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Meaningful evaluation of tax changes is needed

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Perhaps surprisingly there has never been a structured programme of reviewing tax changes to see whether or not they achieve the original objectives. Such reviews have taken place sporadically but have not adopted a consistent approach. 

Margaret Hodge in her time as chair of the Public Accounts Committee put the issue of reviews firmly in the spotlight, and we have seen other politicians taking up the cause. Most notably the Opposition managed to force through a number of anti-avoidance measures in the recent Finance Act which required HMRC to report back on how effective those measures had actually been. Tucked away in the Spring Statement material was HMRC’s first series of responses. To anybody expecting detailed analysis, these replies must have come as a great disappointment. Here is a typical example:

‘The measure comes into effect on 1 January 2020. The first corporate tax returns that will be affected by the change will be those whose accounting period ends after 1 January 2020. The earliest deadline for submitting those returns would be 2 January 2021. HMRC does not have data to assess how effective the measure has been in reducing tax avoidance and evasion. It is not anticipated that section 19 will induce any new tax avoidance opportunities. It has not been possible to estimate the efficacy of this provision in reducing the tax gap for the reasons set out in the summary of findings of this review on page 54’. 

Page 54 says: ‘Many of the provisions in question in Finance Act 2019 have not yet come into effect, and for those that have, the time lag before tax returns for the relevant period are filed means there is as yet no new data available to assess the effectiveness of the provisions. However, the government remains confident that the rationale for introducing the measures is sound and that they will be effective in fulfilling their purpose.’

There is an important lesson here about timing.

Even if a tax change comes into effect immediately after it has been announced there will still be a time lag before companies and individuals are required to make returns for the period covered by the change. HMRC will need time to review returns and collate information.

If, for example, a tax change came into effect on 6 April 2019 it would not be reported until the due date for the 2019/20 return, which would be 31 January 2021. HMRC has a year in which to open enquiries, which takes us to 31 January 2022. If it then takes a year for HMRC to collate the results of all those enquiries it would be January 2023 before any meaningful information about the effectiveness of the change could be produced. 

By insisting on very early reports on the effectiveness of measures, politicians have in effect scored an own goal. It is easy to understand why they would want to get early feedback, but this doesn’t really work within the current system of tax reporting. But one can also see that putting down a requirement for HMRC to report in, say, three years after the introduction of a new measure looks complacent and doesn’t really achieve the desired political results. 

I suspect that the very uninformative results this year may lead to a rethink of the process for the future. Let’s hope so: meaningful evaluation of tax changes is important, and we need a proper mechanism to enable that to happen.

Andrew Hubbard, RSM