MPs probe witnesses on use and abuse of tax reliefs

Committee members in attendance

• Harriett Baldwin (Chair; Conservative)
• Rushanara Ali (Labour)
• Anthony Browne (Conservative)
• Dame Angela Eagle (Labour)
• Danny Kruger (Conservative)
• Siobhain McDonagh (Labour)

The committee questioned:

• Alex Dunnagan, Acting Director, TaxWatch
• Dr Hosam Al Kaddour, Head of Teaching and Learning, Accounting Department, University of Southampton
• Anita Monteith, Head of Taxation Policy, Institute of Chartered Accountants in England and Wales
• Dr Jo Twist OBE, CEO at UK Interactive Entertainment.

The committee has now published the 48 pieces of written evidence it received for this inquiry, including representations received from CIOT and ATT.

You can read the full transcript of the session by clicking here.

Tax reliefs and economic growth

Hosam Al Kaddour was asked by Harriet Baldwin about the role of tax reliefs in growing the economy. He explained that academic research had shown that there were several reliefs – such as entrepreneurs’ relief, business asset disposal relief and R&D relief – that had helped ‘significantly expand and support the growth of the economy’.

But he also cautioned that there remained ‘very wide room’ for improvement. Focusing on R&D relief as an example, Al Kaddour said more could be done to expand its reach across a wider geography, noting that up to 55 per cent of R&D claims are made in London and the south-east. He suggested a role for government and academia in expanding knowledge and awareness of these schemes in areas beyond London.

In later questioning, Rushanara Ali asked whether Dr Al Kaddour’s comments suggested that tax reliefs were helping add to regional inequality. Dr Al Kaddour disagreed with this point and said his focus was on increasing awareness levels across the country to drive better uptake levels.

Anthony Browne noted that both HMRC and the Treasury had been ‘rather sceptical’ about the value of R&D relief. Dr Al Kaddour conceded that there were some limitations in the data used to estimate the value generated by the relief but added that ‘in the long term this is a great relief for the economy, and it is competitive compared to other OECD countries’.

Anita Monteith spoke about some of the challenges facing businesses looking to claim relief. Citing the example of capital allowances, which she described as ‘a great relief’, she said that many claims were being bogged down in bureaucracy. Monteith gave an example of one case that had taken two years to clear the courts and tribunals (in this instance, an offshore windfarm), asking: “Is that really what we want in the UK?...maybe we need to consider how we can fast track that type of investment…we do not want the tax system to slow it down”.

Danny Kruger argued that changes to the additional rate threshold for income tax may help drive up the amounts generated for charities through Gift Aid, although witnesses said they were unable to point to evidence of its likely impact.

Cliff-edges

Asked about the impact of ‘cliff edges’ in tax reliefs, Monteith focused on the challenges faced by smaller businesses operating under the VAT threshold, and the additional costs and bureaucracy associated with scaling up their activity. However she acknowledged too that the current threshold of £85,000 ‘feels like it probably is’ the right level for businesses.

In addition to citing the challenges associated with Stamp Duty Land Tax and mixed-use property, Al Kaddour suggested that allowances could be gradually reduced or increased and linked to specific types of business activity.

In response to a later question from Siobhan McDonagh, Al Kaddour said that HMRC might consider widening the scope of ‘core activities’ that businesses should undertake in the UK in order to qualify for reliefs and provide additional value generation.

Tax relief abuse

Siobhain McDonagh asked about the use of tax relief schemes as a tool for tax avoidance. Anita Monteith explained that ‘some’ schemes were susceptible to abuse ‘because they draw attention to the opportunity’. She would also suggest that there were others – unknown to taxpayers – that may inadvertently give rise to avoidance activity.

In the case of the former, Monteith explained that schemes such as R&D relief might be used ‘to create opportunities to claim the relief that should not be there’. In instances of the latter (she cited the trading allowance that can be used when selling on online platforms, taxpayers ‘probably do not even realise that they should consider whether what they are doing will give rise to a taxable profit’.

Monteith suggested that features such as this were symptomatic of a complicated tax system that could be helped by improving awareness and understanding. This was discussed later when she told Danny Kruger that low uptake of social investment tax relief could be down to complexity and a lack of communication.

Alex Dunnagan said that tax relief abuse was ‘rife in all reliefs’, aided by the complexity of the system and a lack of capacity within HMRC ‘and to a lesser extent professional bodies’ to ensure compliance. Later, in response to a question from Dame Angela Eagle, Dunnagan again highlighted a lack of compliance activity on the part of HMRC, as well as mismatches in the different data sets collated by the Office for National Statistics and HMRC to measure R&D activity (a situation since corrected).

