“The Chancellor must lay before the House of Commons within a year of Royal Assent a review of the tax reliefs contained in this Act which must contain the following:
(1) the number of tax reliefs;
(2) the effect on taxation revenue of each of the tax reliefs; and
(3) an assessment the efficacy of systems for designing, monitoring and evaluating the effect of the tax reliefs.”—
This new clause would require the Chancellor of the Exchequer to report to Parliament on the number and revenue effect of the tax reliefs contained in the Bill, and on the efficiency of systems for designing, and assessing the effects of, such reliefs.
With this it will be convenient to discuss new clause 22—Review of effect of Act on tax revenues—
(2) The review under (1) must contain an estimate of any change attributable to the provisions in this Act in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.
(3) The estimate under (2) must report separately on taxes payable by the owners and employees of Scottish Limited Partnerships.”
This new clause would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of the Bill; and in particular on the taxes payable by owners and employees of Scottish Limited Partnerships.
It is a pleasure to take over from my hon. Friend the Member for Ilford North, and to see you back in the Chair this afternoon, Mr Rosindell.
Throughout proceedings in Committee we have repeatedly touched on the changes that the Government wish to make to tax reliefs. The regularity with which we have discussed such matters is not surprising when we consider that the UK had 1,190 tax reliefs as of October 2019, including 362 so-called tax expenditures—in other words, reliefs that support specific Government objectives.
HMRC has identified that the cost of policy-motivated tax expenditures is large both in absolute terms—approaching 8% of GDP—and by international standards. That is the reason behind this new clause. As I argued earlier in Committee, we on the Opposition Benches would like to see a broad review of tax reliefs, to determine exactly who is benefiting from the hundreds that exist, whether they are fair, whether they represent good value for money and whether they are securing the policy outcomes originally intended.
We believe the Government could start improving the scrutiny of tax reliefs by supporting the new clause to ensure that those contained in the Bill are monitored properly and transparently and that Parliament can debate whether they are having the desired effect and represent value for money for the taxpayer. Points raised earlier in our debates demonstrate the merits of embedding such a practice.
On clause 21, we highlighted how changes to pensions tax relief around the tapered annual allowance will affect all pensions, not just those of the senior clinicians and other public sector workers who have been adversely affected by recent changes. We should therefore be reviewing the impact of that measure, not only to ensure that it reverses the worrying trend we have seen in the retention of senior medical staff, but to consider the overall impact on taxation revenue.
On clause 22, relating to entrepreneurs’ relief, I raised concerns that the measure had benefited a small number of wealthier claimants and had a negligible effect as an incentive for investment decision making. The Minister responded that the Government had conducted an internal review that had influenced the reform and that he would review and monitor the effects of the change as standard.
It is reassuring to know that there are reviews of some of these reliefs, but as the Minister will know from the National Audit Office’s report, the Government’s monitoring of tax reliefs is just not what it could be. Indeed, the Government are not reporting costs on more than two thirds of tax reliefs, and HMRC does not know whether most tax reliefs offer value for money. Furthermore, internal reviews, where they occur, do not go far enough and do not lead to an adequate level of debate or scrutiny.
I know that we have all enjoyed delving into the finer details of Government tax policy in recent weeks. Although we might return to this soon, we should accept that such opportunities are fleeting, and little is done to facilitate ongoing scrutiny of tax reliefs. Other countries do this much more regularly, and I will return to that point. No doubt the intention behind tax reliefs is often positive—namely, to incentivise a certain type of social or economic behaviour that is of some benefit to the country—yet the lack of adequate monitoring and oversight makes determining whether they are having the desired effect more difficult. In many instances, we have seen costs spiral out of control, differing substantially from initial projections.
Of course, cost is not the only metric by which we might want to measure the success or otherwise of a tax relief. There are other—particularly behavioural—impacts that we may want to consider. That is why proper parliamentary scrutiny of these policies, which takes into account the full picture, is so important. This new clause would enable that to happen. In addition, it would help to embed the processes being undertaken by HMRC and the Treasury, which have been noted by the National Audit Office.
