The NAO was particularly critical of the fact that HMRC has carried out ‘only limited analysis’ to investigate why the cost of entrepreneurs’ relief has increased over 500% from £500m in 2008–09, to an estimated £2.9bn in 2013-14, compared to a £900m forecast for the year. The watchdog said the department should have done more to establish whether the cost increase might be influenced by misuse of the relief.

The report also says that while HMRC detected large scale abuse of share loss relief in 2006-07, it failed to check  the total amount of claims for that and subsequent years in order to spot whether there were other unexplained surges.

In 2006-07, the cost of claims against income tax for share loss relief rose from £385m to £1.2bn in real terms. HMRC is investigating 80% of the 2006-07 claims by value (£964m). The NAO says avoidance activity has continued and HMRC has detected 20 undisclosed schemes between 2005-06 and 2011-12. It has opened investigations into 60% of all claims. The amount of relief that HMRC is considering in tax terms over that period is £780m.

The NAO’s report says that of the 400 tax reliefs listed on HMRC’s website, it judges that half (196) are designed to encourage particular behaviour towards a social or economic policy objective. Of these, in 41% of cases HMRC has not estimated costs, while for 14% tax return data is collected but costs are not published.

Amyas Morse, head of the NAO, said: ‘Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money.’

The NAO calculated that of 46 high-value reliefs with social or economic objectives (described as ‘tax expenditures’ on HMRC’s website), 11 had increased in real terms by more than 25% above 2007 levels, but says that under the department’s current approach significant increases in costs do not automatically trigger a response to rule out abuse.

The watchdog looked at ten reliefs in detail. Of these, eight had been in place for more than three years but HMRC had sought to evaluate the impact of only two (R&D tax credits and entrepreneurs’ relief) on taxpayer behaviour. The report stated: ‘Such evaluation can be both methodologically challenging and expensive, but without it, decision makers lack the evidence to judge whether the costs of a relief to the exchequer are commensurate with the social or economic benefits it delivers.’

The report’s recommendations include the need to develop principles and guidance for administrating and reporting on tax reliefs, and to publish data on the cost and effectiveness of significant tax reliefs.  

It also says HMRC and the Treasury should systematically track actual costs over time against mid-year projections and the forecasts made for policy changes, and should report to Parliament each year on the cost and impact of the tax reliefs posing the greatest risks.

The NAO also wants HMRC to carry out a pilot exercise to analyse behavioural reliefs systematically and identify and explore patterns and risks.

Margaret Hodge, chair of the Public Accounts Committee, said: ‘I am deeply concerned that HMRC’s failure to routinely monitor the costs and use of some tax reliefs means that abuse or fraud could go undetected. HMRC argues that it ensures taxpayers comply with tax rules by examining how individuals and companies pay tax, and does not need to monitor how reliefs themselves are used. This approach means that HMRC might respond too slowly to changes in how tax reliefs are used, leaving the door open for tax avoidance.’

A spokesman for HMRC said: ‘It is nonsense to suggest our administration of tax reliefs loses money. We robustly monitor the implementation of reliefs, and identify and tackle abuse as a routine part of our compliance work.’ 

The full report is available here