Twenty years have passed since former chancellor of the exchequer Gordon Brown launched his scheme to promote the British film industry, and in doing so innocently spawned numerous lucrative tax relief opportunities for advisers and their investors.
The scheme, which allowed investors to claim back 40% of a film company’s losses against their own tax bills, ended up meaning that many investors were able to claim around £40,000 tax relief for every £20,000 they put into a production. Brown clamped down on this “double dipping” – effectively claiming tax relief twice on the same production – in 2004, after it became clear it was being abused.
There are still tax reliefs for the British film industry and they make up just a few of the estimated 1,140 schemes offered by HMRC on everything from plant and machinery to pension saving.
Their complexity, and the fact that they favour companies and individuals with the greatest wealth, means that understanding and exploiting the benefits of tax relief is a vast industry.
Every government, including David Cameron’s coalition with the Liberal Democrats, has promised to cut back on the number of reliefs and tackle the avoidance and evasion it inevitably promotes, and each has failed.
In fact Cameron’s government increased the number of reliefs by almost 100, according to the Office for Tax Simplification, an agency that then-chancellor George Osborne founded in 2010.
In 2015, a report by MPs on the public accounts committee (PAC) found that “HMRC does not effectively monitor changes in the cost of tax reliefs, so is slow in identifying instances where a relief is being exploited for a purpose parliament did not intend”.
It concluded – despite vehement denials from the Treasury – that “HMRC and HM Treasury often show a worrying lack of curiosity about the cost of tax reliefs”.
For instance, the costs of research and development tax relief increased from around £100m in 2001 to more than £1bn in 2011-12, “while the actual amount of business expenditure on R&D has stayed more or less the same”, the PAC said. Today the cost of R&D tax relief is £2bn and still corporate expenditure hasn’t budged.
It is a safe bet that Philip Hammond’s budget later this year will include tax breaks to support his modest plans to boost investment and encourage long-term planning.
In Britain, there is an assumption that tax incentives are a spur to action – for households or companies alike – and without them little would change.
The argument goes that few people would save for a pension without money off their tax and the British film industry would be left high and dry without the tax breaks that encourage investment. Companies would drop plans to buy the equipment they need without tax relief. Likewise, private landlords would let their flats go unmaintained if the cost were not tax-deductible.
In short, the HMRC must forego tax to get everyone from the small-time entrepreneur to the boss of a major corporation out of bed in the morning and off to work. Among corporations, it has become commonplace to lobby local and central governments for cash with the threat of leaving for foreign climes if the money is not forthcoming.
Around £100bn is spent on tax relief, which means that if it were cancelled and everyone just paid the tax that was due on their income and profits, the government would have £880bn to spend and not the £780bn it expects to dispense this year.
The Treasury argues that in some instances corporate tax relief is only a fraction of the total help on offer. One example is R&D tax credits, which account for £2bn of the £10bn spent supporting research and development. It also points out that tax relief is cheap to administer, and that a complex tax system is a necessary response to a complex economy.
But the reason the coalition added 100 tax reliefs to its already massive roster was because they were quick and easy to put in place, not because they were effective.
Far better would be to spend some of the money on scrutinising the claims of corporations for help. It would be more transparent – and their needs might turn out to be like those of a young adult seeking funds from the bank of mum and dad when they are more than capable of looking after themselves.
More pernicious is the use of tax relief to support households. Why does the 45p-rate taxpayer get 45p from the government towards their pension saving, when the 20p-rate taxpayer gets just 20p? When upwards of £30bn is lost to the exchequer by encouraging pension saving, it is reasonable to ask why the same amount of government support cannot be given to all.
For a government that wants to support families that are “just about managing”, tax breaks are an irrelevance. Most don’t pay tax, and many don’t even understand how tax is calculated. They need investment in the things that bring well-paid jobs. And nothing the government has done with its growing list of tax reliefs has achieved that.