Our concerns about the adequate scrutiny of tax reliefs go beyond those included in the Bill, and I would like to draw the Minister’s attention to the concerns raised in the NAO report. It notes that the estimated cost of tax expenditures was £155 billion in 2018-19. Some of that will obviously go to achieve worthwhile social or economic objectives, but the NAO says that
“it does not reflect the amount of tax that would be generated if tax expenditures were removed” due to any corresponding behavioural change and the economic impact that would result.
There remains a concern that, for something that is such a cost to the Government, there is little in the way of evaluation to ensure value for money. Of the 362 tax expenditures that exist, 111 have been costed by HMRC, 63 have been assessed by the Treasury, and only 15 have had published evaluations since 2015. That is despite their cost having grown in recent years. In July 2019, the OBR reported that the known cost of tax expenditures had risen in the past decade. That is a 5% real increase in the summed estimated cost of tax expenditures from 2014-15 to 2018-19.
The mounting number and cost of tax reliefs adds complexity to our tax system and to evaluating fairness and value for money. Despite warnings, we have not seen enough progress on this front. The NAO stated in 2014 that there was little in the way of “a framework or principles” to guide the administration of tax reliefs. In 2018, the Public Accounts Committee concluded that HMRC did not know whether a large number of tax reliefs were delivering value for money. It should be acknowledged that both HMRC and the Treasury have since taken steps to increase their oversight of tax expenditures and actively consider their value for money, but that has not allayed concerns. In July 2019, the OBR identified the costs of tax reliefs as one of four new fiscal risks to the public finances. It stated:
“The Government does not seem to have a systematic way of evaluating the effectiveness of those tax reliefs and expenditures with a stated policy objective.”
The International Monetary Fund has also stated that tax expenditures require the same amount of Government oversight as public spending.
Despite those warnings and recommendations, we have simply not seen the necessary progress from Government in implementing the measures that would allow for the proper scrutiny of tax reliefs. This new clause would help us to turn a page on this, by establishing the principle that Parliament should play an ongoing role in this process. As I mentioned earlier, in relation to the annual allowance and entrepreneurs’ relief, we should be able to assess whether these reforms are having the right effect and debate this in Parliament.
Other measures in the Bill demand similar levels of ongoing scrutiny. As we heard in the debate on clause 27, many businesses are set to benefit from increases to the rate of relief for investing in research and development. In that debate, my hon. Friend the Member for Ilford North noted:
“We have to ensure that any uplift in innovation investment also ensures value for money, and that we are more ruthless about returns for the taxpayer and our economy.”––[Official Report, Finance Public Bill Committee,
Such a warning is pertinent, given the NAO’s observation that R&D tax credits have been subject to increased levels of abuse, including by companies with a limited UK tax presence. As the OBR states, when a tax credit becomes more generous,
“it increases incentives to re-badge existing expenditure as qualifying R&D or to engage in fraudulent claims.”
It is welcome that the NAO has found that HMRC has been working to better understand factors affecting the cost of R&D reliefs and others, including entrepreneurs’ relief. Rigorous parliamentary oversight would ensure that any abuse of tax relief measures is properly investigated.
The wider point about the potential abuse of tax reliefs is worth exploring further. I am grateful to the research of TaxWatch UK, which highlights the troubling extent of these practices. For example, it points out, in relation to the video games tax relief, that some companies claiming significant amounts in tax credits were not even paying corporation tax. The relief was initially estimated by the Government to cost £35 million a year. Ministers committed to reviewing the relief after three years of operation to determine whether it had been effective. However, it is not clear whether a review has taken place, and in the meanwhile the cost of the relief has substantially exceeded what was forecast, reaching £108 million in 2017-18.
TaxWatch highlights how Netflix has similarly benefited from tax reliefs, despite operating a tax avoidance structure to minimise its tax liability in the UK. Those cases highlight the real potential for unfairness in our tax relief system—something that is all the more jarring when we consider the wider changes in both social security and tax reliefs over the last decade, which have had a disproportionate impact on working families.
