Tax system more complex than in past, HMRC director admits

Athow was speaking at a Treasury Committee  session on tax reliefs, held on Wednesday 17 May. Alongside Athow were HMRC colleagues Philippa Madelin, Director of Wealthy and Mid-Sized Business Compliance, and Jane Whittaker, Director of Knowledge, Analysis and Intelligence.

Simplification & the OTS

Asked by committee chair Harriet Baldwin (Con) about the impact that the abolition of the Office of Tax Simplification on HMRC and how it is now embedding the work of tax simplification, Jonathan Athow said the OTS only worked on existing tax law and was not involved in the process of developing policy, whereas HMRC will “look at proposals as they are coming through”.

Overall, Athow felt the OTS achieved some successes but “the challenges of sometimes making the tax system simpler come up against other policy objectives”.

He said several specific simplifications were announced at last month’s Tax Administration and Maintenance Day, including an extension of the cash basis and a review of guidance for small businesses. He added that ending the lifetime allowance has been a major simplification.

Asked if the current number of tax reliefs was a record, Athow said “the danger of trying to look at metrics for measuring complexity is that one tax relief can be quite different from another”. He said some reliefs are actually “very simple” or designed to remove complexity. However, Athow acknowledged that “most commentators” would say the overall tax system is now more complex than in the past.

Purpose and effect of reliefs

Athow said that when looking at the complexity of the tax relief system, HMRC does estimate the “burdens” on business of complying with the tax system, though “sometimes the burdens come from applying for something that is beneficial to them”. They also try to focus on measures such as undesirable behaviours and high numbers of those at the same point “would be an indicator of undue complexity”. He added that many errors in tax returns were also “probably an indication of a degree of complexity”.

Athow said there are “probably about four or five different categories of relief”, including:

• Simplifying the system
• Reducing reporting requirements
• Economic behavioural effects
• distributional effects to support particular groups of taxpayers

When asked how behavioural change is analysed, Athow said HMRC carries out both qualitative, anecdotal research by speaking to taxpayers, and “harder edged economic analysis”. While some reliefs, such as the R&D scheme, were easier to measure by conducting an evaluation of how much extra research and development there was for each of the two schemes, other reliefs are harder to track. “Sometimes the way it affects behaviour requires a number of different stages, and we do not know exactly whether the tax relief is the thing that might have made the behaviour more likely,” he added.

Abuse and error

Emma Hardy (Lab) raised concerns flagged by the Institute of Chartered Accountants in England and Wales that poorly designed tax reliefs can “skew behaviours” or create opportunities for exploitation or abuse.

Athow said he agreed with that assessment but that HMRC “try to turn that round as much as possible and design the tax system in a way that helps people to comply and minimises the chances of non-compliance”. He used the example of film tax reliefs, which he said were historically open to “distortion and abuse”, adding: “We monitored that and made changes to it.”

Asked by Andrea Leadsom (Con) on how reliefs, especially screening for fraud or error, have put strain on HMRC services and systems, Athow said while some of this can be handled by IT systems, much is also passed on to caseworkers. He added that R&D and SME (small and medium-sized enterprises) schemes can have large numbers of claims which need to be assessed, saying: “It is a burden on us.”

Philippa Madelin said HMRC has a “threat risk assessment” for all claims, which can spot potential criminal attacks on the system, based on an actual attack last year which caused a pause on payments, and further levels of escalation. She added: “There are layers and tiers, but our first approach will always be systemic. We do as much automatically as possible and then apply our expert resource to the highest risks we see.”

Other topics

Athow said input from the wider tax community is important, and that he and his team often get invited to receptions hosted by organisations including the Chartered Institute of Taxation. He added: “I am happy to attend those and make certain I am talking to relevant people.”

Baldwin asked about calculations on how the end of VAT-free shopping for overseas tourists would affect the economy. Jane Whittaker said HMRC were “involved in costing the original decision but no evaluation had yet been carried out.

Responding to an enquiry from Dame Angela Eagle (Lab) on the costs of the Enterprise Investment Scheme and the Venture Capital Trusts tax relief, Madelin said together they tallied £2.3 billion for 2021-22, with 4,500 companies claiming. She added: “For EIS, that is the largest number we have had since the beginning of the schemes, up 39% on the year before. That is largely reflection of post-Covid and post-pandemic investments.”

On the rise of artificial intelligence, Madelin added that HMRC’s risk and intelligence service use some systems which “have a form of AI attached to them”, but they are largely based around automation and analytical techniques. Baldwin added: “It is probably quite a useful tool in scouring a lot of tax returns that are using the same relief.”

Madelin also said the controversial loan charge was independently reviewed by Sir Amyas Morse, who found that it was legal to apply it in the way it was. However, she added that if customers need support, “we would really encourage people to come forward and speak to us”. She added there is “enhanced” support for more vulnerable customers or those facing large tax bills, such as time-to-pay arrangements and that 60,000 cases have now been closed.

Read the full transcript of the session.