.
8 In its Fiscal risks report, July 2019, OBR set out its four new fiscal risks as: a no-deal Brexit; output gap
mismeasurement; the higher cost of tax reliefs; and discretionary fiscal loosening.
9 International Monetary Fund, How to notes: Tax Expenditure Reporting and Its Use in Fiscal Management.
A Guide for Developing Economies, March 2019.
The management of tax expenditures Part One 21
Changes in the number and cost of tax expenditures
1.15 In July 2019, the OBR reported that the known cost of tax expenditures had risen
in the past decade.
10
Our analysis of data published by HMRC, including the latest data
published in October 2019, shows that, between 2012-13 and 2018-19 the estimated
cost of tax expenditures increased in real terms from £126 billion to £155 billion
(forecast).
11
The forecast cost of tax expenditures in 2018-19 is equal to 7.3% of gross
domestic product (GDP).
1.16 The rate of growth has slowed in recent years, increasing in real terms by
£8billion (5%) from £147 billion in 2014-15.
12
The overall number of tax reliefs has been
relatively stable recently. The government added 14 new tax reliefs (including seven tax
expenditures) and removed four tax reliefs (all tax expenditures) between 2017 and 2019.
The government has also made changes to extend or restrict 47 other tax reliefs.
1.17 Between 2014-15 and 2018-19 corporation tax tax expenditures grew at a
faster rate than other tax expenditures (£2.6 billion, 57%), driven by the research and
development reliefs (combined cost up by £1.7 billion). The cost of VAT tax expenditures
grew most in absolute terms (£5.6 billion, 11%), due mainly to the relief on new dwellings
(up £4.6billion). The cost of the tax expenditures that can apply to either income tax or
corporation tax declined the most (£5.5 billion, 54%) (Figure 6 overleaf).
1.18 In November 2018, the Committee of Public Accounts recommended that HMRC
improve its understanding of the cost of those tax reliefs where it does not already
have that information.
13
Some existing cost estimates are also incomplete. For example,
HMRC’s cost estimates for some inheritance tax, income tax and capital gains tax
expenditures do not include the use of these tax expenditures by trusts – which are
arrangements used frequently in tax planning.
1.19 It will take time to improve information on the total cost of tax expenditures.
InApril2019 HMRC committed to reducing the number of un-costed tax reliefs
and saidthat it would focus on the 251 tax expenditures where costs are currently
unavailable. It has set up a project that will run in two stages over several years.
Thefirststage will involve a comprehensive review of currently available data to
provide indicative estimates for tax expenditures. The second stage will identify tax
expenditureswhere HMRC would need to collect or buy additional data to estimate
costs. HMRC intends topublish some new estimates in 2020 and expand coverage
in2021 and 2022. HMRCwill prioritise higher-risk tax expenditures.
14
10 Office for Budget Responsibility, Fiscal risks report, July 2019.
11 In Comptroller and Auditor General, Tax Reliefs, Session 2013-14, HC 1256, National Audit Office, April 2014 we
reported that the cost of tax expenditures was £101 billion in 2012-13. The figure of £126 billion reflects subsequent
revisions by HMRC to its cost estimates for 2012-13 and an adjustment to convert the estimates to 2018-19 prices.
Asshown at Figure 2, HMRC currently costs 111 of 362 tax expenditures. Most recent data is in HMRC, Estimated
Costs of Tax Reliefs, October 2019.
12 HM Revenue & Customs, Estimated Costs of Tax Reliefs, October 2019, available at https://assets.publishing.service.
gov.uk/government/uploads/system/uploads/attachment_data/file/837766/191009_Bulletin_FINAL.pdf.
13 See footnote 7.
14 Letter from HMRC Chief Executive to the Chair of the Committee of Public Accounts, April 2019, available at: https://
www.parliament.uk/documents/commons-committees/public-accounts/Correspondence/2017-19/Letter-from-Sir-
Jonathan-to-Chair-in-response-to-report-on-HMRC’s-Performance-in-17-18-recommendation-13-and-4-190430.pdf.
22 Part One The management of tax expenditures
Figure 6 shows Cost of tax expenditures (where known) by tax
Figu
re 6
Cost
of tax expenditures (where known) by tax
The cost of tax expenditur
es (where known) is increasing in real terms for most taxes
No
tes
1
All costs at 2018-19 prices.
2
Three tax expenditures can reduce income tax or, if used by companies, corporation tax.
3
Values are calculated by aggregating the estimated cost of individual tax expenditures. For many tax expenditures, the 2018-19
estimates are projections based on previous years’ actual data. 2018-19 values are therefore shown in italics.
4
The estimated costs of reliefs do not reflect the amount of tax that would be generated if these tax expenditures were removed
as it does not take into account behavioural change or wider economic impacts.
5
Costs shown are for the 111 tax expenditures HM Revenue & Customs reports costs on. As shown in Figure 2 there are 362 tax
expenditures in total.
6
Tax expenditures are tax reliefs which government uses to encourage particular groups, activities or products in order to achieve
economic or social objectives.
Sour
ce: National Audit Office analysis of data from HM Revenue & Customs, Estimated Costs of Tax Reliefs, October 2019
Value Added Tax
Income tax
Capital gains tax
National Insurance Contributions
Income tax and corporation tax
2
Inheritance tax
Corporation tax
Other
01020304050
£ billion
60
49.9
55.5
28.9
29.0
27.8
30.3
17.2
21.2
10.2
4.7
5.0
3.2
4.6
7.2
3.9
4.2
2014-15 cost
2018-19 cost
The management of tax expenditures Part One 23
Figure 7 shows HM Revenue & Customs’ (HMRC’s) categorisation of tax expenditures
Understanding the tax expenditures government needs to prioritise
1.20 In 2019, HMRC completed a provisional classification of tax expenditures into three
sub-categories, reflecting the broad type of outcome that they are designed to achieve
(Figure 7). This work provides a basis on which to assess the scale of oversight that
may be required for each broad class of tax expenditure. For example, tax expenditures
intended to incentivise behaviour may require more detailed assessment than those
designed to benefit a specific group. The absolute cost, and change in the cost of atax
expenditure, will also affect the level of scrutiny that is appropriate.
1.21 While HMRC’s categorisation is useful in understanding the broad objectives of tax
expenditures, it is not sufficiently detailed to group tax expenditures targeted at similar
sectors or those with similar social or economic objectives. Such analysis is important
for HM Treasury to monitor the combined effect of tax forgone alongside spending,
forexample grant funding to business and business tax expenditures. In January 2020,
we reported that the cost of tax expenditures supporting business exceeds the cost of
direct business support grants.
15
1.22 HM Treasury reviews the tax system, including tax expenditures, annually as part of
the Budget. This process can result in more tax expenditures being introduced than the
number that are removed, depending on ministerial objectives and priorities for the tax
system. In 2011, the Office of Tax Simplification (OTS), which reports to the Chancellor
ofthe Exchequer, conducted a review of 155 tax reliefs and made recommendations
that 47 be abolished on the basis that they were either time-expired, there was
no ongoing policy rationale, the value was negligible, or the administrative burden
outweighed the benefit (Appendix 3). The OTS said at the time that there was clearly
scope to simplify a number of the remaining 883 reliefs but such work would logically be
part of wider projects reviewing specific taxes or the ways specific taxes affect particular
sectors.
16
Since 2011, OTS has considered specific tax reliefs as part of the wider
reviews it has conducted, such as of particular taxes or events that affect taxpayers.
15 Comptroller and Auditor General, Business support schemes, Session 2019-20, HC 20, National Audit Office,
January2020, paragraph 6.
16 Office of Tax Simplification, Review of tax reliefs final report, March 2011.
Figure 7
HM Revenue & Customs’ (HMRC’s) categorisation of tax expenditures
HMRC’s provisional classification shows that most tax expenditures are to incentivise behaviour or
benefit a specific group
HMRC classification
Approximate percentage of the
total of 362 tax expenditures (%)
Example
To incentivise a specific behaviour
40 Relief on contributions
topension schemes.
To benefit a specific group
40 Zero rating of VAT
onnew dwellings.
To serve a social purpose
20 Zero rating of VAT
onfood.
Source: National Audit Offi ce and HM Revenue & Customs
24 Par t Two The management of tax expenditures
Part Two
The design and monitoring oftaxexpenditures
2.1 As government auditors, we expect to see evidence of HM Revenue & Customs
(HMRC) and HM Treasury (the exchequer departments) effectively using their resources
to manage tax expenditures. In 2014 we set out the characteristics of an effective
system (Figure 8).
2.2 This part of the report considers the progress that HMRC and HM Treasury have
made in improving how they use their resources in their oversight of tax expenditures,
with a particular focus on the design and monitoring of taxexpenditures. Part Three
considers the evaluation and review of tax expenditures.
HM Treasury’s design of tax expenditures
2.3 In the run-up to each Budget or fiscal event, officials advise ministers on a variety
of tax measures including the design of new tax expenditures and the reform of existing
tax expenditures in line with ministerial objectives and HM Treasury’s responsibility to
ensure a sustainable tax system. Tax expenditure proposals can be made within the
context ofwider policy changes to the tax system or spending measures.