As the Fabian Society’s 2019 report on tax reliefs makes clear, if we look broadly at all benefits and tax reliefs, we see that the Government now provide more support to the richest fifth of non-retired households than to the poorest fifth. Between 2010-11 and 2017-18, the value of Government financial support, including tax reliefs, grew by 6% or or £437 a year for the poorest fifth, and by 31% or £1,850 a year for those in the fourth quintile. On average, households in the fourth and fifth income quintiles receive more in tax reliefs than households in the poorest fifth receive in means-tested benefits. Those statistics only reinforce the importance of change in this area. We need to be able to monitor the impact of tax reliefs and to consider whether the system is working fairly and delivering value for money.
We would not want to give a wholly negative account of tax reliefs, which, as I have said, can play a valuable role in driving socioeconomic outcomes. The Minister may well be aware of the letter from my hon. Friends the Members for Ilford North, and for Liverpool, Walton (Dan Carden), about the social investment tax relief. The Government introduced that relief, which is the only tax break specifically for social enterprises and charities, in 2014, and it has gone on to help 76 social enterprises to deliver a public benefit. My hon. Friends’ letter makes clear the case for extending the social investment tax relief’s end date from April 2021 to April 2023. Unfortunately, I am not aware that a response has been received to that request. I hope that the Minister can comment on that.
The parliamentary scrutiny that we seek through the new clause would enable us to preserve and enhance those tax reliefs that are having desirable outcomes, as well as establish a process for monitoring and evaluating tax reliefs more generally. That should not be beyond the imagination of Government. It is regrettable that the UK lags so far behind many other countries that undertake far more rigorous scrutiny of tax expenditure.
One comparative assessment of tax expenditure reporting in 43 G20 and OECD countries concluded that the UK falls into a group of 26 countries deemed to produce only “basic” reporting of tax expenditures. That contrasts with other countries, including Australia, Austria, Canada, France, Germany, Italy, the Netherlands, Korea and Sweden, which, it is argued, have detailed and comprehensive reporting on tax expenditure. It looks at best practice with regard to the frequency of reporting, whether there is a legal requirement to report, whether reports are integrated into budgets, the number of estimations and the quality of accompanying descriptions.
The Resolution Foundation points out that the Governments of Canada, Australia and New Zealand produce annual tax expenditure statements. Those can include projections for the forecast period, which can be compared to out-turn, and that can be accompanied by parliamentary debate. We want to see such parliamentary debate about tax reliefs—a point echoed by the 2017 report, “Better Budgets: Making tax policy better”, a joint effort by the Institute for Fiscal Studies, the Institute for Government and the Chartered Institute of Taxation. They say that when Parliament does engage on tax issues, it usually focuses on new proposals, as is the case today, rather than the effectiveness of past measures. They recommend increased support for Parliament on tax issues.
The case for improved parliamentary scrutiny of tax reliefs is hard to deny, given their substantial and increasing cost at a time of pressure on public finances, and harder still when we compare the zeal with which the Government have cut public spending over the last decade with the largesse they have shown through certain tax reliefs that have benefited the wealthiest in our society. That needs to change, and our new clause is designed to effect that change.
I will also touch on new clause 22, tabled by the Scottish National party, calling for a report on the effect of the Bill on tax revenues with a specific focus on the tax gap and the effect on Scottish limited partnerships. I appreciate the concerns raised by SNP Members in our earlier debates on Scottish limited partnerships. The new clause echoes points made at the beginning of the Committee by Labour Members—that we want to see more active scrutiny of the revenue effects of measures in the Bill and particularly their distributional effects.
As we have said throughout, we are living through times like no others. We recognise that. We understand the pressures on the public finances and the need to properly fund all our public services, but it is vital that measures put forward by Government meet the scale of the challenge that the crisis presents, and that the burden of ensuring sustainable public finances is shared right across our society, particularly by those with the broadest shoulders. That burden should not, as it has done over the last decade, fall disproportionately on working people.
