Private residence relief comes in for special attention by the National Audit Office (Tax reliefs).
The National Audit Office (NAO) has called for more scrutiny of tax reliefs generally and specifically the capital gains tax exemption, which is used by people selling their main home and apparently costs the exchequer £18bn a year (Tax reliefs).
The NAO said that monitoring of tax reliefs was ‘not yet systematic or proportionate to their value or the risks they carry’. ‘Reliefs reduce tax bills and may be exploited or used in ways which parliament did not intend,’ it said.
Altogether, tax reliefs cost more than the budget of any government department and MPs, lawyers and think-tanks have questioned their effectiveness and value for money.
The cost of exempting main residences from capital gains tax rose from £10.5bn to £18bn in the four years to 2015-16 as house prices went up. It was the biggest factor in a 13 per cent rise in the cost of reliefs – to £117bn – during the past four years.
The NAO said the £1.7bn increase in the cost of principal private residence relief between 2014-15 and 2015-16 had not been explained by HM Revenue & Customs and the costs were not monitored by its policy team.
It said there was scope for the misuse of the relief, given its scale, the complexity of the rules and the lack of reporting requirements.
It noted that the number of buy-to-let landlords had risen significantly in recent years and said the eligibility rules for the relief were not always straightforward.
‘There are several restrictions and related reliefs which allow individuals to claim relief for two homes concurrently. This means more scrutiny may be needed to ensure people are following the rules correctly,’ the NAO said.
HMRC said the rise in the cost of the relief was because house prices had gone up and there have been more sales. It said: ‘We ensure the right capital gains tax is paid through reviewing the data we hold and cross-checking it against third-party information.
We also carry out targeted campaigns … where we use our own analysis to reach people we believe should have declared a gain but did not, and to raise awareness about the rules.’
The NAO said it had found examples of good practice in the way HMRC monitored the cost of reliefs though. It said specialist units checked all claims concerning the ‘patent box’ – a tax relief on profits from intellectual property – creative industry reliefs, including breaks for makers of high-end television shows and venture capital schemes.
HMRC had been able to detect unusual changes in the costs of these reliefs and respond, in cases where it monitored costs over time.
The NAO said the sheer number of tax reliefs meant it would be impractical for HMRC to administer each one individually, adding that in many cases the costs of doing so could outweigh the benefits.
HMRC recognised the need to take a risk-based approach to manage reliefs proportionately and had introduced new guidance that focused on new tax reliefs, which tend to carry greater uncertainty and risk.
But the NAO warned that older tax reliefs could present risks too. It said that ‘changing trends can lead to increased take-up or they can become the focus of tax avoidance schemes’.
Worryingly for business owners the NAO said HMRC was planning an extensive review of entrepreneurs’ relief. The use of so called ‘money boxing’ has already been the subject debate and likely action.
The NAO had previously raised concerns that entrepreneurs’ relief was costing three times more than expected, although the government has since introduced changes to reduce its cost and it is understood that there is no general HMRC concern about the fundamental principle of the relief- some form of which has been available for many years.
The fundamental point underlying the NAO concern is that there should be a very regular ‘cost/benefit’ analysis applied to tax reliefs. It is hard to argue with this principle.
Tax reliefs are generally introduced in order to change taxpayer behaviour. A regular assessment of whether targeted behavioural changes have been secured or not seems essential given the cost of many reliefs.
The cost of pensions tax relief (>£30bn) has had very high publicity over the past year or so. The Centre for Policy Studies clearly had this very much in mind in making their recommendations for an alternative means of pensions saving in their ‘ISA Centric Savings World’ document.
Tax reliefs and Financial Advice Bristol
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