2.4 To understand the design process, we reviewed HM Treasury’s approach to
designing and revising three tax expenditures. We found that HM Treasury had
considered most of the factors we would have expected (Figure 9 on page 26).
HMTreasury had considered a range of options to deliver policy objectives for two
of our case studies andconsidered value for money for all three. It did least well in
articulating clear objectives for what the tax expenditures should achieve and how
theywould bemeasured andevaluated.
2.5 Following the design or revision of a new tax expenditure, the exchequer
departments normally publish ‘tax information and impact notes’ (TIINs). Wereviewed
TIINs for significant tax expenditures introduced since 2013 and found the gaps in
coverage for our three case studies were repeated.
17
The TIINs set out objectives
in general terms and did not provide baselines against which the benefits could
be measured. None of the TIINs set out criteria for evaluating or reviewing the
tax expenditure, such as triggers if costs or benefits differed significantly from
their forecasts.
17 In total we identified 14 new tax expenditures introduced since 2013, which each cost more than £50 million a year
by2018-19. Weidentified TIINs for 11 of these.
The management of tax expenditures Par t Two 25
2.6 HM Treasury normally conducts a public consultation on the introduction of a
tax expenditure at the design stage, unless it considers doing so will have adverse
market implications. It is not always feasible for the exchequer departments to test
for the behavioural impact of a new or revised tax expenditure given the difficulty of
isolating the impact of a tax expenditure from other potential influences such as the
economic environment.
2.7 The exchequer departments have also published ‘policy costings’ for the measures
in each Budget since 2011.
18
These are helpful to Parliament in scrutinising costs. They
contain information on the level of detail and behavioural assumptions behind estimated
costs, although this has reduced over the years. The Chartered Institute of Taxation, the
Institute for Fiscal Studies and the Institute for Government, who represent key users of
TIINs and policy costings, report that the level of detail has reduced over the years.
19
18 The Office for Budget Responsibility scrutinises each of the government’s costings of individual tax and annually managed
expenditure policy measures to decide whether to certify them as ‘reasonable and central’ estimates. It also assigns an
uncertainty rating for each costing, and explains the reasons behind those that it deems are highly uncertain.
19 Jill Rutter et al, Better Budgets: Making tax policy better, Chartered Institute of Taxation, Institute for Fiscal Studies,
Institute for Government, 2017, p. 33.
Figure 8
Characteristics of an effective system to design, manage and
evaluate tax expenditures
Decision on policy objective
Out of scope of this report
1
Evaluation and feedback
A process to evaluate the costs and
benefits of the tax expenditure has been
identified and is undertaken
Feedback from evaluation informs
changes and the knowledge base for
design of future tax reliefs
Administration and monitoring
The costs and benefits are monitored
and assessed
Process for delivering the relief
ismanaged
The risks are assessed and mitigated
Note
1
The Comptroller and Auditor General does not comment on the merits of policy objectives.
Source: National Audit Offi ce
Design
There is an adequate evidence base
available to support decisions over design
The objectives and intended
outcomesareclear
An impact assessment and option
appraisal was undertaken
Figure 8 shows Characteristics of an effective system to design, manage and evaluate tax expenditures
26 Part Two The management of tax expenditures
Figure 9
Issues considered by HM Treasury during design of our three case studies of new or recently
amended tax expenditures
For our three case studies, HM Treasury had considered most of the factors we would expect
First-time buyers’ relief
fromstamp duty land tax
Structures and buildings
capital allowance (SBA)
1
‘Risk to capital’ condition for
venture capital schemes relief
Context Part of a package of
housingmeasures
Part of a package with other
changes to capital allowances to
support business investment
One option in a package of
options to encourage high-risk
business investment following
the‘Patient Capital Review’
2
Issue
Objectives set out Yes in general terms
(not SMART)
3
Yes in general terms (not SMART) Yes in general terms (not SMART)
A range of tax options
(for example, different rates
ofrelief)
Yes No for SBA, but yes for other
options in the package
Yes
Compared to
spendingalternatives
No but part of a package
with spending measures
No Yes
Estimated costs/impacts
fortheoptions
Yes Yes for package as a whole Yes
Value for money Yes Yes Yes
Confidence in estimates
4
Yes Yes Yes
Differential impacts on different
sectors, regions and types
ofpeople
Yes Yes No
Risks of rewarding behaviour that
would have occurred anyway
Yes Yes Yes
Risk of the measure
beingabused/different
legalinterpretations
Yes Yes Yes
How well the measure or a
similarmeasure had, or had not,
worked in the past
Yes Yes Yes
HM Revenue & Customs’
administration costsquantified
Yes Yes No
Practical implementation issues Yes Yes Yes
How it will be evaluated No No No
Notes
1
Capital allowances have both structural and tax expenditure elements.
2
For risk to capital condition we have assessed whether the issues were considered for the overall package of options
HM Treasury was considering. Thelargest venture capital scheme is the enterprise investment scheme.
3
SMART objectives are those which are: specifi c, measurable, achievable, relevant and time-bound.
4
‘Confi dence in estimates’ refers to whether there has been consideration of how certain the forecasts are and/or
how sensitive they are to changestounderlying assumptions.
Source: National Audit Offi ce analysis of HM Treasury documents
Figure 9 shows Issues considered by HM Treasury during design of our three case studies of new or recently amended tax expenditures
The management of tax expenditures Par t Two 27
Administration and monitoring of tax expenditures
2.8 HMRC administers most tax expenditures as part of its wider administration of each
tax stream. It manages some tax expenditures separately where they require specialist
knowledge or involve significant payments to taxpayers, such as research and development
(R&D) reliefs. As well as ensuring compliance with the rules, HMRC is responsible for
monitoring costs and benefits and evaluating tax expenditures. In 2014 we found some
good practice but also inconsistency and fragmentation in how HMRC managed reliefs,
with insufficient information-sharing on risks, costs and benefits.
20
In 2016, we encouraged
HMRC to approach each tax relief in a way that is in proportion to its risk.
21
2.9 HMRC has implemented all four of the recommendations relating to tax reliefs in
the National Audit Office’s 2016 report.
22
Specifically, they set up a small central team
in 2016 to improve management of tax reliefs, including tax expenditures. Theteam
introduced a process for tax reliefs and helped to coordinate its use. By 2019 the team
had finalised acomplete list of all tax reliefs for the first time and identified staff with lead
responsibilityfor each tax relief.
2.10 The team has established compulsory guidance and has developed a
frameworkof questions based on good practice to help staff with lead responsibility
for tax expenditures. This framework is designed to capture information on reliefs
in a consistent manner across the Department. The framework covers most of the
areas we would expect to see including costs, public awareness and promotion of
thetaxexpenditure, andarrangements for monitoring and evaluation.
2.11 The framework does not provide adequate guidance for all the risks affecting
tax expenditures, including risks of abuse; overlap with spending programmes; and
identification of the resources needed to administer the tax expenditure effectively.
However, when we looked at nine tax expenditures in more detail we found that
HMRChad considered risks to tax revenue in each case.
2.12 We held a workshop with HMRC staff to understand how they used the
frameworkand to identify possible areas for development. Staff with lead
responsibilityfor tax expenditures told us that the framework helped them manage
taxexpenditures. However, some of these staff said that the framework did not
change what they did in practice as they considered they were already effectively
managing their tax expenditures. Other staff said that following the framework
helpedtomaintainknowledge of tax expenditures.
20 Comptroller and Auditor General, The effective management of tax reliefs, Session2014-15, HC 785,
NationalAuditOffice, November 2014.
21 Comptroller and Auditor General, HM Revenue & Customs 2015-16 Accounts, Report by the Comptroller
andAuditorGeneral, National Audit Office, July 2016.
22 See footnote 21.
28 Par t Two The management of tax expenditures
2.13 HM Treasury has also improved its monitoring of tax expenditures. It has developed
a monitoring template to ask officials to review whether prominent tax expenditures
are achieving their objectives, informally assess their value for money, and consider the
case for reform. Following International Monetary Fund (IMF), National Audit Office and
Committee of PublicAccounts concerns, HM Treasury piloted a monitoring template in
2017 for 40tax reliefs costing more than £40 million with specific policy objectives. In
its process of providing ministerial advice, HM Treasury expanded coverage so that by
early 2019 it had assessed 63 tax reliefs. HM Treasury told us the framework is a tool for
collecting information and officials’ views to help inform advice to ministers. The quality
of these assessments is considered in Part Three.
2.14 HM Treasury has not integrated its monitoring with HMRC’s. HM Treasury’s current
monitoring template does not cover the design of tax expenditures and, of the 57
questions in HMRC’s framework, only eight address design. As of October 2019, the
departments reported that they were developing a single framework. HM Treasury was
considering what it could learn for how it appraises new tax expenditures from its ‘Green
Book’ guidance on appraising spending proposals and from international comparisons.