I agree wholeheartedly with the hon. Member for Houghton and Sunderland South. She has gone into extensive detail, and I am sure everybody will be glad to know that I do not aim to repeat what she said, but the notion of the tax gap, and the fact that money is not coming in that our public services desperately need, particularly at this time, is very serious. The UK Government should be seized of the significance of this, and should do everything they can to eliminate the tax gap.
In many cases, the tax gap arises because of the complexity of our tax system. Those who are looking for loopholes—who are looking not to pay their taxes, and to divert and dodge—find ample opportunity to do so. It is not acceptable that this and successive Governments have played whack-a-mole with all these tax schemes as they have appeared. As soon as one appears, the Government shut it down, and then another one, or several more, emerge. A whole lot more needs to be done on anti-avoidance, rather than our being reactive to all this. A comprehensive anti-avoidance rule, and measures to make sure that the tax that is supposed to come in does so, ought to be a priority for the Government.
Our new clause—it is similar to Labour’s new clause, which we fully support—states:
“any change attributable to the provisions in this Act in the difference between the amount of tax required to be paid…and the amount paid” be reported on.
However, I want to touch more on Scottish limited partnerships, because this issue is not going away. The Government have failed to deal with it comprehensively. There is a continuing problem, both in respect of Companies House and in respect of how the partnerships are dealt with; that includes fines not being enforced and collected. Again, that money should be in the Government’s bank account, but if they are not going to enforce the rules, they will not get the fines. The fines would have been quite substantial had they been enforced since the measures came into place a couple of years ago.
The system allows those with an intent to conceal or deceive to do so easily by registering in secret as an SLP. These vehicles have a legal personality that makes them quite different from English limited liability partnerships. It means that individuals can make agreements in the name of the financial product without ever having to name the person or the people who control it. They have been used for years to funnel millions of pounds of dirty money created by illicit business activities, and this is still ongoing.
I can quote headlines to the Committee. There is, “How a Scots council house was secret base for criminals busting Putin sanctions”. There is one about Scotland’s firms and bribes to Argentina and Uzbekistan. There is, “Russian gang leader jailed for faking metal exports to Scotland”, and “Ukrainian mercenaries are using Scottish ‘tax haven’ firm as front”. There are headlines about money coming through Baltic banks, the effect on issues in Peru and a private war in Libya funded by Scottish funds. These are all current or previous issues in which Scottish limited partnerships have been involved. As I said in a previous debate, this is having an impact on Scotland’s reputation in the world. Most recently, just last month, David Leask and Richard Smith, who have been brilliant campaigners on this issue, revealed that more than 700 British firms have been blacklisted in Ukraine for suspicious activity related to money laundering across the former Soviet Union, and all involve Scottish limited partnerships.
That is why we in the SNP keep pushing on this issue; that is why it is so important to us. There is dirty money going around the world, fuelled in part by SLPs and the way in which they work. Also, the Government are not collecting tax on any of this money, and that contributes to the tax gap—the money that is not going to the Exchequer—as well as to global criminality.
If the Minister will not accept the new clause—given all the new clauses that the Government have not accepted, I suspect that they will not accept this one either—I urge him, at the very least, to listen to my concerns and those of campaigners about SLPs, and to take action to close the loopholes, including by fining the companies that are still flouting the rules, which the Government are not doing, and making sure that the money collected goes to the Exchequer, where it can be spent for the benefit of all our constituents.
New clause 6 would require the Government to review all tax reliefs in the Bill within a year, while new clause 22 would require the Government to review the effect on tax revenue of the Bill within six months of it being passed into law. These amendments are not necessary. Let me deal first with new clause 6 and then turn to new clause 22.
As Members will know, the Government keep all tax reliefs under review, to ensure that they strike the right balance between simplicity, effective targeting and overall yield. When a new tax relief is announced at a fiscal event, the Government publish estimates of the Exchequer impacts of the policy change in the Budget document.
The Government also consult on new tax reliefs and proposed changes to tax reliefs, bringing in external expertise as part of the policy-making cycle. Officials are constantly working on ways to improve policy development and administration, and management of reliefs.
