The Public Accounts Committee recently held an inquiry into the UK’s management of “tax expenditures”: tax reliefs which are granted on certain activities or goods.
There are two broad categories of tax reliefs: structural tax reliefs that are integral parts of the tax system – like the basic rate of income tax relief – and non-structural tax reliefs or “tax expenditures” where the government opts not to collect a portion of tax for social or economic objectives – like tax credits for companies’ research and development costs, or income tax relief on pension contributions.
The Committee note that some tax expenditures simply reflect a policy choice by ministers to support particular groups or sectors, like the housing market, while others are designed to incentivise behaviour by making a choice more or less expensive. In the UK the largest tax expenditures are the reliefs on pension contributions, not charging VAT on food and new dwellings, and not charging capital gains tax on people’s main home. Tax “expenditures” reduce the amount of tax collected, rather than allocating tax resources after they’re collected as in the traditional idea of public spending. The UK tax system has over 300 of this kind of tax reliefs, which cost the Government an estimated £155 billion of foregone tax revenues in 2018-19, but National Audit Office evaluations have shown that the impact of applying different tax reliefs is not guaranteed, and many require careful monitoring to ensure the tax expenditure, the tax revenue given up, is “money well spent”.
In a report published in February this year the NAO repeated previous concerns about the effectiveness of HM Treasury’s and HM Revenue & Customs management of tax expenditures. It found that there is no formal framework governing the administration or oversight of tax expenditures, and that while HMRC and HM Treasury have begun welcome steps to increase their oversight of tax expenditures and more actively consider their value for money, these will not be sufficient on their own to address value-for-money concerns.
To do that, the NAO found that the departments must formally establish their accountabilities for tax expenditures and enable greater transparency, pointing to lessons that can be learned from other countries that have established clear arrangements for evaluating and reporting on tax expenditures, and calling on HM Treasury and HMRC to follow suit by clarifying arrangements for value for money and improving the evaluation and public reporting of tax expenditures.
Later in June the Committee will question officials from HM Treasury, and Her Majesty’s Revenue and Customs, on management of tax reliefs, the number of reliefs and the Government’s understanding of whether they represent value for money.
The Committee is now inviting evidence on the questions of accountability and value for money in tax expenditures raised by the NAO report. CTG submitted a short response highlighting the importance and appropriateness of tax reliefs for charities, as well as highlighting the amount of tax still paid by the sector.
- Charities benefit from important and valuable tax reliefs (estimated at £3.79bn in 2018/19) and it is important that any reforms to them do not have any inadvertent adverse financial impacts on charities. However, charities do still face a cumulative burden of taxation, both in terms of tax payable (particularly irrecoverable VAT and employment taxes) and the administrative burden associated with compliance – both of which are higher than generally perceived by the public. Traditional income sources for the charity sector have come under increased strain. New and improved tax reliefs could help to support charities at a time when their services are more required than ever.
- The Charity Tax Commission report, like the NAO report, rightly noted the general lack of data available on tax reliefs and the report highlights that CTG’s forthcoming research on the socio-economic value of VAT reliefs and the cost of irrecoverable VAT, will be an important contribution to the debate. Its publication has been delayed due to COVID-19 but the results are expected to be shared later this year.
- It is sometimes assumed that tax reliefs received by charities are simply Government expenditure that could simply be redistributed. There is a strong and long-standing rationale for many tax reliefs and it is important that in reform of the tax system key principles are not undermined e.g. the principle underpinning donor reliefs (including Gift Aid, gifts of assets and payroll giving) is that individuals should not pay tax on income given to support charities. As such, this is not strictly Government expenditure. Charity reliefs from VAT, rates, corporation tax and other taxes create an even playing field with companies (which are able to offset costs against fees and recover their VAT costs) by reducing costs and recognising charities’ not-for-profit status. CTG cautions against any attempt to limit reliefs to particular types of charities: not treating charities equally jeopardises the independence of the sector – something to be avoided at all costs.
- Additionally, a large proportion of activity undertaken by charities either replaces statutory provision or would require Government intervention if it was not available. It would usually cost Government more to provide these services (and there is often neither capacity nor desire to do so). Many charities have taken over, or are willing to take over, the delivery of public services outsourced by governmental bodies, but irrecoverable VAT creates a disincentive to do this. Structural distortions in the VAT system result in a total bill for the sector of at least £1.5bn a year in irrecoverable VAT, so VAT reliefs are very important.
- By contrast, charities do not benefit directly from corporation tax reductions, which are often used to stimulate the economy and improve competitiveness. This imbalance should be addressed through other tax reliefs, particularly due to the increasing contribution made by the sector to the economy, not least through the delivery of services and R&D.
- While the focus of the NAO report and this inquiry is on how effective, evaluated and targeted tax reliefs are, which is important, it would be helpful to review the scope and value of taxes actually paid by charities and whether this is appropriate. The truth is that if many of the existing tax reliefs were not in place the cost to the sector and the wider community and economy would be higher as charities would have fewer resources to deliver their vital work, much of which would revert to being the Government’s responsibility to provide. A holistic view is therefore needed.