It is not uncommon for politicians to compare managing the public finances to running a household budget. Hence the frequent statements about greater public borrowing equating to maxing out the nation’s credit card from Conservatives such as David Cameron and Rishi Sunak. Of course, this comparison is highly misleading – for a start, governments can raise money in tax and borrow more over a longer period of time.
But there is another way the comparison falls down. Households generally have an idea of their outgoings and how much money is being spent. But this isn’t the case for government – at least not when it comes to tax relief, the cost of which is often unclear. Tax reliefs are a key part of the tax system. If a person sells their home, they do not have to pay capital gains tax on any rise in value of their property. In 2022 to 2023, capital gains tax relief on the sale of a main residence is estimated to have cost £35bn. In the same year, income tax relief for registered pension schemes is estimated to have cost £27bn. There are also some less well-known reliefs. Did you know that rock used for cutting building stone with one or more flat sides is exempt from the aggregates levy? In 2022 to 2023, this cost £10m.
There are many more tax reliefs in the tax system: currently about 1,180. But HMRC has costings for only a third of them. Why? Because they aren’t treated as government spending, so they escape the scrutiny that public spending attracts. This is despite the fact that they cost a significant amount of public money. Using data for 2021 to 2022, the Treasury committee noted that about one-third of non-structural tax reliefs (that is, specific tax breaks introduced to shape the behaviour of individuals or companies) had a combined cost of £195bn. For comparison, spending on health and social care in the same year was £272bn.
The huge amounts of public money that go towards funding tax reliefs must come with greater scrutiny, a message echoed by the National Audit Office, the Office for Budget Responsibility (OBR), the public accounts committee and the Treasury committee. It is simple, really: tax reliefs should be counted as government spending. This way it would be subject to the same level of detailed scrutiny that public spending is.
Greater scrutiny would mean the government could check whether or not tax reliefs are serving its aims. Tax reliefs might be a useful tool for achieving particular goals, such as boosting savings in ISAs, but they can also be abused. In his autumn statement in 2022, the chancellor, Jeremy Hunt, referred to abuse and fraud within research and development tax relief for small- and medium-sized enterprises, which amounted to £1.13bn for 2020-2021, according to an HMRC report.
Reliefs can also fuel tax avoidance. For instance, there are reliefs offered on inheritance tax for land or property that is classed as either for business or agricultural use. In theory, these reliefs are intended to stop businesses and farms having to be broken up to pay an inheritance tax bill. But there are signs that such reliefs can be a way of avoiding inheritance tax. The OBR notes that estate agents have marketed agricultural property reliefs as an investment opportunity and the proportion of agricultural land bought by farmers fell from 60% in 2011 to 40% in 2017, as such land became more popular among other buyers looking to capitalise on it.
Does this mean that abolishing particular tax reliefs will raise exactly the same amount in tax revenue? Unfortunately not. Closing loopholes will save money but may also change the behaviour of taxpayers, which can then affect revenues. For instance, abolishing the tax relief on capital gains from the sale of a main residence is likely to impact property prices, with knock-on effects in different parts of the economy.
Regardless, it is vital for there to be the same transparency when it comes to tax relief as for other forms of public spending. Greater transparency would mean tax reliefs could then be subjected to the same value-for-money assessments as public spending, which would mean better scrutiny and policy. Debates about the public finances always create a lot of heat. But when it comes to tax reliefs, what is needed is more light.
Dr Rajiv Prabhakar is a senior lecturer at the Open University and author of Financial Inclusion: Critique and Alternatives