by When Keir Starmer and Rachel Reeves consider the funding gap between what they want a Labor government to achieve and the money available, there are billions of pounds in unwarranted tax giveaways that could be put canceled to help reverse the intensity.
Successive governments have introduced tax breaks to boost economic growth that are in the worst examples a cheater’s cartel and, even in less scandalous circumstances, are undermined by a lack of evidence as to whether they achieve their aims.
Tax experts agree that there is scope for savings; as does the National Audit Office. In a report earlier this year the watchdog said there were 341 tax breaks with the ostensible task of promoting economic growth worth £204bn.
After examining how HMRC managed these tax breaks, it concluded that the tax agency did not know much about their impact on economic growth. In other words, it may not have been enough to just line the pockets of company owners and people better off.
In one example, £1bn is given away every year to business owners when they are sold up. The business asset disposal relief scheme, known as entrepreneur relief before 2020, reduces the capital gains tax (CGT) rate on disposals of businesses or business assets from 20% to 10%.
The £1bn tax break could be justified if studies show that more businesses are started because it is there. But there are no such studies, so it is widely considered to be just a bung for those who have already built successful enterprises.
There are many exemptions to inheritance tax, including one that allows people to invest in funds that focus on shares listed on the London stock exchange’s Aim market for small businesses. The gains made from these investments are excluded from estates for inheritance tax purposes.
Absurd tax breaks, like most of those in the inheritance tax system, let the rich hang onto their wealth
Richard Murphy, head of Tax Research
Are more investments made in small companies because this tax break exists? Again, no one knows.
Richard Murphy, head of consultancy Tax Research, says: “Under absurd tax relief, like most of those in the inheritance tax system, the rich are allowed to hang on to their wealth.”
Another gift for the wealthy is tax relief at a higher rate on gifts to charities. Why not offer everyone the same level of support for giving to charities rather than giving a better deal to those with a lot of money? The same could be said for the estimated £15bn returned to higher rate taxpayers who save into a pension. Basically, the state gives someone earning less than £50,271 20p in every £1 saved in pension, but 40p in £1 for someone with a higher annual income.
It has never been fair and the only justification for keeping the current system is the complaints from pension funds about the difficulties they would have to change their computer systems. They also spread fears of a decline in pension savings, but there was no evidence to support this claim.
The UK tax system allows people living abroad to avoid capital gains tax on their UK investments. Most countries impose what is called a withholding tax on dividends, which charges a 20% fee unless the investor can show that he has paid the tax in another country. It means that people based in tax havens such as the Cayman islands pay tax on German investments but not those made in the UK.
Mike Warburton, a well-known tax expert and former partner at accountants Grant Thornton, said: “Labour could justify [scrapping it] on the basis that most other countries apply it and only those living abroad benefit from it.”
Probably the worst example of a tax break for businesses was the scheme aimed at promoting investment in research and technology by smaller companies.
It is so generous that it allows companies to write off 186% of the value of any investment against corporation tax.
The bill to the Exchequer increased by 575% in cash terms between 2013-14 and 2021-22, when it cost £4.76bn. It is understood that a delayed crackdown on fraud by HMRC has reduced the cost of the subsidy over the past year, but what HMRC cannot do is show that the tax break has encouraged R&D by small businesses.
Related: Care must be taken, not grand plans, if Labor is to build wealth in Britain
Reeves has said she will ramp up HMRC’s resources to tackle fraud and avoidance schemes. She has started to cancel some tax breaks for the wealthy while allocating the money to extra teachers and reductions in health service waiting lists. A panel including former Treasury official Sir Edward Troup will advise her on next steps.
What the NAO report shows is that there is more scope to review and reform the UK’s huge pot of tax relief to save billions of pounds more.
• Phillip Inman is economics editor of the Observer and economics writer for the Guardian
