It seems tax is very much on the agenda at the moment, with savvy politicians identifying that the COVID-19 situation may offer a unique window of opportunity to raise taxes as the taxpaying population realise that the billions of pounds of coronavirus support must be paid for somehow. Last week, the Chancellor asked the Office for Tax Simplification to look specifically at capital gains tax (CGT), and a new Treasury Select Committee consultation was launched looking specifically at ‘Tax after Coronavirus’.
This week, in addition to Government initiatives centred on tax avoidance and marketed schemes, and modernising the tax system, the Public Accounts Committee (PAC) has published a report asking the Government to look at the current tax reliefs available, and to evaluate whether they are worth keeping.
The PAC report points out that the ten most expensive reliefs cost the taxpayer £117bn a year, with the total cost of the identified tax reliefs coming in at an estimated £159bn. Back in 2015, the PAC recommended that these reliefs be reviewed for their value for money, and how far they meet their objectives. In 2019, HMRC completed an assessment of tax reliefs that had an economic and social objective, resulting in them being grouped into three categories reflecting the broad type of outcome they were designed to achieve. Around 40% are designed to incentivise a specific behaviour, 40% to benefit a specific group, and 20% to serve a social purpose.
Given the swiftly approaching time for belt-tightening across all areas, it seems highly likely that some of our most valuable, and therefore most expensive, reliefs may not be long for this world. Here we consider the top five contenders for the chop- and how you might think about acting now to secure tax advantage.
Total estimated cost: £2,100m
Why it’s at risk: Although already severely curtailed in the 2020 Budget, the PAC first questioned the validity of Entrepreneurs’ Relief back in 2015, given that it was then costing £2 billion more than forecast. In his 2020 Budget speech, the Chancellor stated that the relief was unfair, with nearly three quarters of the £2 billion a year cost benefiting just 5,000 individuals. In 2017, an evaluation of the relief found that at the point they invested, only 8% of claimants reported that their behaviour had been influenced by the relief.
What can I do? Consider accelerating potential sales to before an Autumn Budget date.
Total estimated cost: £21,200m
Why it’s at risk: The cost of this relief is huge, as it includes both tax relief on contributions, but also the tax benefits of growth within the schemes. The PAC are also concerned over who is benefitting from pension relief and whether the availability of relief changes their behaviour; for example, is the regime incentivising retirement savings in those who would otherwise rely on state support, or is it just facilitating larger savings for those who would have made provision in any case. In addition, recent data has highlighted the fact that the current system does not work for everyone- with around 1.75 million low-paid and part-time workers earning less than the personal allowance (of whom around three quarters are women) not receiving tax relief on their pension contributions under auto-enrolment.
What can I do? Consider making pension contributions sooner rather than later and utilising any brought forward unused reliefs from earlier years.
Total estimated cost: £15,250m
Why it’s at risk: Another big hitter in terms of cost, the PAC are worried that this relief is not targeted enough to be effective. HMRC does not collect and report data on who benefits from all major tax reliefs, so cannot distinguish between subsidising the building of one new luxury property or 25 affordable homes. While the cost of these reliefs includes some that are currently mandatory under EU law, once we are no longer bound by Brussels on VAT, reforms may be implemented to better identify and select who will benefits from the tax relief.
What can I do? If you are building a luxury property, or 25 affordable homes, try and ensure these are built as fast as you can socially distance your construction workers on site.
Total estimated cost: £3,300m
Why it’s at risk: Another popular relief, with over 21 million ISA contributors in 16/17, this one may be under risk despite its relatively modest cost. The reason for this is similar to the concern over pension savings. Is an individual who can afford to save £20,000 into an ISA every year really going to have changed from a non-saver to a saver purely owing to the existence of ISAs? Again, there are more targeted ISA schemes, such as Help to Buy and LISAs that do offer specific incentives to certain groups of people, but we may see the ISA limits reduced to more modest levels in a post-COVID Budget.
What can I do? Where possible, top up ISAs to maximum contribution levels as soon as possible, although it is likely that any changes would take effect from the next tax year.
Total estimated cost: £26,500m
Why it’s at risk: This single relief costs the Treasury a massive amount each year, as well as having one of the higher number of claimants, given many thousands of people move home each year. Removing this relief would be difficult politically, and under normal circumstances some might say impossible, but the incentive in terms of cash savings is clear to see. That said, there are other ways in which CGT could be reformed to target those with active investment gains, rather than an accidental increase in value of your main residence, that may be more palatable to the public. One of those ways could be to introduce an overall wealth tax, rather than to attack the family homes of Middle England.
What can I do? Consider selling up pre-Budget and moving to a campsite. Until tent tax is introduced.
Note: Cost figures from HMRC’s Estimated costs of tax reliefs (published October 2019)
If you want to discuss any of these points further please get in-touch with your usual contact at Claritas Tax.
The world of tax is constantly changing, so keep up to date on all our news, views and opinions
22 November 2023
To find out more about what we do, please get in touch.