He also cited the use of profit shifting in film and video games tax relief, where products are created in the UK and then sold to parent companies in other jurisdictions where it becomes liable for tax. Jo Twist pushed back on some of these suggestions, explaining that tax reliefs provided the video games industry with incentives to invest in locations and staff across the UK and provided added value in the form of employment taxes.

In other sectors of business (he cited the hospitality industry), Dunnagan also suggested that a lack of compliance capacity within HMRC had led to ‘borderline fraudulent claims’ for relief being approved.

Regulation of the tax profession

Angela Eagle suggested that reports of fraud and abuse of R&D relief posed wider questions around the regulation of the tax profession and ‘the cowboys in the tax advice industry’. Anita Monteith said that reports of advisers engaging in dubious activities were a ‘hindrance to the work of the tax system’ and to those advisers who are trying to do their job and make the tax system work properly. She added that HMRC was ‘increasingly going after’ those advisers who were abusing the system but that doing so was not easy.

Measuring the value of tax reliefs

Referring to her time as a Treasury minister in the last Labour government, Angela Eagle asked whether the department had improved its ability to assess the value of tax reliefs to the economy, noting that in her time, ‘there was no sensible way of assessing them’.

Anita Monteith said that failing to assess the results of reliefs is ‘a big problem’. Some of the challenges she highlighted in her evidence included a lack of ‘real-time’ information, which hampered the ability to assess the value of reliefs ‘because information comes through so long after the event’. She questioned whether HMRC had the resources to capture and analyse the data that is generated and argued that the increased digitalisation of the tax system might offer greater scope for identifying and measuring the value of reliefs.

Hosam Al Kaddour told Eagle that HMRC had started to react to concerns about the measurability of tax reliefs but that this work was ‘not enough to ensure that this will represent good value for taxpayers’ money’. Alex Dunnagan agreed that HMRC was starting to move in the right direction but that it was ‘right to highlight (the) lack of scrutiny’ that has existed to date.

Anthony Browne also focused his initial questions on measuring the value of non-structural tax reliefs. Monteith and Al Kaddour both highlighted the challenges associated with existing data sets. Al Kaddour suggested that ‘a small body or office’, part of the Office for Tax Simplification or National Audit Office, could be charged with collating data and reporting on the value for money of tax reliefs. He also said that the digitisation of the tax system might help to provide ‘timely information’ on the activities and reliefs being claimed by some industries and businesses and that this could, over time, be widened to include ‘all the 1,192 reliefs available for any business in the UK’.

Alex Dunnagan said non-structural reliefs provided benefits in the employment they helped generate, but that it was more difficult to measure the ‘return and investment for each £1 spent’. Dr Twist argued that there was clearer evidence on the value of tax reliefs to the video games and film industry.

Rushanara Ali asked whether the biggest tax reliefs received appropriate scrutiny. Al Kaddour said that most did but that there remained gaps in the data that prevented a full evaluation of their effectiveness.

Simplification

Rushanara Ali asked if the UK’s system of tax reliefs could be improved by introducing a ‘one-in, one-out rule’. Anita Monteith said that the idea of streamlining reliefs had merit, but that a one-in., one-out rule might not necessarily work, “because then you have to bend yourself over to get rid of one just to have an urgent new one that you have thought up”.

As an alternative, Monteith suggested greater use of sunset clauses as a precursor to a wider review of tax reliefs. Al Kaddour agreed that there was a role for sunset clauses with sufficient time to enable analysis of their impact. Jo Twist disagreed on the idea of sunset clauses, suggesting that they would be ‘disastrous’ for a video games industry that works to long timescales and requires long-term certainty.  

Asked about the decision to abolish the Office for Tax Simplification, Anita Monteith said it was ‘a terrible idea’ and that expecting HMRC to absorb many of its responsibilities at a time when the tax authority was under increased pressure was ‘very optimistic’. She said its work had been ‘fantastic’ but ‘where we have slipped up is that we have not implemented enough of its suggestions’.

Ali also asked about how the tax relief system could be made easier to understand while ensuring that ‘rich people with smart tax advice are not paying much less, when everyone else is paying their fair share’. Monteith argued that ‘having fewer reliefs’ could help with this as part of a move towards a ‘more manageable tax system’. She suggested too that it was unfair to criticise richer taxpayers for taking advantage of reliefs ‘[b]ecause they have more complex (tax) affairs’ and ‘they will be looking at using or accessing more reliefs’. She continued: ‘If those reliefs are there, (it is) because governments have put them there’. For those at the other end of the income scale, Monteith suggested greater use of small allowances, such as the trading exemption, to provide protection and support.

The inquiry continues.