23
2.15 Neither HMRC nor HM Treasury differentiates between management of tax policy
as a whole and tax reliefs, meaning that it is not possible to set out the precise amount
of resources working on tax expenditures. HM Treasury reports that around 200 of its
staff work on tax policy overall.
Monitoring and forecasting the cost of tax expenditures
2.16 Accurate forecasting of future costs is inherently difficult, particularly for new
tax expenditures. Government’s published forecasts are prepared by HMRC and
scrutinisedby the Office for Budget Responsibility (OBR) in its role as the government’s
official forecaster.
24
2.17 Increases in cost can indicate that a tax expenditure is working well. Conversely,
increases can also mean that a tax expenditure is being used in ways not intended.
Economic growth, inflation, policy changes and changes to underlying tax rates
can alsohave an effect. It is important that the exchequer departments understand
the reasons for changes in costs but these are often hard to determine without a
substantive assessment. Such assessments would ideally include comparisons of
expected and actual costs. However, HMRC does not compare the government’s
original published forecasts for new tax expenditures to their actual costs.
23 HM Treasury, The Green Book: Central Government Guidance on Appraisal and Evaluation, 2019. Available at https://
www.gov.uk/government/publications/the-green-book-appraisal-and-evaluation-in-central-governent.
24 In order to carry out its statutory duties, OBR has a legal right of access to information and analysis across the public
sector. For tax matters this includes HMRC, where officials are required to produce any analysis, including draft
forecasts, that the OBR requires to fulfil its remit.
The management of tax expenditures Par t Two 29
2.18 HMRC told us that costs in its official statistics can appear to be very different
from published forecasts because they are prepared on a different basis. For example,
published forecasts assess the impact on public finances and can reflect:
•
reductions in the cost of other tax expenditures where taxpayers are expected
toswitch to a new and more generous tax expenditure;
•
the expected wider economic impacts of a new tax expenditure; and
•
the expected impact on public finances of related policy changes made at the
same time.
25
Forecasts are calculated on a National Accounts Basis, while the official statistics are
generally on an accruals basis (they represent the effects on the tax liabilities for each
year, not receipts in each year).
26
2.19 We compared government’s published forecasts with costs in official statistics
for nine new tax expenditures adjusting for differences as far as possible with the
data available.
27
These comparisons indicate that estimates for five tax expenditures,
including the three largest, were broadly in line or within government forecasts
(Figure10 on page 30). However, the comparisons also indicate that the costs of four
tax expenditures could be more than original forecasts by around 50% to 150%. We also
found that the cost of the R&D expenditure credit (primarily claimed by large companies)
phased in from 2013 was higher than internal government forecasts (Figure 11 on
page31).
28
Theexchequer departments do not report largedifferencesinexpected
andactual costs.
2.20 It was more difficult to compare the costs of established tax expenditures with
published government forecasts because projections cover a maximum of five years.
However, three of our case studies introduced before 2013 had published forecasts
covering longer periods as a result of several policy changes The combined cost of
these three tax expenditures increased from around £1 billion in 2008-09 to around £5
billion in 2017-18, much faster than any published forecasts suggested.
29
Since 2008-09,
their costs have grown by between 245% and 625% (Figure 12 on pages 32 and 33).
Economic growth will have contributed to the cost increases.
25 Government forecasts the impact of new tax expenditures on public finances but HMRC subsequently monitors
and reports the total cost of taxpayers using the tax expenditure. These can be very different. For example, when a
taxpayer moves from an existing to a more generous new tax expenditure. The forecast cost of the new tax expenditure
is based on the change in the level of relief provided to the taxpayer; actual cost is based on the total level of relief the
new tax expenditure provides.
26 Under the National accounts basis, costs represent time-shifted cash.
27 We identified 13 new tax expenditures introduced since 2013 which had published forecasts and each cost more than
£50 million a year by 2018-19. We excluded from our analysis four of these tax expenditures because forecasts either
included the impact of taxpayers moving from a less generous relief or included wider policy changes (paragraph 2.18).
We identified internal government forecasts for another tax expenditure – the R&D Expenditure Credit – costing more
than £50 million a year by 2018-19. Weanalysed this separately (Figure 11).
28 The TIIN for the new scheme did not set out its full forecast cost.
29 Part of the growth in the cost of the R&D scheme for small- and medium-sized enterprises in recent years has been
due to data revisions. As explained in Figure 12, HMRC has corrected gaps in data for 2015-16 to 2017-18 but data for
earlier years have not been corrected. We have shown an increase in the period to 2017-18, as data for 2018-19 on a
receipts basis is not yet available for the research and development scheme for small and medium enterprises.
30 Par t Two The management of tax expenditures
1
Cumulative for period covered by forecast
Forecast
(£m)
Actual
(£m)
Actual less forecast
(£m)
Actual less forecast
(as a percentage of
forecast)
(%)
Period covered
3
7, 24 5 7,000 -245 -3 April 2014 – March 2018
2,800 2,805 5 0 April 2013 – March 2017
2,010 2,320 310 15 April 2015 – March 2019
295 695 400 136 May 2015 – March 2019
685 680 -5 -1 November 2017 –
March 2019
4,5
215 574 359 167 April 2013 – March 2018
335 350 15 4 April 2016 – March 2019
4,5
80 208 128 160 September 2014 –
March 2019
3,4
75 116 41 55 April 2014 – March 2017
Government forecasts are prepared by HM Revenue & Customs and scrutinised by the Offi ce for Budget Responsibility. Government prepares forecasts
to show the impact on public fi nances of new tax expenditures. Actuals are the costs of taxpayers using tax expenditures. With the data available to us
wehave not been able to identify to what degree differences in approach would affect the differences between actual and forecast cost shown above.
Figure covers new tax expenditures introduced since 2013 which i) had published forecasts, ii) cost more than £50 million by 2018-19 and iii) where we
could make indicative comparisons.
Forecasts for Employment allowance and High-end TV include the forecast impact of changes made to the schemes after they were introduced.
Theassumptions underpinning these forecasts (such as the assumed economic growth rate) will differ from the assumptions underpinning the initial
forecasts of the schemes’ costs.
Actuals are on accruals basis except for High end TV, Video games and Theatre which are on a receipts (that is, cashfl ow) basis. The values on an
accrualsbasis represent the effects on the tax liabilities for each year, not receipts in each year.
For High end TV, period includes 2017-18, where costs are provisional and thus values are in italics. For Theatre, period includes 2017-18 and 2018-19,
where costs are provisional and thus values are in italics. Non-italicised values are all fi nal.
Tax expenditures are tax reliefs which government uses to encourage particular groups, activities or products in order to achieve economic or
socialobjectives.
Forecasts are for the nominal costs of tax expenditures. Actuals also shown on a nominal basis.
Figure 10 shows Comparison of government’s estimates of actual costs with published forecasts for nine tax expenditures introducedsince 2013-14
The management of tax expenditures Par t Two 31
Figure 11
Costs compared with forecast for the research and development (R&D) expenditure credit
£ million
0
500
1,000
1,500
2,000
2,500
2013-14 2014-15 2015-16 2016-17 2017-18
The cost of this tax expenditure has been much higher than forecast since 2015-16. Across the period 2013-14 to
2017-18 costs exceeded forecasts by £2.7 billion (55%)
Notes
1 All costs in 2018-19 prices. Costs are on a receipts (that is, cashflow) basis and thus differ from those shown in Figure 13, which are on an
accruals basis. Receipts data have not yet been produced for 2018-19. Values for 2016-17 and 2017-18 are provisional, and are italicised to
distinguish from final values.
2 The research and development expenditure credit is a tax expenditure to support research and development activity. It is primarily claimed
by large companies, although available to small- and medium-sized enterprises in certain circumstances. It was introduced in April 2013
but large companies could continue to use the old scheme for large companies until March 2016. Forecasts and actuals for the period up
to 2015-16 are totals for both schemes.
3 Forecasts from 2015-16 include the forecast impact of three changes made to the research and development expenditure credit after it
was introduced. The assumptions underpinning these forecasts (such as the assumed economic growth rate) will differ from each other
and from the assumptions underpinning the initial forecast of the scheme's cost.
4 Costs over this period have increased due to cuts in the corporat
ion tax rate. Not all the cuts in corporation tax were reflected in the cost
forecasts for the scheme.
5 In 2018, HM Revenue & Customs identified that it had been under-reporting the total costs of both the R&D expenditure credit (and its
predecessor scheme for large companies) and the R&D scheme for small- and medium-sized enterprises by around £550 million. HMRC
has corrected values from 2015-16. Values for earlier years are understated.
Source: National Audit Office
747
1,005
734
988
1,568
2,030
2,189
1,042
1,026
1,056
Actual cost
Initial forecast when scheme introduced plus
forecast impact of changes to scheme
HMRC has corrected values for gaps in data which has increased
reported costs for the period 2015-16 to 2017-18. Gaps in data
remain in values reported for 2013-14 and 2014-15.
