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The UK’s tax relief system is too complex and open to abuse, a group of cross-party MPs said on Wednesday, as it told the government to conduct an urgent review of the exemptions system.
The House of Commons Treasury select committee criticised in a report the method of scrutiny of more than 1,000 tax breaks, calling it “inadequate”.
A crackdown by the chancellor Jeremy Hunt into abuse and fraud concerning claims for tax relief on research and development by small and medium-sized businesses had highlighted the need for better checks, the report said.
“HM Revenue & Customs and the Treasury need to work hand in glove to get a grip on the complexity, lack of transparency and potential for abuse,” said Harriett Baldwin, chair of the Treasury committee.
Tax reliefs reduce the amount paid in compulsory rates by an individual or company to the government when they meet certain criteria.
For example, the ‘personal allowance relief’ allows individuals to earn £12,570 a year before becoming liable to pay income tax. Meanwhile, ‘private residence relief’ exempts people from paying capital gains levies when they sell a property that has been their main home for the period they have owned it.
But while the UK has 1,180 tax exemptions in operation, the government has only published information on how much 365 of these cost the Treasury, leaving 815 reliefs unaccounted for.
“The fact we only have costings for a third of reliefs is staggering — and something which needs rectifying with urgency,” said Baldwin.
HMRC statistics published in May showed that 105 of the 1,180 reliefs cost the Treasury £195bn in 2021-22. This compared to a total health and social care bill of £271.6bn in the same year, the MPs highlighted.
“The disparity between scrutiny of tax reliefs and that of equivalent direct public expenditure is stark,” the MPs said.
Successive governments have been inclined to introduce tax breaks rather than remove them, the MPs added, and an ever-increasing number of reliefs had made the system complex for taxpayers, opening up “opportunities for abuse”.
Examples of such abuse were found in inheritance tax and in research and development exemptions but the report did not detail the nature of the fraud or specific cases.
The committee demanded that HMRC publish cost data for all tax reliefs from the 2025-26 year onwards and monitor the potential abuse of the system in an ongoing review.
It recommended that the government introduce five-yearly reviews of each tax relief and remove exemptions that no longer served their policy goal or were vulnerable to abuse.
To improve transparency and accountability, the MPs said ministers must categorise tax reliefs as public spending. This would mean the exemptions would be evaluated under existing value-for-money assessments, leading to “improved scrutiny and ultimately better policy”, the MPs argued.
The government said: “Tax reliefs are a key way we can support fairness in the system and encourage activity that can help grow our economy. HMRC continue to take action against tax relief fraud, more than doubling the number of people working in R&D compliance.”