The Government also conduct evaluations, including of a number of quite significant reliefs, such as research and development expenditure credit, or R&D tax credits, and entrepreneurs’ relief. In 2015, Her Majesty’s Revenue and Customs published an evaluation of R&D tax credits. In 2017, it commissioned an evaluation of entrepreneurs’ relief that led to a series of reforms—most recently, in Budget 2020, a significant reduction in the lifetime limit. HMRC will continue to monitor and evaluate reliefs, and it will bring forward a pipeline of further evaluations in due course.
HMRC is also considering—very much at my insistence—a proposal for a more systematic evaluation programme for tax reliefs, which would respond to the concern raised by the hon. Member for Houghton and Sunderland South, and it already monitors the effect of tax reliefs on taxation revenue.
HMRC issues an annual tax reliefs statistics publication, which includes estimates of the costs of tax reliefs. It is also undertaking a project to expand its published cost information, and I am pleased to remind the Committee that in May HMRC published cost estimates for a further 47 previously uncosted tax reliefs.
New clause 22 would require the Government to review the impact of the Bill on tax revenues within six months of it receiving Royal Assent. As I have said, the Government keep all taxes under review, and will continue to measure and publish annual statistics on the tax gap.
HMRC’s annual “Measuring tax gaps” report estimates the difference between the amount of tax due to be paid to HMRC and what is actually paid. It provides a breakdown of different kinds of behaviour, taxpayer groups and changes over time. However, the tax gap report is retrospective, with some time lag, due to the dates on which data become available. For example, estimates for 2018-19 are due for publication in July 2020, with some components projected in this year.
In addition, data limitations mean the tax gap is not suitable for evaluation at a granular level. For this reason, it would not be possible to disaggregate the impact of the compliance, for example, of SLPs. Furthermore, the tax gap may rise or fall due to a number of external factors that are unrelated to the actions of the Government.
HMRC also publishes annual reports and accounts, which include detailed information on revenue collection and on additional yield from compliance activity. It is committed to providing transparency to taxpayers about its activities, and these publications are important in demonstrating that commitment.
I now come to some of the points made by the hon. Members for Houghton and Sunderland South, and for Glasgow Central. The hon. Member for Houghton and Sunderland South, who I welcome back to the Committee after her period of absence, is absolutely right that tax reliefs can play a valuable role. However, she is also right that there are reliefs that can and should be reduced. That is, as I have said, a matter on which the Government are closely focused.
The hon. Lady raised the question of the social investment tax relief. First, I have not actually seen the letter from the hon. Member for Ilford North, but I have asked my officials to dig it out. What I have done, as she and he will know, is respond to a bunch of letters from interested stakeholder groups and other organisations that benefit from, or have a different interest in, the preservation of that relief. We have reached no view as to the relief. The concern, which I think would be shared by a Government of any stamp, is that the relief has been on the books for five years or so, and has been very little used—much less used than I think was anticipated. The question is: can it be made more effective, and if so, how? I have written to key stakeholders to ask whether they can help us to identify a pipeline of interested capital that would like to use these reliefs, and a pipeline of interested projects that could benefit from it. If they can come forward with strong evidence, or even just evidence, that we can assess—but with a degree of credibility behind it, rather than simply empty promises, which occasionally one sees in other contexts—we of course will take that very seriously.
The hon. Member for Glasgow Central seems not to be aware that the tax gap remains the object of our very, very careful scrutiny, and that it has reduced very significantly in regard to avoidance over the past few years. The avoidance tax gap fell from about £5 billion in 2005-06 to an estimated £1.8 billion in 2017-18, and the tax gap as a whole has fallen, from memory, by about 1% over the last 10, 13 or 14 years—from the time under the last Government to the present one. We remain closely focused on that issue. With that in mind, I encourage the Committee to reject new clauses 6 and 22.
I welcome the Minister’s suggestion that the Government will look more systematically at the whole range of tax reliefs that are available, but it is not clear to me that, without the sterling work of the National Audit Office, we would have seen much progress at all in this area. The Government must seek to do a lot more. We believe that there is a strong case for additional parliamentary scrutiny in this area, so I would like to test the will of the Committee on new clause 6.