5
Initial forecast
when scheme
introduced plus
forecast impact
of changes to
scheme
Actual costs
Figure 11 shows Costs compared with forecast for the research and development expenditure credit
32 Part Two The management of tax expenditures
Figu
re 12
Cost
of three case study tax expenditures since 2008-09
£ million
The costs of these thr
ee tax expenditures are much higher than in 2008-09
Film tax r
elief
3
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
£ million
£ million
0
500
1,000
1,500
2,000
2,500
Resear
ch and development relief for small- and medium-sized enterprises
2
Cost
Cost
339
379
430
510
685
799
1,286
1,760
2,154
297
HMRC has corrected values for gaps in
data which has increased reported costs
for the period 2015-16 to 2017-18. Gaps
in data remain in earlier years.
2
0
60
0
50
0
40
0
30
0
200
100
700
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
172
151
228
245
227
278
359
442
492
595
261
Figure 12 shows Cost of three case study tax expenditures since 2008-09
The management of tax expenditures Par t Two 33
Figu
re 12 continued
Cost
of three case study tax expenditures since 2008-09
£ million
The costs of these thr
ee tax expenditures are much higher than in 2008-09
Entr
epreneurs’ relief
4
Cost
No
tes
1
All costs at 2018-19 prices.
2
R&D relief for small- and medium-sized enterprises – this tax expenditure is to support research and development activity. Costs are on a
receipts basis and thus differ from those shown in Figure 13, which are on an accruals basis. Receipts data has not yet been produced for
the R&D scheme for 2018-19. Values for 2016-17 and 2017-18 are provisional, and have been italicised to distinguish from actuals. In 2018,
HM Revenue & Customs identified that it had been under-reporting the total costs of both the R&D scheme for small- and medium-sized
enterprises and the R&D expenditure credit (and the predecessor scheme for large companies) by around £550 million. HMRC has
corrected values from 2015-16 to 2017-18. Values for earlier years are understated.
3
Film – this tax expenditure is to support the UK film industry. Costs are on a receipts (that is, cashflow) basis and thus differ from those
shown in Figure 13, which are on an accruals basis. Values for 2017-18 and 2018-19 are provisional and have been italicised to distinguish
from actuals.
4
Entrepreneurs’ – this tax expenditure is to encourage enterprise. The relief reduces capital gains tax to 10% for sales of certain assets.
Costs are on an accruals basis. Costs before 2014-15 do not include the costs of trusts claiming the relief. Value for 2018-19 is a projection
based on previous years’ actual data, and has been italicised to distinguish from actuals.
5
For all three tax expenditures, policy changes (such as changes to make schemes more generous) will have contributed to the cost
increases shown.
Sour
ce: National Audit Office
0
3,000
2,500
2,000
1,500
1,000
500
3,500
4,000
4,500
5,000
2008-09 2010-11 2012-13 2018-192009-10 2011-12 2013-14 2014-15 2015-16 2016-17 2017-18
427
584
1,809
2,216
3,752
4,570
2,180
2,348
2,200
2,935
The cost of the scheme
increased from June 2010
when the capital gains tax
rate for higher rate taxpayers
increased from 18% to 28%
The cost of the scheme
reduced from April 2016
when the capital gains tax
rate for higher rate taxpayers
was cut from 28% to 20%
1,378
Figure 12 shows Cost of three case study tax expenditures since 2008-09
34 Par t Two The management of tax expenditures
Investigation of movements in cost
2.21 In July 2019, the OBR questioned whether government adequately scrutinises tax
reliefs to control their cost.
30
We tested HMRC’s understanding of changes in cost for
our nine case studies of established tax expenditures. The costs of five had increased
by more than 30% in real terms over the past four years, and the costs of another had
increased by more than 30% since its introduction in 2016-17. The cost of one case study
tax expenditure was broadly flat and two showed reductions in the period (Figure 13).
30 Office for Budget Responsibility, Fiscal risks report, July 2019, pages 95 and 110. Available at: https://obr.uk/frr/
fiscal-risks-report-july-2019/
Figure 13
Case study tax expenditures – cost and HM Revenue & Customs’ (HMRC’s) understanding
ofcost movements
Costs have changed significantly for seven case studies
Tax expenditure
Cost in
2014-15
1,2
(£m)
Cost in
2018-19
3
(£m)
Percentage cost
change 2014-15
to 2018-19
(%)
HMRC’s
understanding of
cost movements
4
Costs
checked to
other data
5
VAT relief for new dwellings
10,238 14,800 45
No
Entrepreneurs’ relief from
capitalgainstax
6
3,752 2,200 -41
Internal
Research and development (R&D) reliefs for:
Small- and medium-sized enterprises 1,404 2,515 79
External
R&D expenditure credit
7
1,790 2,340 31
External
Patent box
697 1,150 65
No
Film tax relief
327 550 68
No
Relief on employer National Insurance
Contributions for employees under 21
574
(2015-16)
610 6
(since 2015-16)

No
Relief on employer National Insurance
Contributions for apprentices under 25
83
(2016 -17)
160 93
(since 2016-17)
No
Agricultural property relief
356
(2015-16)
315 -12
(since 2015-16)

External
Notes
1
All costs at 2018-19 prices. Costs are on accruals basis. Accruals represent the effects on the tax liabilities for each year, not receipts in each year.
2
For the two reliefs from National Insurance Contributions, values are for the fi rst year the schemes were in operation. For agricultural property relief,
2015-16 value shown as HMRC used a different costing approach in 2014-15.
3
Most 2018-19 costs are projections based on previous years' actual data. Projections – and percentage changes based on projections –
are shown in italics to distinguish from actuals.
4
 = good, = some, = none.
5
Shows whether HMRC gets assurance about its cost estimates by comparing to other data it holds or reported by third parties.
6
The relief reduces capital gains tax to 10% when entrepreneurs sell certain assets. The cost of the relief has reduced since 2014-15
because the capital gains tax rate for higher rate taxpayers was reduced from 28% to 20% from April 2016.
7
R&D expenditure credit is mainly claimed by large companies, although available to small- and medium-sized enterprises in certain circumstances.
Source: National Audit Offi ce
Figure 13 shows Case study tax expenditures – cost and HM Revenue & Customs’ (HMRC’s) understanding ofcost movements
The management of tax expenditures Par t Two 35
2.22 HMRC had identified reasons for cost changes for each case study but it did
not normally test how far its reasons explained the cost movements. HMRC provided
quantitative analysis to support its reasons in only one case. For agricultural property
relief, HMRC had compared cost trends to death rates for those liable to inheritance
tax. HMRC told us that it was not possible for it to carry out quantitative analysis for
allour nine case studies because, for example, it could not separate out different
factorsaffecting costs or there was no suitable external data for comparison.
2.23 HMRC’s understanding of cost changes appeared insufficient for the four largest
case study tax expenditures, given their cost and the scale of change. We identified
several reasons for HMRC’s limited understanding: treatment of tax expenditures as
structural tax reliefs; data quality; insufficient comparisons with other data, such as tax
returns or official statistics; and not quantifying the actual impacts of policy changes.
The four tax expenditures were:
a Zero-rated VAT on construction of new dwellings. The cost of this tax
expenditure increased by 80% between 2012-13 and 2018-19, reaching
a forecast cost of £14.8 billion. HMRC carried out limited analysis because
itviews this long-standing tax expenditure as close to being a structural relief
as it is an established part of the housing market and would be difficult to
remove. HMRCis not able to gather cost from tax returns because, as with other
VATreliefs, taxpayers neither apply for the tax expenditure nor disclose it on tax
returns. Instead, HMRC estimates the cost of this tax expenditure using national
statistics on the number and price of new dwellings, meaning that estimates of
therevenue forgone are determined by the value of house-building.
HMRC has
notidentifiedother data sources it can use to make comparisons.
b The two research and development (R&D) reliefs. Combined forecast cost
£4.9 billion in 2018-19. HMRC’s understanding of cost movements was limited
by inaccurate data and because it is investigating apparent differences with trends
in other sources. In 2018, HMRC identified that it had been under-reporting the
costs of R&D reliefs by £550 million due to an error. HMRC has compared its
data from tax returns on the R&D activity companies claimed to have undertaken
in the UK and overseas, with national statistics on total UK (only) R&D activity.
31
This comparison showed that the R&D activity companies had claimed to
have undertaken rose from 82% of all UK R&D activity in 2013-14 to 143% in
2016-17 (latest year for which data are available).
32
HMRC had not completed its
investigation of the reasons for the increase as at January 2020. Itconsidered
that reasons for the increase were likely to include: the introduction ofthe
R&Dexpenditure credit scheme from 2013-14, which enabled large loss-making
companies to make claims; data corrections from 2014-15; the increasing
generosity of the R&D reliefs; and increasing awareness of the R&Dreliefs.
Abuseand poor-quality claims have also increased costs.
