Whether business tax reliefs are corporate welfare or essential elements of the tax system was the topic of the latest CIOT/IFS debate.
CIOT President John Preston introduced the panellists to the audience of tax and accounting professionals, economists, civil servants and others with an interest in tax policy.
The first speaker was Helen Miller, Associate Director at IFS, who urged the audience to look for the tax design behind the big numbers. Although HMRC statistics say we forego over £400 billion of revenue each year as a result of reliefs, and headline writers can make their work particularly striking by comparing them to total government spending – around £800 billion – or to corporate tax receipts – around £50 billion - they are not particularly meaningful unless you know what tax reliefs are. Some are part of our tax structure and others encourage activities. Miller said economists generally want a broad base and low rates. Since almost all taxes distort people’s behaviour in ways that are undesirable, it makes sense not to load all the distortions onto one tax base. A broad base also makes sense because exempting some activities or incomes creates boundaries in the tax system, which in turn create complexity and avoidance opportunities and often lead to unfairness. But the broad base/low rate rule of thumb does not imply zero reliefs are optimal.
It is desirable to tax companies’ profits rather than revenues, said Miller. If we tax revenue, we will tax high-revenue, high-cost activities more heavily than low-revenue, low-cost activities. Our current system does not consistently deduct the cost of investment, meaning that some investments are discouraged, some are incentivised and some are unaffected by the tax system.
Miller added that it is desirable to design taxes in such a way that we minimise the extent to which they lead people or firms to change their behaviour, and she added that too many reliefs have weak or poorly articulated policy aims.
Entrepreneurs’ Relief is poorly targeted, she argued. Unlike R&D tax credits, it is not targeted at investment but at profits. It is available to many businesses that are not entrepreneurial but not available to entrepreneurs who cannot take their income in the form of capital gains.
She closed her speech by saying that to work out which we should scrap or modify, we should get more accustomed to digging into the details and evaluating how each relief stacks up against a clearly stated tax design. The bar for introducing any new relief should be high.
The NAO has undertaken a host of research on tax reliefs. Rob Prideaux, Director at the NAO, said the auditing body had found it ‘impossible’ to identify policy aims for all business tax reliefs, not least because some are so old, such as on agriculture which go back hundreds of years. Others have changed because the rules around them have changed. He added that the NAO found the cost of many tax reliefs to be unknown, partly because it is impractical for HMRC to collect data through tax returns on all of them. The NAO found that just 180 reliefs had published costs and quite a lot of these had ‘costs unknown’ against them.
He displayed a series of graphs to show how there is a significant time lag between the Government taking action to narrow the definition of tax reliefs to tackle suspected tax avoidance, such as with film tax reliefs, and the impact being shown by a reduction in their use. Prideaux gave examples of tax reliefs that have proved far more costly to the Exchequer than was forecast when Parliament approved them. For example, the expected cumulative Exchequer impact of Entrepreneurs’ Relief as approved by Parliament was £729 million but in 2011-12 the actual cost was £2.1 billion. It can be easy to spot when tax relief is being exploited at an industrial scale for tax avoidance; the sharp rise in 2006-7 in ‘share loss relief’ was put down to marketed avoidance, although HMRC was not aware of this peak until 2013.
A panel with plenty of punch: (left to right) Helen Miller, Rob Prideaux, CIOT President John Preston, Annie Gascoyne and Dr Kevin Farnsworth. An audio recording of the event is below.
The next speaker was Dr Kevin Farnsworth, Reader in Social Policy at the University of York and a regular writer on the concept of ‘corporate welfare’. Farnsworth mentioned many examples of problems with tax reliefs, in the hope that it would lead to an overdue ‘honest and open’ public debate about them. Farnsworth said the problem with tax reliefs is that many provide the wrong type of ‘corporate welfare’. He said tax reliefs should be seen as part of the ‘wider corporate welfare system’. They are relatively blunt policy tools and there is evidence that they are not always the most efficient, effective and transparent way to delivering support to businesses. But tax reliefs can help make a progressive tax system, he said.
Tax reliefs and tax expenditure are not just accountancy work or ‘god given’, they are politically engineered and therefore must not be discussed in a narrow way, said Farnsworth. Many reports on reliefs tend to find the same things; he drew attention to the Public Accounts Committee’s work on tax reliefs, especially its conclusion that HMRC rarely assess whether a tax relief is an economically efficient way of meeting its policy objective. They are simply not scrutinised as other policies are, he added. He said the NAO estimates that in excess of £4 billion per year is lost as result of fraud related to tax reliefs. Even for non-contested reliefs such as R&D tax credits, the actual estimate of return is highly variable.
Tax reliefs offer one way of bending policy to achieve aims, but these can be achieved in other ways, Farnsworth argued. Post Brexit, should we compensate business who face increase exporting costs, shall we invest more in supply chain or in human capital? We could have more options to support business without the restrictions on EU state aid rules, he pondered. Reliefs face a more testing policy environment, in any case and will only prove partial answers in any event.
Annie Gascoyne, Head of Economic Policy at CBI, told the audience that of the ‘180 or so’ principal tax reliefs costed by HMRC, only three per cent in expenditure terms result in reliefs from corporation tax. She compared the business tax (excluding income tax and VAT) contribution, worked out by CBI, of businesses to be £205 billion and against tax expenditure, a subset of tax reliefs, of £4.4 billion. Leaving markets to their own devices leads to sub-optimal outcome such as underinvestment that impacts business and customers, and society more broadly. She talked about ‘above the line R&D expenditure credit’, which allows business to ‘recognise’ the R&D credit before pre-tax profits, so loss-making companies benefit. This is important to support the UK’s growing high tech sector and smaller businesses, which are characterised by high upfront investment costs, fast revenue growth but it takes them a number of many years before a profit is realised. Building those nascent businesses is important, she said. Gascoyne cited HMRC statistics which show R&D expenditure used to claim R&D tax relief was £22.9 billion in 2015-16, and 20 per cent of that R&D expenditure was by SMEs and 40 per cent by businesses under 10 years of age or under.
There is a wealth of research showing foreign direct investment, influenced by tax reliefs such as the Patent Box, leads to clustering of activity and boost innovation capacity of domestic firms, Gascoyne said.
Audience members raised a range of the points. John Cullinane, CIOT Tax Policy Director, asked if we should look more at VAT and personal tax reliefs as these affect business too. Sam Mitha CBE, former HMRC Deputy Director of Central Policy, and current LITRG volunteer, said that politics is the main factor behind the introduction of tax reliefs. Another member of the audience compared adjusting individual tax reliefs to putting and then removing ball bearings from a sheet, with the idea that more and more are added to the sheet and therefore making a change to one relief has knock on effects to other reliefs.
An audio recording of the March 5 2018 event at the RSA can be found below.
Short introduction from CIOT President John Preston and followed by Helen Miller, Associate Director, IFS
Helen Miller slides
Rob Prideaux, Director, NAO
Rob Prideaux slides
Kevin Farnsworth, Reader in Social Policy, University of York
Annie Gascoyne, Head of Economic Policy, CBI
Question and answer session