The true cost of tax reliefs

Despite the UK government providing tax reliefs worth billions of pounds each year to encourage economic growth, HMRC and HM Treasury are not monitoring or evaluating all these reliefs closely enough to understand their true cost and benefit, say a National Audit Office report.

As of December 2023, the UK has 341 ‘non-structural’ tax reliefs intended to achieve certain social or economic objectives. The NAO report said that HMRC and HMT have made a number of important improvements to how they administer, evaluate and report on tax reliefs, but the lack of oversight of the true costs of some tax breaks was costing billions of pounds.

The NAO said the government has acted in some cases to reduce reliefs following evaluation, increasing tax revenue by billions of pounds. In the case of Entrepreneurs’ Relief, evaluation findings helped identify that the relief was costly, ineffective, and not value for money. This led to the decision to reduce the threshold, saving the exchequer £1.6 billion in 2021-22 alone.

Some reliefs are also subject to large-scale abuse. HMRC has estimated that the most likely level of error and fraud on the R&D SME relief was 24.4% in 2020-21 – that’s £1.04 billion. An evaluation of the R&D SME scheme led to a policy decision to reduce it from April 2023, a move forecast to led to a net reduction in costs of £4.5 billion in the next 5 years.