31 Companies can claim for some overseas expenditure under the scheme.
32 HM Revenue & Customs, Research and Development Tax Credits Statistics, October 2019.
36 Par t Two The management of tax expenditures
c Entrepreneurs’ relief. The cost of this tax expenditure reached £4.6 billion
in 2015-16 and then halved to £2.2 billion in 2016-17. HMRC has a partial but
improving understanding of movements in cost. HMRC has identified the two
main factors driving movements. It has analysed these factors with the aim of
improvingfuture forecasting, but it has not quantified their impact on reported
costs. Thetwo main factors were the lifetime limit on individual entrepreneurs,
which had increased three times, pushing up costs; and changes in the
main capital gains tax rate. Changes in the rate had first increased and then
reducedthevalue of the relief to entrepreneurs.
2.24 In July 2019, the OBR concluded that the cost of tax reliefs was poorly understood.
In particular, it said that HMRC was unable to offer it any explanation for why the cost of
R&D tax reliefs or entrepreneurs’ relief had been rising or why the cost of entrepreneurs’
relief then halved in a single year.
33
Since July 2019 HMRC has been working to better
understand factors affecting the cost of the R&D reliefs and entrepreneurs’ relief.
Managing abuse and error
2.25 Abuse and errors increase both the cost of tax expenditures and the resources
that HMRC needs to administer them. Those tax expenditures which result in payments,
such as R&D reliefs, are attractive to fraudsters as well as those that make legitimate
claims. HMRC does not hold data on tax at risk from abuse and error for all tax
expenditures.
34
However, it has developed a single view of the 63 main compliance risks
it faces across its business. Six of these risks are specific to tax reliefs. Someofthe
other risks partly arise from tax reliefs. HMRC’s data do not show the significance
ofreliefs to these risks.
2.26 Of the six risks specific to tax reliefs, HMRC estimates the tax at risk was
increasing for three, with a risk arising from R&D tax expenditures increasing the
most. In 2018 HMRC substantially increased its estimate of tax at risk from R&D
taxexpenditures to a level indicating that further action was required.
33 Office for Budget Responsibility, Fiscal risks report, July 2019, pages 5 and 110. Available at: https://obr.uk/frr/
fiscal-risks-report-july-2019/
34 Tax at risk is HM Revenue & Customs’ measure of ongoing risks to tax revenue.
The management of tax expenditures Par t Two 37
2.27 Between 2017 and 2018 HMRC’s new centralised R&D team identified that the
scheme for small- and medium-enterprises was subject to four significant compliance
issues. HMRC addressed an attempted fraud. It also began investigating an artificial
avoidance scheme. The two other issues will take time to address for reasons within
andoutside HMRC’s control, meaning that tax will continue to be lost.
•
Abuse of the relief by companies with a minimal UK presence is expected
to continue to 2022-23, and possibly beyond, partly because of the time to
consult and change legislation. The abuse began after legislation was changed in
2012 removing a cap which had sought to ensure that companies claiming payments
through the R&D scheme had not been arranged solely for this purpose.
35
In early
2018, HMRC identified that overseas entities were routing non-UK expenditure
through UK entities they had established with the purpose ofaccessing R&D
payments. The October 2018 Budget proposed reintroducing acap from April
2020. The departments consulted on the cap in2019.
36
If the capis introduced from
April 2020 as proposed, companies will have until 2022-23to make claims under
existing rules for accounting periods beginning in the 12 months before April2020.
37
HMRCestimates that the proposed cap will save theExchequer £45 million a year.
•
The time needed to fund and train new staff and develop systems has
slowed HMRC’s response to poor-quality claims. Poor-quality claims are the
main cause of lost tax. They have been an issue since the scheme was introduced
with, for example, companies or their agents claiming for non-allowable spending.
HMRC has sought to improve quality by, for example, providing better guidance.
HMRC has used funding provided by the November 2017 Budget to increase
the number of compliance staff in its R&D team. The new staff are expected to
be fully trained by the end of 2020, and will continue to build up experience for
a considerable period after that. Following the increased assessment of tax at
risk in2018, HMRC is also exploring opportunities to improve its systems and
processes for risk-assessing claims and preventing incorrect payments, which
islikely to require both legislative change and funding.
35 The cap limited the payments a company could receive in a year to its total PAYE and National Insurance
Contributionspayments.
36 New cap – set at three times a company’s PAYE and NICs liability – seeks to strike a balance between limiting
abuseand not disadvantaging legitimate claims.
37 Change will affect accounting periods which commence on or after 1 April 2020. Claims can be submitted up to
24months from the end of a company’s accounting period.
38 Part Three The management of tax expenditures
Part Three
The evaluation and review oftaxexpenditures
3.1 How HM Revenue & Customs (HMRC) and HM Treasury (the exchequer
departments) evaluate and report tax expenditures is a necessary condition for
informing ministers’ decisions and enabling public scrutiny. In this part of the report
weassess the adequacy of:
•
the exchequer departments’ approach to evaluating tax expenditures;
•
arrangements for assessing value for money and acting on this; and
•
arrangements for public reporting.
Evaluating the impact of tax expenditures
3.2 Evaluating tax expenditures is an important means of assessing the impact of the
forecast £155billion of tax revenue forgone.
38
Nevertheless, HMRC has evaluated only
asmallminority of established tax expenditures.
3.3 Since 2015, HMRC has published evaluations covering just 15 established tax
expenditures costing around £11 billion in 2018-19 (7% of the known cost of tax
expenditures).
39
Two tax expenditures costing more than £1 billion a year (gift aid and
entrepreneurs’ relief) had been evaluated more than once. Many of the other costliest
tax expenditures, or those growing at a fast rate, have not been evaluated. In total
HMRC has evaluated:
•
none of the 10 largest tax expenditures;
•
five of the other 13 tax expenditures costing more than £1 billion a year; and
•
three of 11 tax expenditures costing between £50 million and £1 billion a year with
cost increases of more than 30% in real terms between 2012-13 and 2016-17.
38 £155 billion is the aggregate forecast cost of 111 tax expenditures in 2018-19. As shown in Figure 2, HMRC reports cost
estimates for 111of the 362 tax expenditures. As explained at paragraph 3, aggregating the cost of tax expenditures
gives a sense oftheir scale, but it does not reflect the amount of tax that would be generated if tax expenditures were
removed because some taxpayers would change their behaviour and there may be wider economic impacts.
39 Fourteen tax expenditures were covered by evaluations HMRC had commissioned. HMRC publishes all externally
commissioned research, which includes any commissioned research that contributes to evaluation of tax expenditures.
The other tax expenditure was evaluated by HMRC. HMRC does not have a central record of all the tax expenditures
where it has undertaken an evaluation. HMRC does not report a cost for one of the 15 tax expenditures evaluated
andthus £11 billion is the aggregate cost of 14 tax expenditures.
The management of tax expenditures Part Three 39
3.4 The cost of evaluations is not large compared to the value of tax expenditures.
Evaluations HMRC commissions typically cost between £50,000 and £250,000.
Weestimate that since 2015 HMRC has spent around £2 million on evaluations
of taxexpenditures. This estimate does not include the cost of HMRC staff in
overseeingevaluations, which could be significant.
40
3.5 Two factors have limited the number of evaluations HMRC has commissioned
oftax expenditures:
•
HMRC has a central research budget (£2 million in 2019-20). Proposals to
evaluatetax expenditures must compete against proposals covering HMRC’s
wider business and HM Treasury priorities.
•
HMRC considers some tax expenditures to be difficult to evaluate because, for
example, they have multiple or unclear objectives, or objectives which are difficult
to assess, such as reducing the risk of taxpayers behaving in a particular way.
3.6 HMRC’s evaluations indicate that the impact of tax expenditures can vary widely.
The evaluations HMRC has published since 2015 have assessed the impact of 13
of the15 tax expenditures covered.
41
The evaluations found that seven of these tax
expenditures (costing £3.6 billion in 2018-19) were having a positive impact on behaviour,
one (£1.4 billion) had a mixed impact, and the other five (£5.2 billion)
42
had a limited
impact (Figure 14 on pages 40 and 41).
HM Treasury’s assessments of the value for money of
taxexpenditures
3.7 HM Treasury has responded to National Audit Office (NAO), Committee of
PublicAccounts and International Monetary Fund (IMF) concerns about its oversight
of tax expenditures by establishing a monitoring exercise for them, beginning in
2017. Theexercise includes anassessment of their value for money and represents
animportant step in improving HM Treasury’s management of tax expenditures.
3.8 The number of tax reliefs for which HM Treasury has collated informal
value-for-money views from officials has increased from around 40 in 2017 to 63
in2019. In 2019, it brought together the results of its value-for-money assessments
forthefirst time.
40 HMRC does not separately record staff time spent on overseeing evaluation from staff time spent on analysis of taxes
and tax expenditures, meaning that it is not possible to set out the precise amount of resource and associated cost to
overseeing evaluations.
41 The other two tax expenditures – agricultural property relief (cost in 2018-19, £315 million) and business property relief
(£480 million) – were covered by a single evaluation. The evaluation considered issues such as awareness among
target groups butdidnot conclude on the impact of the tax expenditures.
42 The £5.2 billion figure is based on four tax expenditures with cost estimates. The fifth does not have a cost estimate.
