The UK Parliament’s Treasury Committee has established an inquiry into the tax reliefs available to individuals and businesses to find out where they benefit the broader economy. Gerry Brown looks at the scope of the inquiry and whether it might lead to changes in the tax system.
The Treasury Committee is accepting evidence on whether our tax reliefs give us value for money, and impact employment, investment and growth in the UK.
MPs are looking for evidence on “whether reliefs are being used in the way they were intended, and if they cause problems to the tax system, such as through tax evasion or avoidance”.
This reference to evasion is odd. Evasion is illegal and it is difficult to see how claiming a relief – assuming the conditions for that relief are met – could constitute evasion.
That aside the inquiry is intended to be very wide ranging with the Committee following Her Majesty’s Revenue & Custom’s (HMRC’s) definitions of tax reliefs.
Definitions of tax reliefs
Structural reliefs are integral parts of the tax structure. Their purpose is to define the scope of the tax or calculate income or profits correctly, eg the income tax personal allowance.
Non-structural reliefs encourage particular activities or behaviour to achieve economic or social objectives, eg reliefs to promote research and development activity.
HMRC has estimated that there are 339 non-structural reliefs. With that in mind, it seems unlikely that all of them will be subject to scrutiny.
The five largest non-structural reliefs
Main residence relief from capital gains tax (CGT) was estimated at £28.4bn in 2020-21. Larger still however, was pensions tax relief, estimated at £42.7bn in 2020-21, from:
- income tax, estimated at £22.9bn in 2020-21, and
- National Insurance contributions (NICs) estimated at £19.8bn in 2020-21.
VAT relief, estimated at £35.5bn in 2020-21, came from:
- food, approximately £20.7bn in 2020-21
- construction and sale of new dwellings, about £14.8bn in 2020-21.
It’s hard to see any of these significantly changing as they’re hard-wired into the UK tax code.
Changes to pensions tax are suggested almost weekly, but always assume the continuation of some form of tax relief – whether on contributions, pension fund income or on taking benefits such as tax free cash.
Inheritance tax exemptions
It’s unlikely that the inheritance tax (IHT) exemption for transfers between spouses will change. In many respects this is a deferral of the tax rather than a relief from the tax. After all, tax will be due on the ‘second death’ on the combined estates of both spouses, subject to nil rate bands.
Of course the deferral gives time for further planning so the overall IHT ‘hit’ might well be lessened.
However, why does the UK tax code offer an IHT relief for transfers to political parties? What is the economic benefit flowing from this relief?
Income tax
Why is tax relief given for ‘professional subscriptions’?
It’s hard to see how this relief provides an economic benefit to the country. Is it a relic from bygone years? It appears that this relief disproportionately benefits higher and additional rate taxpayers.
Could it disappear in the name of ‘levelling up’?
Capital gains tax
The capital gains tax (CGT) hold over relief is available for transfers of assets to discretionary trusts. This relief is useful to tax planners, but again it’s difficult to see it providing an economic benefit to the country.
Public Accounts Committee review
Another parliamentary committee, the Public Accounts Committee, reviewed tax reliefs in 2014 and concluded:
“With the breadth, number and tax complexity of reliefs, HMRC cannot be fully vigilant and knowledgeable about the cost and value of reliefs… We look to the Departments [Treasury and HMRC] to set out clear proposals on how to improve the management and accountability to Parliament of the cost and performance of tax reliefs.”
That observation remains valid, but will the current inquiry provide greater clarity?
Gerry Brown is a Consultant at QB Partners. He began his professional career as an inspector of taxes and later qualified as a chartered accountant. He’s worked at a number of financial services companies providing technical support and contributes to our Diploma in Paraplanning (DipPP).
Related content
Find out more about our Diploma in Paraplanning (DipPP)