Public finances are in a bind. This is the finding of CPP’s latest report: Funding Fair Growth: How to transform the UK economy. In our report, we set out how just to stand still, to maintain the provision of public services at their current level, the Government will need to spend an additional £142bn per year by the end of this decade.

It is striking then that the Government still chooses to forgo billions of pounds every year in order to maintain tax reliefs that have little and often no positive impact on the economy.

Depending on what gets included as a tax relief, the UK may have as many as 1,100, costing the exchequer £400bn per year. While many of these are non-controversial, such as exempting children’s clothes and food from VAT, others are not. In Funding Fair Growth, we have set out four tax reliefs which will cost public finances £8.1bn in the first year of the next Parliament. As we set out in our report, each of these reliefs fail to contribute to fair, inclusive growth. We propose abolishing them and redirecting revenue towards policies aimed at driving inclusive growth such as restoring funding for the public health grant to its 2015/16 level and funding family hubs in line with peak funding for SureStart.

Capital allowances for expenditure on new oil and gas developments

Currently companies developing new oil and gas rigs and platforms are handed corporation tax allowances for their first year of operating, costing the exchequer around £1.1bn per year. This seems bizarre, given the UK’s push towards net zero. This tax relief is an anachronistic policy left over from the early development of North Sea oil, when companies needed to be encouraged to develop new fields. By contrast, this relief is not extended to the renewable energy developers needed to power our push to net zero. It is obviously a mistake to offer an effective subsidy for fossil fuels if we want to incentivise the transition to net zero and this is a relief that we believe should be removed.

Business Asset Disposal Relief (BAD Relief)

Formerly Entrepreneur’s relief, this tax relief is targeted at those selling part of or all of their business. Initially aimed at encouraging people to set up businesses, it has instead functioned as a way to avoid capital gains tax and so to give a tax break to business owners that is not available to anyone else. As Chancellor, Rishi Sunak appeared to recognise this fact in 2020 when he reduced the lifetime limit an individual can gain from the disposal of business assets from £10mn back to the 2010 level of £1mn.

BAD relief still costs the Treasury around £1.1bn in revenue each year, despite the fact that for it to function as an incentive for investment, it would need to be applied to when a person sets up a business, rather than when they sell it on.

Business Property Relief

Business Property Relief is intended to prevent family businesses being broken up by inheritance taxes. In practice take up rates are low and normally limited to a tiny number of highly wealthy families, at a cost of around £800mn to the exchequer.

A better way to prevent family businesses being broken up, without forgoing this revenue, would be to allow taxes to be recouped when the business is sold, rather than when it is inherited. This would allow family businesses to be passed on, without allowing some people to avoid paying the same tax as others.

R&D tax credits

Lastly, there are tax reliefs aimed at incentivising companies to invest in R&D. While some of the revenue forgone as a result of these reliefs do produce this investment, these reliefs are associated with massive deadweight losses that should be addressed by reform.

Research by the IPPR has found that 80% of the revenue forgone as a result of the R&D expenditure credit (a scheme used mainly by large firms) goes to companies that would make the same investments regardless of the availability of these reliefs. Similarly, 57–67% of the revenue forgone through the small- and medium-sized enterprises scheme is a deadweight loss. CPP has used these deadweight loss estimates to calculate that reforming these reliefs to better target revenue to firms seeking to make new investments, or to directly provide grants for these companies, would achieve the same outcome, while saving the Exchequer around £5bn a year over the next Parliament.

Conclusion

Successive Chancellors have espoused the view that Government ministers should spend public funds with the same care they give to their own money. In spite of this, a lack of care and attention has been given to tax reliefs, compounding problems and leading to billions in forgone revenue. Among other measures, set out in Funding Fair Growth, we recommend that the Treasury launch a fundamental review of tax reliefs, to prevent waste and to fund policies geared towards inclusive growth.