40 Part Three The management of tax expenditures
Figure 14
HM Revenue & Customs’ (HMRC’s) evaluations concluding on the impact of tax expenditures
Evaluations commissioned or undertaken by HMRC found evidence that seven of 13 tax expenditures were
having a positive impact on behaviours
1
Tax expenditure
2
Year
published
Estimated cost
2018-19
3
(£m)
Key finding Impact on
behaviour
1
Video games relief
2017 115 There were several ways the relief had
helped developers start new games and
get them to the market place. Therelief
was welcomed by the video industry but
had yet to reach its full impact.
Positive
2
Enterprise investment scheme –
income tax
2016 600 The schemes were generally working as
intended in terms of how investments were
used (for example, bridging finance gaps),
and 60% of investors said their proposed
investment would either definitely or
probably not have taken place without the
schemes.
Positive
3
Enterprise investment scheme –
capital gainstax
120
4
Venture capital trusts – income tax
relief on share subscriptions
160
5
Venture capital trusts – income tax
relief on dividends
60
6
Venture capital trusts – relief on
capital gains tax
15
7
Research and Development (R&D)
relief for small- and medium-sized
enterprises
4
2015 2,515 Each £1 of relief provided stimulated
£1.53to £2.35 of additional R&D
spending.HMRC did not test or adjust
results for abuse of this tax expenditure
(paragraph 2.26).
Positive
8
Gift aid
2016 1,350 Of individuals eligible to add gift aid, 20%
always did, 50% sometimes did and 30%
never did.
Improving awareness could help to reduce
gift aid claims among ineligible donors and
increase claims among eligible donors.
Some
9
Relief on employer National
Insurance Contributions for
employees under 21
2018 610 A third of employers viewed the
savings from the reliefs as very or fairly
significant. However, in isolation neither
tax expenditure has had a significant
impact on workforce planning or decisions
abouthiring.
Limited
10
Relief on employer National
Insurance Contributions for
apprentices under 25
160
11
Entrepreneurs’ relief
2017 2,200 The tax expenditure had limited impact
on those who claimed it. For example,
of those surveyed who had claimed
entrepreneurs’ relief in the previous
five years, only 8% said that the tax
expenditure had influenced their decision
at the point of investment.
Limited
Figure 14 shows HM Revenue & Customs’ (HMRC’s) evaluations concluding on the impact of tax expenditures
The management of tax expenditures Part Three 41
3.9 The assessments are intended to be light-touch but nonetheless cover many of
the areas that we would expect to see. In addition to asking HM Treasury ‘owners’ of
tax expenditures to assess value for money, monitoring templates ask for assessments
ofwhether, for example, a spending alternative is available for a tax expenditure.
3.10 HM Treasury officials had informally assessed the value for money of eight of
ourcase study tax expenditures as part of its monitoring exercise. The types of evidence
and analysis varied, with HM Treasury only reporting a cost–benefit ratio for three
(Figure15 overleaf). In the examples of our case studies, HM Treasury was best placed
to assess value for money where HMRC had evaluated the tax expenditure’s impact,
as was the case for both National Insurance Contributions reliefs and entrepreneurs’
relief. However, the number and scope of HMRC evaluations limits the analysis that
HMTreasury is able to draw upon. For two of our case studies (patent box and
agricultural property relief) HM Treasury did not have quantitative evidence to inform
its assessment of value for money. In the case of the research and development (R&D)
expenditure credit, the only quantitative evidence was an evaluation of the previous
version of the scheme for large companies.
Figure 14
continued
Evaluations concluding on the impact of tax expenditures
Tax expenditure
2
Year
published
Estimated cost
2018-19
3
(£m)
Key finding Impact on
behaviour
12
Employment allowance
2015 2,200 The allowance was having limited impact
on business decisions; 27% of employers
claiming the allowance had or intended
to use it for a specific purpose, such as
more spending on staffing. Only 22% of
these said that spending only happened,
or would only happen, because of the
allowance, with another 7% saying the
allowance had or would increase spending
they would have otherwise made.
Limited
13
Business asset rollover relief
2
2015 Cost
unavailable
There were relatively few cases where the
relief appeared to have a major influence
on the business behaviour and tax
planning of claimants.
Limited
Notes
1
The evaluation of the R&D relief for small- and medium-sized enterprises was undertaken by HMRC. All other evaluations were commissioned by HMRC
from external organisations. Evaluations are available through HMRC’s Estimated Costs of Tax Reliefs, October 2019 (second document on this web page
www.gov.uk/government/statistics/main-tax-expenditures-and-structural-reliefs, tab Non-statistical information on impacts of tax reliefs).
2
Where a tax expenditure has been covered by more than one evaluation, most recent evaluation shown. The 2015 evaluation of business asset
rollover relief also covered entrepreneurs’ relief.
3
Most costs are projections for 2018-19 based on previous years’ actual data. Projections are shown in italics to distinguish from actuals.
4
The assessment also covered the previous scheme for large companies. It generated a single additionality ratio covering both tax expenditures.
AtJanuary2020, HMRC was fi nalising a second assessment of the tax expenditure for small- and medium-sized enterprises, which should refl ect some
ofthechanges since 2015 to make it more generous.
5
Tax expenditures are tax reliefs which government uses to encourage particular groups, activities or products in order to achieve economic or social objectives.
Source: National Audit Offi ce
Figure 14 shows HM Revenue & Customs’ (HMRC’s) evaluations concluding on the impact of tax expenditures
42 Part Three The management of tax expenditures
Figure 15
Evidence used to assess value for money
Quality of evidence HM Treasury used varied across our case study tax expenditures
Case study
Consideration
of deadweight
andavoidance
1
Consideration
of spending
alternative
Comparison
of cost to
forecast
Quantitative
evidence for
cost–benefit ratio
Quantitative
evidence for
outcomes/
behaviour
change
Quantitative
evidence
for value-
for-money
assessment
Entrepreneurs’ relief
  
Relief on employer
National Insurance
Contributions for
employees under 21
   
Relief on employer
National Insurance
Contributions for
apprentices under 25
   
Film tax relief
Research and
Development
relief – small- and
medium-sized
enterprises
  
Research and
Development relief –
large companies
4
  
Patent box

Agricultural
propertyrelief
Notes
1
‘Deadweight’ is where the tax expenditure is paid when behaviour sought would have occurred anyway.
2
 = good, = some, = none.
3
One of our case studies – VAT on relief on new dwellings – had not been assessed.
4
Quantitative evidence was from the previous version of the scheme.
Source: National Audit Offi ce
Figure 15 shows Evidence used to assess value for money
The management of tax expenditures Part Three 43
3.11 There are aspects where the monitoring process lacks maturity. Although
HMTreasury asks the owners of tax expenditures to make informal assessments
onvalue for money, they do not possess a shared definition of this and assessments
are not quality-assured. HM Treasury told us that the monitoring exercise had helped
to improve the strategic approach it takes by providing advice to ministers on tax
expenditures as a whole.
3.12 HM Treasury’s assessments of tax expenditures contain information which could
strengthen Parliament’s scrutiny of them, including whether HM Treasury regards
these expenditures as delivering value for money. However, HM Treasury told us its
assessments of value for money should not be published because they are informal
assessments and donot represent the official position of the Department and are
alsopart of the policy-making process and therefore confidential.
Responsibility for acting on value-for-money concerns
3.13 HM Treasury’s value-for-money assessments help inform policy decisions about
whether a tax expenditure should be reformed. Decisions about whether to amend
atax expenditure are a matter for ministers, who may need to consider a wider range
of factors including wider government objectives, the priorities of each fiscal event,
andlevels of Parliamentary support and public perception.
3.14 HM Treasury does not use its value-for-money assessments to inform
administrative action HMRC could take to improve the effectiveness of tax
expenditures. These administrative solutions could, for example, include HMRC
promoting tax expenditures more actively to target particular groups and improving
theaccessibility and understandability of guidance. Additionally, HM Treasury could
use the value-for-money assessments to identify the characteristics of tax expenditures
which are good and poor value for money, to better inform design, risk assessment
and monitoring.
3.15 In 2014, HM Treasury set out its view on accountability for tax reliefs but it did not
consider specifically accountability for value for money.
43
In 2019, HMRC informed the
Committee of Public Accounts that the broader question of the value for money of tax
reliefs is the responsibility of HM Treasury, withHMRC providing relevant advice as part of
the tax policy partnership in the normal way.
44
Policy decisions on the value for money of
tax expenditures are for Treasury ministers, who are ultimately accountable to Parliament
for the tax system and policy. This includes decisions on the effectiveness of tax policy,
including on the value for money of tax reliefs. HM Treasury officials are accountable
for providing ministers with high-quality advice to make those decisions, including
value-for-money considerations, in line with their objectives and those of the Department.
43 HM Treasury, Treasury Minutes: Government responses on the Sixty-First report (Session 2013-14) and the First to the
Seventh reports from the Committee of Public Accounts: Session 2014-15, Cm 8938, September 2014, page 12.
