National Audit Office Criticises HMRC Over Tax Relief Schemes

According to Whitehall’s official spending watchdog, billions of pounds’ worth of tax might be lost forever because of government failings.

The National Audit Office released a report on Friday that labelled HM Revenue & Customs’ management of nearly 400 tax relief schemes as inadequate.

Margaret Hodge, who is currently chair of the public accounts committee, was dumbfounded by the Revenue’s reactions, remarking that it was “beyond belief” that tax officials were not keeper closer tabs on tax reliefs.

Entrepreneurs’ relief has cost the Treasury £2bn a year more than expected but tax officials failed to question why. Officials had also seemingly turned a blind eye to a 300% increase in businesses applying for share-loss relief in 2007 to £1.2 billion, even with strict anti avoidance schemes in place. The report alleges that this abuse carried on for six years.

HMRC replied in their defense and claimed that it was “nonsense” to suggest its administration of tax reliefs lost money.

Tax avoidance has become a significant part of the political agenda recently, with both Labour and the Conservatives taking a tough stance on the matter.

Margaret Hodge said: “HMRC [says] it ensures taxpayers comply with tax rules by examining how individuals and companies pay tax, and does not need to monitor how reliefs themselves are used.

“This approach means that HMRC might respond too slowly to changes in how tax reliefs are used, leaving the door open for tax avoidance.”

Tax relief schemes cover a wide range of government issues from welfare and housing, to food and education. You can claim tax relief if you work in the Creative Industry for example.  Critics of these schemes have accused them of  making the tax system more complex than it already is, as well as less transparent, and a greater risk to the Exchequer because costs can rise unabated.

For its report the NAO looked into  10 tax breaks to ascertain whether the government was keeping a close enough eye on the sums of money involved. Astoundingly it found that data was not always held on the cost to the public purse of these reliefs, even when costs were estimated to be in the millions of pounds.

One such example is the aforementioned entrepreneur’s  relief – introduced in 2008 by the then chancellor Alistair Darling – which allowed investors to pay just 10% tax on their first £1m investment instead of 18%. This scheme ended up costing £2.9bn last year, far greater than the £900m foreseen by the government.

A spokesperson for HMRC said: “It is nonsense to suggest our administration of tax reliefs loses money. We robustly monitor the implementation of reliefs, and identify and tackle abuse as a routine part of our compliance work.”

There are currently around 400 tax relief schemes in the UK and you can find out about them and how to qualify on their site.