Tangled tax break approach needs drastic overhaul, MPs warn

MPs have called for a drastic overhaul of the complicated tax relief system (Kirsty O’Connor/PA)
MPs have called for a drastic overhaul of the complicated tax relief system (Kirsty O’Connor/PA)

A major overhaul of tax breaks is required to end abuse and untangle a complicated and expanding system, MPs have said.

An inquiry by the Commons Treasury Committee expressed concern about a serious lack of scrutiny of the tax reliefs, which reduce the tax a person or company pays if certain conditions are met.

In a new report published on Wednesday, MPs found that while there are currently 1,180 tax reliefs, HMRC only publishes cost data for 365 – leaving over 800 uncosted.

The committee found that in 2021/22, 105 of nearly 340 non-structural tax reliefs cost a total of £195 billion, prompting MPs to note the “stark” disparity between scrutiny of such reliefs against direct public spending.

The system, the committee concludes, is “too complicated” and “seemingly ever-expanding”.

MPs point out that too often political pressure leads to the creation of new tax reliefs while keeping existing reliefs on the statute book, contributing to an ever more complicated and cluttered system.

Urging ministers to carry out a “comprehensive and systematic” review of the existing system, the report also recommends a formal and structured system where tax reliefs would be reviewed every five years.

Creating a more simple system, MPs suggest, would also end abuse of tax reliefs.

Treasury Committee Chairwoman Harriett Baldwin said: “Our tax system is too complicated, and the proliferation of uncosted tax breaks add to that complexity.

“While some reliefs are very effective, others are prone to abuse or simply lie dormant, cluttering the ever-expanding tax code.

“The fact we only have costings for a third of reliefs is staggering – and something which needs rectifying with urgency.”

She called on HMRC and the Treasury to “work hand in glove to get a grip on the complexity, lack of transparency and potential for abuse”.

Among the other recommendations, the cross-party committee also calls on HMRC to publish cost data for all tax reliefs from the 2025 tax year onwards, while also suggesting that reliefs are reclassified as Government spending as a way to improve scrutiny.

A Government spokesman said: “Tax reliefs are a key way we can support fairness in the system and encourage activity that can help grow our economy.

“Keeping tax simple remains a priority, as seen with the recent abolition of the pensions lifetime allowance and reforms to alcohol duty.

“Additionally, HMRC continue to take action against tax relief fraud, more than doubling the number of people working in R&D compliance.”