44 HM Treasury, Treasury Minutes: Government response to the Committee of Public Accounts on the Sixty-Fourth
to the Sixty-Eighth reports from Session 2017-19, CP 18, January 2019, page 11; and Public Accounts Committee,
Oralevidence: HMRC Standard Report 2018-19, HC 28, October 2019, Q88.
44 Part Three The management of tax expenditures
3.16 The respective roles and responsibilities of the exchequer departments for tax
expenditures are not specified in publicly available documentation. HM Treasury’s
accountability systems statement and single departmental plan refer to its accountability
to Parliament for the use of its resources, its role in structuring and delivering taxes,
andthe need to work closely with other government departments in undertaking this.
These documents do not, however, define the role in relation to tax reliefs explicitly,
which the different departments currently perform.
Reporting on the costs and benefits of tax expenditures
3.17 Parliament can need information provided by HM Treasury and HMRC to hold
ministers accountable for the value for money of tax expenditures. As part of the legislative
process the government publishes costings and ‘tax information and impact notes’ (TIINs)
and ministers outline their aims to Parliament. In response to recommendations made by
us and by the Committee of Public Accounts since 2014, HMRC has made a series of
improvements in its public reporting of tax expenditures. These included providing links
tothe evaluations HMRC has published on tax expenditures.
3.18 HMRC’s latest (October 2019) published bulletin covering tax expenditures is
much improved. HMRC listed all 362 tax expenditures for the first time. The bulletin also
provided descriptions for all tax expenditures; and some analysis, supported by limited
commentary, on movements in costs for the largest tax expenditures. For the largest tax
expenditures, costs are provided in nominal terms, and as a percentage of nominal gross
domestic product (GDP) to control for the effects of inflation and economic growth.
45
3.19 Overall, however, the information publicly available to Parliament on the costs
and benefits of tax expenditures is not sufficient for it to assess their value for money.
Economic and social objectives are not explained for each tax expenditure and there is
no comparison of costs and benefits to published forecasts. Commentaries on changes
in cost tend to be descriptive and do not cross-refer to impact, or the number of
claimants, which is reported for the most recent year where data are available.
3.20 Some other countries have more comprehensive evaluation and reporting of tax
expenditures, despite comparatively lower levels of tax expenditure. HM Treasury has
carried out a review of practices in five other countries as part of its work to consider
how it could improve its oversight of tax expenditures. These countries all do more
than the UK to evaluate and report on tax expenditures (Figure 16). Most have clear
parameters to review the ongoing case for tax expenditures and to evaluate and to
report on their performance publicly. Particular good practice includes:
•
regular evaluations of tax expenditures against an established framework;
•
regular and detailed public reporting on tax expenditures; and
•
mechanisms to review the ongoing value of tax expenditures such as time limits.
45 HM Revenue & Customs, Estimated Costs of Tax Reliefs, October 2019, available at https://assets.publishing.service.
gov.uk/government/uploads/system/uploads/attachment_data/file/837774/191009_Bulletin_FINAL.pdf.
The management of tax expenditures Part Three 45
Figure 16
International case examples
Some countries prepare more comprehensive reports on tax expenditures, and have a more systematic approach to evaluation
Netherlands
Applies a standard set of questions to facilitate the
introduction of new tax expenditures. Questions include
whether the same goals can be achieved through other
policy instruments.
Reviews established tax expenditures – both the ministry
of finance and the spending department can be involved.
Results of the reviews are set out in the budget
memorandum.
Budget memorandum also outlines plans for the next
reviews of tax expenditures.
Ireland
Publishes an annual report on tax expenditures summarising the fiscal impact of the
range of tax expenditures and the results of reviews of individual tax expenditures.
Has established a framework for evaluating new and existing tax expenditures. For existing
tax expenditures the framework covers: relevance; cost; impact; and efficiency. 
Allows for flexibility in how framework is applied to reflect nature and scale of
thetaxexpenditure. More thorough evaluations are recommended for more costly
taxexpenditures.
Guidelines specify:
•
the tax system should only be used where there are demonstrable market failures
and where a tax-based incentive is more efficient than direct expenditure; and
•
all tax expenditures should be time-limited, making them subject to review every
3–5years, depending on cost.
Canada
Prepares a comprehensive report intended to facilitate the analysis of federal
taxexpenditures.
Report covers:
•
costs – both estimates of actual costs and forecasts for future years;
•
summary of each tax expenditure, including a brief description, its objectives,
historical information, and references to spending programmes relevant to the
policy area; and
•
evaluations and analytical papers assessing the impact of specific
taxexpenditures.
Germany
Legal obligation to report on tax expenditures to parliament
every two years.
Applies a standard evaluation framework with four core areas:
•
target accuracy;
•
cost-efficiency;
•
necessity; and
•
sustainability.
Had externally evaluated 82% of tax expenditures (by value)
byNovember2019.
France
Annual budget document sets out the
total cost of tax expenditures for three
years, with latest cost split by government
function (for example, economy).
Includes a list of evaluations of reliefs in
budget documents.
Evaluations can be internal or carried out
bythe court of auditors.
Source: National Audit Offi ce analysis
Figure 16 shows International case examples
46 Appendix One The management of tax expenditures
Appendix One
Our audit approach
1 This report examined the economy, efficiency and effectiveness of how the
exchequer departments used their resources with regard to the design, administration,
monitoring, evaluation and management of tax expenditures.
2 In this report we examine the exchequer departments’ management of tax
expenditures across different stages of their lifecycles, specifically:
•
the number and cost of tax expenditures (Part One);
•
design and monitoring of tax expenditures (Part Two); and
•
the evaluation and review of tax expenditures (Part Three).
See Figure 17.
The management of tax expenditures Appendix One 47
Figure 17 shows our audit approach
Figure 17
Our audit approach
The objective of
departments
How this will
beachieved
Our study
Our evaluative
criteria
Our evidence
(see Appendix Two
for details)
Our conclusions
We conducted nine case studies of established tax expenditures, and three of those which had been recently
designed or revised.
We analysed tax expenditure cost data.
We held a series of meetings with officials at HMRC and HM Treasury.
We drew on existing National Audit Office evidence.
We consulted with stakeholder groups.
We reviewed published policy documents, guidelines and evaluations.
We reviewed strategic documents provided by the departments.
Government has full knowledge
of the number and cost of
taxexpenditures.
Government evaluates and
reviews all tax expenditures.
Government designs
and monitors tax
expenditureseffectively.
HM Treasury: design sustainable taxes, benefits and pensions, consistent with sound public finances.
HM Revenue & Customs (HMRC): collects revenues due and bears down on avoidance and evasion.
HMRC and HM Treasury (the exchequer departments) are responsible for: advising on design; managing;
administering; and monitoring tax expenditures.
We examined the effectiveness of the exchequer departments’ management of tax expenditures across all stages
of their lifecycles.
At a forecast cost of £155 billion in 2018-19, tax expenditures represent an important means by which
governmentpursues economic and social objectives. Evaluations show that their impact is not guaranteed, and
many require careful monitoring. We have previously raised concerns about how effectively government is managing
tax expenditures. Both HMRC and HM Treasury have responded to our recommendations by increasing their
oversight of tax expenditures and actively considering their value for money.
While these steps are welcome, they are very much still in development. The large number of tax expenditures
means it will take time to identify and embed good practices. Both departments need to make substantial progress
and ensure sufficient coverage and rigour in the work they undertake on this matter.
On their own these improvements will not be sufficient to address value-for-money concerns unless the departments
formally establish their accountabilities for tax expenditures and enable greater transparency. Lessons can be learned
from other countries that have established clear arrangements for evaluating and reporting on tax expenditures.
We look to HM Treasury and HMRC to follow suit byclarifying arrangements for value for money and improving the
evaluation and public reporting of taxexpenditures.
48 Appendix Two The management of tax expenditures
Appendix Two
Our evidence base
1 We conducted our examination of tax expenditures between April and
November2019. Our audit approach is outlined in Appendix One.
2 We conducted case studies of nine established tax expenditures. We selected
these expenditures based on criteria including: relevance to government objectives;
cost; cost increase in recent years; whether action has been taken on abuse in recent
years; and whether a tax expenditure has been covered by previous National Audit
Office (NAO) work. Theninetax expenditures we selected on this basis were:
•
Research and Development tax reliefs for small- and medium-sized enterprises;
•
Research and Development expenditure credit (primarily claimed by large companies);
•
Entrepreneurs’ relief on Capital Gains Tax;
•
Zero-rated Value Added Tax on the construction of new dwellings;
•
Relief on employer National Insurance Contributions for employees under 21;
•
Relief on employer National Insurance Contributions for apprentices under 25;
•
Film tax relief;
•
Agricultural property relief from Inheritance Tax; and
•
Patent box relief.
3 For each tax expenditure, we assessed the effectiveness of the management of
the tax expenditure by HM Revenue & Customs (HMRC) and HM Treasury, considering
issues such as monitoring arrangements, cost forecasts, management of risks such
as abuse, and consideration of the impact of the tax expenditure. We undertook these
assessments through a series of structured meetings with HMRC and HM Treasury
officials and reviewed documents.
