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Pension tax reliefs and other tax rules faced fierce critiques in July as the Public Accounts Committee claimed the government had not evaluated the system sufficiently. This, they also explained, is very important given the continued economic impact of coronavirus.
As the committee summarised at the time: “Tax reliefs have an enormous impact on tax revenue but it is far from clear whether they deliver the economic and social objectives many are supposed to support. The full cost of tax reliefs that support government’s economic and social objectives is not known and could exceed £159billion a year.
“We have long been concerned that tax reliefs are not sufficiently evaluated to ensure they are delivering what was intended when they were introduced. The impact of Covid-19 on public finances means that it is ever more important that tax reliefs are demonstrably cost-effective. Despite our repeated examination of this topic since 2013, HM Treasury and HM Revenue & Customs (HMRC) have made unacceptably slow progress in improving their management of tax reliefs.
“It is staggering that they still have insufficient understanding of the cost and value for money of tax reliefs, as well as who benefits from them. Tax reliefs need rigorous challenge, as costs can be much higher than expected and their benefits are not always evident.
“HM Treasury and HMRC need to make a step change in their understanding and administration of reliefs. The current pressures on the public finances require an immediate and fast response. They must do more and focus on the largest and riskiest tax reliefs.”
The committee went on to call on HMRC to:
- Establish and publish the criteria it will use to determine which reliefs to evaluate within three months (by October) and
- Within 12 months, have evaluated the impact of pension tax reliefs
Today, the government responded to these calls and detailed they disagreed with the committee’s recommendation(s).
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They argued they had already undertaken several consultations on the aspects of pension tax relief over the last few years, with at least five reports being produced on the topic since 2016.
As they explained in today’s response: “These investigations included gathering views and evidence from stakeholders to understand the regime’s impacts and the impacts of possible changes.
“The evidence provided directly influenced policy development. For example, responses to the 2015 wide-ranging consultation on pension’s tax relief indicated there was no clear consensus for reform at that time, and so at Budget 2016 the then government announced it would not make fundamental reform to pension’s tax reliefs at that stage.”
The government acknowledged additional work will be done going forward but there are no immediate plans for a rethink, as they continued: “The government will continue to engage with stakeholders to understand the regime’s impacts and gather evidence through consultations such as those listed above but does not think it is the right time now for a formal evaluation”.
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Tom Selby, a senior analyst at AJ Bell, commented on the government’s decision: “Given the Government has postponed this year’s planned Budget due to COVID-19, it is no surprise there is little appetite for another fundamental review of pension tax relief either.
“However, given the number of times the Treasury has floated radical pension tax reform – including potentially introducing a flat-rate of tax relief – and comments from the previous Chancellor about the ‘eye-watering’ costs, it would be naïve to think this draws a line under the issue.
“As sure as night follows day, I expect the issue of pension tax relief reform to resurface once the Government is in a position to assess the nation’s parlous financial situation.
“AJ Bell has always been supportive of reform to the tax system provided it is aimed at simplifying the rules savers have to navigate and encouraging more people to save for retirement.
“Whenever the UK is able to begin moving forward from this pandemic, protecting and enhancing the fragile savings culture being fostered in part through automatic enrolment will be absolutely critical to building greater levels of financial resilience.”
Rachael Griffin, a tax and financial planning expert at Quilter, also broke down what the government has already altered when it comes to tax arrangements and what changes may arrive in the coming months: “Rishi Sunak, the Chancellor, has already moved to cap entrepreneurs relief at £1m on the basis that it was believed few people launching a new business from scratch were actually incentivised by the tax break. The government will now examine the tax system and identify other areas which are worthy of scrutiny.
“HMRC have been set a relatively short timetable and will begin reporting back on some of their findings before the end of the year. This could signal reliefs which are in the Chancellor’s crosshairs and, given the current scale of government expenditure, it would be no surprise if he sought to amend or abolish some reliefs as a cost saving measure.
“However, it is important the government don’t allow their enthusiasm for fiscal prudence to cloud their judgement.
“Reforming tax reliefs may save them money in the short term, but it is critical to make careful decisions to avoid any damaging long-term impacts.”
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