In our most recent edition of Tax Tuesday, we looked at the changes to research and development compliance as part of HMRC’s crackdown on tax relief fraud. However, R&D is not the only relief to be taken advantage of – the complexity of the UK’s tax relief system opens many of these reliefs up to abuse.
Aside from the scope to abuse the system, the excessive number of reliefs available mean that a large proportion of them are unknown to the people who would benefit the most from them. Earlier this year, MPs from multiple parties came together to urge the government to conduct an urgent review of the UK’s tax relief system.
So, as we continue to race through September, we thought it would be apt to take ourselves ‘back to school’ and consider the UK’s tax relief system more broadly to understand just why so many are calling for it to be overhauled.
A recap on the tax relief system
Tax reliefs are in place to reduce the amount of tax payable by an individual or company, providing that they meet specific criteria. The UK currently has 1,180 tax reliefs in operation, which can be split into two categories: structural reliefs, and non-structural reliefs.
Structural reliefs make up approximately 71% of current reliefs, and are integral to the tax system. They have various purposes, such as to define the scope of the tax or calculate income or profits correctly (e.g. income tax personal allowance).
Non-structural reliefs make up the rest of the reliefs; they are designed to help or encourage particular types of individuals, activities or products to achieve economic or social objectives (e.g. pensions tax relief or research and development relief).
In the Treasury Committee’s ‘Tax Reliefs’ report published earlier this year, they urged the government to work towards a tax system which is simpler to navigate, better value for government funding, more effective, and less prone to abuse.
The report also highlighted how tax reliefs aren’t simply a money-saving exercise for individuals and companies. Used correctly, they can be one of the main tools for generating business growth, supporting innovation and creating employment opportunities. An example of this comes from the British Film Institute, who explained how tax reliefs have ‘played a key role in the continued growth of the screen industries’. This demonstrates the need for such reliefs to be in place to foster creative talent within the UK, as well as in other industries.
So, what’s the problem?
Although the UK has 1,180 tax reliefs in action (and therefore costing the government money), the true extent of how much these cost the government is unknown. At this point, the government has only published information detailing the cost of 365 reliefs to the treasury, which means that 815 reliefs are unaccounted for.
The tax relief system has reached a point of complexity where people are missing out on the reliefs designed to help them. Meanwhile, others with a more in-depth understanding of the system – and its loopholes – are able to take advantage.
Accessing the reliefs could be discouraging to individuals who are acting without the help of an accountant or tax advisor. The complexity of the system leaves room for confusion and potential errors in an individual’s or company’s tax return, for which the consequences could be grave.
Despite the increasingly complex tax system, the government recently closed the Office for Tax Simplification (OTS). In light of this, HMRC committed to considering tax simplification as part of the policy development process. However, the Treasury Committee highlighted that existing policies should be examined for the opportunity to be simplified, rather than just focusing on those that are yet to be developed.
There are calls for a complete redesign of the UK tax relief system, to make it more accessible for those who need it, whilst decreasing the scope for abuse. In their report, the Treasury Committee put forward a demand for HMRC to publish data to show the cost of all tax reliefs from the 2025-26 tax year onwards. Similarly, it was suggested that five-yearly reviews of each tax relief are carried out, to help the government stay informed when the reliefs have served their purpose or become easy to abuse.
We can only hope that pressure from the Treasury Committee and other external groups may lead to the cultivation of a simpler and more secure tax relief system. In the meantime, we would recommend that you seek advice from one of our expert tax advisors about the tax reliefs that you, or your company, are entitled to, before submitting your tax returns.