4 In addition, we conducted further case study examinations of three more recently
designed or revised tax expenditures: first-time buyers’ relief from stamp duty; structures
and buildings capital allowance; and the ‘risk to capital’ condition for venture capital
schemes relief. These tax expenditures were selected based on criteria including
their age, the amount of revenue forgone, and the extent to which their success was
dependent upon behavioural change. For each of these case studies, we conducted
aseries of meetings with HMRC and HM Treasury officials and reviewed documents.
The management of tax expenditures Appendix Two 49
5 The case studies tell us how HMRC and HM Treasury had designed and
administered the selected tax expenditures. However, the basis for selecting the case
studies means they do not provide representative evidence on the way they design and
administer all tax expenditures. We carried out other methods which were relevant to the
population of tax expenditures.
6 We conducted a number of pieces of analysis of the costs of tax expenditures.
Thisanalysis examined factors such as the extent to which costs had changed against
their original baseline forecasts. Where we have converted nominal costs to 2018-19
prices, we have used the gross domestic product (GDP) deflator.
46
7 The National Audit Office’s operations management team ran a workshop with
HMRC officials examining the maturity of the processes introduced by HMRC’s central
tax reliefs management team. We examined tax information and impact notes for recent
tax expenditures, assessing issues including how thoroughly they set out expected
costs and benefits and how these would be measured and evaluated.
8 We interviewed a range of organisations and individuals with an interest in
taxexpenditures:
•
British Chambers of Commerce;
•
Professor David Connell, Senior Research Fellow, Centre for Business Research,
University of Cambridge;
•
Department for Business, Energy & Industrial Strategy;
•
Federation of Small Businesses;
•
Institute of Economic Affairs;
•
Institute for Fiscal Studies;
•
Institute for Government;
•
Office for Budget Responsibility;
•
Office of Tax Simplification; and
•
Resolution Foundation.
46 HM Treasury, National Statistics, GDP deflators at market prices, and money GDP, December 2019 (Quarterly National
Accounts), January 2020.
50 Appendix Two The management of tax expenditures
9 In addition, the Chartered Institute of Taxation held a day-long informational
workshop for us, in which we discussed issues related to each of our case study
taxexpenditures.
10 We consulted throughout different stages of the study with Kim Scharf, Professor
of Economics, Head of the Economics Department at the University of Birmingham
andEditor of International Tax and Public Finance.
11 We conducted a series of meetings with HM Treasury officials.
12 We reviewed a range of documents related to the overall management of tax
expenditures by HMRC and HM Treasury.
13 We reviewed practices in other countries and verified these practices
withinternational counterparts and published sources.
The management of tax expenditures Appendix Three 51
Appendix Three
Key reports covering tax reliefs and HMRC
andHM Treasury’s response
1 Figure 18 is on pages 52 and 53.
52 Appendix Three The management of tax expenditures
Figure 18
Timeline of key events
HM Revenue & Customs (HMRC) and HM Treasury have responded to some of the concerns raised by us,
the Committee of Public Accounts (the Committee) and other stakeholders
Source: National Audit Offi ce
Mar 2011
Office of Tax Simplification
identifies more than 1,000 tax
reliefs and examines 155reliefs,
of which it recommends 47
areabolished
Mar 2015
Committee recommends
that HMRC should
publish and maintain
an up-to-date list
of tax reliefs toaid
transparency
Apr 2014
NAO states that tax
reliefs are subject
to less scrutiny
than other areas
ofpublicpolicy
Jun 2014
Committee reports
there is a lack of
accountability
fortax reliefs
Nov 2014
National Audit Office (NAO) reports that HMRC and
HM Treasury do not keep track of reliefs intended to
change behaviour, or adequately report to Parliament
or the public on whethertaxreliefs are expensive or
work as expected
Nov 2016
International Monetary
Fund (IMF) concludes
that UK lacks control
over the size of tax
expenditures, which
are relatively high by
internationalstandards
Feb 2016
HMRC
launches a
central tax
reliefs team
2017
HM Treasury pilots new
template for assessing
tax reliefs – applied to
40 tax reliefs costing
more than £40 million
2017
HMRC introduces a
framework to improve the
management of tax reliefs.
Framework to be compulsory
for all taxexpenditures
Dec 2016
HMRC begins
to improve its
public reporting
oftaxreliefs
Jan 2017
Institute for Government,
Institute for Fiscal Studies,
and Chartered Institute of
Taxation call for enhanced
scrutiny and challenge
of tax policy-making
including taxreliefs
Nov 2018
Committee recommends
that HMRC takes greater
responsibility for the value
for money of tax reliefs and
improves its understanding
ofuncosted reliefs
Nov 2018
HM Treasury
develops its
template. It was
used to assess
63 taxreliefs
Apr 2019
HMRC commits to
reducing number of
un-costed reliefs
Oct 2019
HMRC, for the first time, has a
complete list of all tax reliefs.
This enabled HMRC to include
tax expenditures in its annual tax
reliefs bulletin for the first time
2019
HMRC’s framework
has been
completed for all
taxexpenditures
Jul 2019
The Office for Budget Responsibility
findings on tax reliefs include that:
government does not know the
overall cost of tax reliefs; there is a
lack of systematic evaluation of them;
andtaxreliefs add to complexity
Jul 2016
NAO recommendations include that
HMRC should provide a central role to
oversee the management of tax reliefs
and make good-practice guidance for
administering tax reliefscompulsory
Jul 2011
Budget announces
abolition of 7 reliefs
Mar 2012
Budget 2012
announces 28 reliefs
will be abolished in
subsequent years
2011
2016
2013
2018
20152012
2017
2014
2019
Key reports on tax expenditures
HM Revenue & Customs/HM Treasury actions
The management of tax expenditures Appendix Three 53
Figure 18
Timeline of key events
HM Revenue & Customs (HMRC) and HM Treasury have responded to some of the concerns raised by us,
the Committee of Public Accounts (the Committee) and other stakeholders
Source: National Audit Offi ce
Mar 2011
Office of Tax Simplification
identifies more than 1,000 tax
reliefs and examines 155reliefs,
of which it recommends 47
areabolished
Mar 2015
Committee recommends
that HMRC should
publish and maintain
an up-to-date list
of tax reliefs toaid
transparency
Apr 2014
NAO states that tax
reliefs are subject
to less scrutiny
than other areas
ofpublicpolicy
Jun 2014
Committee reports
there is a lack of
accountability
fortax reliefs
Nov 2014
National Audit Office (NAO) reports that HMRC and
HM Treasury do not keep track of reliefs intended to
change behaviour, or adequately report to Parliament
or the public on whethertaxreliefs are expensive or
work as expected
Nov 2016
International Monetary
Fund (IMF) concludes
that UK lacks control
over the size of tax
expenditures, which
are relatively high by
internationalstandards
Feb 2016
HMRC
launches a
central tax
reliefs team
2017
HM Treasury pilots new
template for assessing
tax reliefs – applied to
40 tax reliefs costing
more than £40 million
2017
HMRC introduces a
framework to improve the
management of tax reliefs.
Framework to be compulsory
for all taxexpenditures
Dec 2016
HMRC begins
to improve its
public reporting
oftaxreliefs
Jan 2017
Institute for Government,
Institute for Fiscal Studies,
and Chartered Institute of
Taxation call for enhanced
scrutiny and challenge
of tax policy-making
including taxreliefs
Nov 2018
Committee recommends
that HMRC takes greater
responsibility for the value
for money of tax reliefs and
improves its understanding
ofuncosted reliefs
Nov 2018
HM Treasury
develops its
template. It was
used to assess
63 taxreliefs
Apr 2019
HMRC commits to
reducing number of
un-costed reliefs
Oct 2019
HMRC, for the first time, has a
complete list of all tax reliefs.
This enabled HMRC to include
tax expenditures in its annual tax
reliefs bulletin for the first time
2019
HMRC’s framework
has been
completed for all
taxexpenditures
Jul 2019
The Office for Budget Responsibility
findings on tax reliefs include that:
government does not know the
overall cost of tax reliefs; there is a
lack of systematic evaluation of them;
andtaxreliefs add to complexity
Jul 2016
NAO recommendations include that
HMRC should provide a central role to
oversee the management of tax reliefs
and make good-practice guidance for
administering tax reliefscompulsory
Jul 2011
Budget announces
abolition of 7 reliefs
Mar 2012
Budget 2012
announces 28 reliefs
will be abolished in
subsequent years
2011
2016
2013
2018
20152012
2017
2014
2019
Key reports on tax expenditures
HM Revenue & Customs/HM Treasury actions
This report has been printed on Pro Digital
Silkand contains material sourced from
responsibly managed and sustainable
forestscertified in accordance with the
FSC(Forest Stewardship Council).
The wood pulp is totally recyclable and
acid-free. Our printers also have full ISO 14001
environmental accreditation, which ensures
that they have effective procedures in place to
manage waste and practices that may affect
the environment.
£10.00
9 781786 043016
ISBN 978-1-78604-301-6
Design and Production by NAO External Relations
DP Ref: 006585-001
You have reached the end of this document