Tax allowances and credits not periodically evaluated as agreed. Tax break can differ significantly from actual amount
The State Secretary for Finance does not periodically evaluate and, if necessary, revise the 48 tax allowances and credits provided for in 17 laws intended to simplify the tax system. The government is failing in its duty of evaluation. Neither the government nor parliament knows whether this tax instrument is a true reflection of reality, one of the aims of the allowances and credits.
Tax allowances and credits are fixed sums added to or deducted from certain groups of taxpayers’ income if they enjoy an advantage or suffer a disadvantage, such as unearned income (box 3), home ownership, public transport credit or the benefit in kind of a company car.
Some allowances and credits not revised since 1980
Half of the 48 allowances and credits have not been revised since 2010, whereas the regulations require them to be evaluated at least once every seven years. Many allowances and credits used since the introduction of the Income Tax Act 2001 have never been revised. Six, mostly provided for by the Inheritance Act (concerning gifts and legacies), have not been revised since 1980. But circumstances have certainly changed since then; interest rates have been falling for many years and life expectancies have gradually been increasing, at different rates, for men and women. Allowances and credits are not systematically (periodically) evaluated and parliament is therefore not systematically informed of their development and whether or not they are still appropriate. Tax allowances and credits, however, are an instrument of tax policy and the government has a duty to evaluate them. If evaluations are not carried out it is not known whether an allowance or credit is a true reflection of the advantage or disadvantage to the taxpayer.
Parliament does not periodically receive systematic information from the State Secretary regarding the budgetary importance of almost all of the allowances and credits we audited. The costs and benefits of most of them are not known. It is known, though, that the capital yield tax base raises more than €4 billion a year, the notional rental value for owner occupiers €3 billion and the benefit in kind of a company car more than €1.5 billion.
Efficiency of tax collection?
The audit report published by the Court of Audit on 26 June 2019 shows that the State Secretary does not monitor whether tax allowances and credits contribute to the efficiency of tax collection by the Tax and Customs Administration. The Administration’s efficiency is one of the main reasons to use this tax instrument. The alternative is to take individual measures for each taxpayer.
No visible evaluations had been made of the efficiency gains (and other benefits) and the costs of any of the allowances or credits we audited. Thousands of taxpayers appealed against their tax assessments because they thought the capital yield tax base was unjust. By way of illustration, dealing with the appeals against box 3 assessments cost the Tax and Customs Administration 16,463 hours in the first 11 months of 2018.
Response of the State Secretary
The State Secretary for Finance acknowledged in his response that periodic evaluations were not carried out and the allowances and credits needed to be revised. He undertook to carry out a further study and submit the results to parliament in early 2020. The Court of Audit’s findings could contribute to the debate on the simplification of the tax system. In its afterword, the Court of Audit reiterated the need for evaluation and stressed the importance of revising the allowances and credits with a view to increasing the efficiency of the Tax and Customs Administration.