Use of tax expenditures in budgeting

Annex A. Case studies

Case study – Canada

Tax expenditures in Canada

Federal context

This case study focuses on the federal budget, which accounted for nearly 40% of general government revenue and expenditure in 2025. However, both federal and provincial governments have control over tax policy and can create tax expenditures, some of which are co-ordinated through intergovernmental agreements.

These intergovernmental arrangements mean that tax expenditures can be created by different levels of government even if they apply to the same tax base. Ontario, for example, had 149 tax expenditures in 2019-2020 at an estimated cost of CAD 44 billion; of which 100 measures were directly controlled by the province and 49 by the federal government (Financial Accountability Office of Ontario, 2020[43]).

Canadian provinces have taken varying approaches to tax expenditures, for instance in the case of disability benefits, some provinces use cash transfer payments while others offer a tax credit. Decisions by the federal government to exempt part of the tax base from income or sales taxes may also impact provincial budgets. As with direct expenditure in budgets, the federal government must therefore co-ordinate decisions on tax expenditure not only for its own spending programmes, but also recognise that decisions may affect provincial tax and spending policies.

Intergovernmental administration agreements provide a degree of formal co-ordination mechanism for tax policy and support the predictability of budget arrangements. For example, for most provinces, entering into an administrative agreement provides virtually-free-of-charge administration of their tax system on the condition of acceptance of a common tax base - enabling the federal government to define taxable income for personal and corporate tax and the tax base for sales tax. This allows the federal government to establish deductions or exemptions for tax expenditures from the tax base. It also allows provinces to set additional tax rates and to establish tax credits (as these can be applied after taxable income has been calculated) (Financial Accountability Office of Ontario, 2020[43]). Other features of the administration agreements include the Canada Revenue Agency’s role in tax collection in the provinces, which centralises cash management for the tax payable.

Major tax expenditures

In Canada, tax reliefs are identified in relation to a benchmark tax system for the federal government, which specifies “only the most fundamental aspects of the tax system” for PIT, CIT and GST (Department of Finance - Canada, 2025[44]).

There is no aggregated cost of tax expenditures in the budget, annual report or financial statements. Instead, the government publishes a detailed list of tax expenditures and the estimated cost to the budget in an annual Federal Report on Tax Expenditures, which presents measures under three categories:

• Non-structural reliefs which have defined objectives and can be considered substitutes for direct expenditure (Auditor General of Canada, 2015[31]).

• Structural reliefs where the main objective is specific to the tax system, which may be tax expenditure or other measures.

• Refundable tax credits, which are deducted from the taxes owed by taxpayers to the government, but are refundable as a transfer payment when the credit exceeds the taxes owed.

Each of these categories have fiscal and budget impacts. All non-structural reliefs and around a third of structural reliefs are classified as tax expenditure. The remaining two thirds of structural reliefs are classified as tax measures other than tax expenditure. Since 2013, refundable tax credits have been classified as transfer payments and recorded as direct expenditure, though they are authorised through tax legislation and administered by the Canada Revenue Agency (Auditor General of Canada, 2015[31]).

A relatively small number of policies account for most of the estimated costs of tax expenditure to the federal government. The 2026 Report on Federal Tax Expenditures reports 229 tax measures. The 12 largest measures made up more than 50% of the estimates for all reported tax reliefs (Table 3). Most of the largest measures are non-structural reliefs, similar to those reported as tax expenditures in other OECD Member countries, e.g. Netherlands and United Kingdom.

Table 3. Largest tax reliefs reported

Tax reliefs with an estimated cost of more than CAD 18 billion

Tax measure	Group	Category	Tax	Estimate CAN, millions
Credit for the Basic Personal Amount	Tax measure other than tax expenditure	Structural	PIT	54 640
Transfer of income tax points to provinces	Tax measure other than tax expenditure	Structural	PIT/TRU/CIT	44 975
Transfer of income tax points to provinces	Tax measure other than tax expenditure	Structural	PIT/TRU	38 710
Transfer of income tax points to provinces	Tax measure other than tax expenditure	Structural	PIT	37 315
Partial inclusion of capital gains	Tax expenditure	Non-structural	PIT/TRU/CIT	36 920
Canada Child Benefit	Refundable tax credit classified as transfer payment	N/A	PIT	31 000
Registered Pension Plans	Tax expenditure	Non-structural	PIT	25 360
Registered Pension Plans	Tax expenditure	Non-structural	PIT	23 290
Tax treatment of Canada Pension Plan and Quebec Pension Plan contributions and benefits	Tax measure other than tax expenditure	Structural	PIT	20 710
Registered Pension Plans	Tax expenditure	Non-structural	PIT	19 570
Partial inclusion of capital gains	Tax expenditure	Non-structural	CIT	18 650
Partial inclusion of capital gains	Tax expenditure	Non-structural	PIT/TRU	18 275

Source: Department of Finance Canada (2026[30])

Recent changes to tax expenditure

From a fiscal perspective, the main changes to tax expenditure in Canada since 2019 were in relation to two general policy initiatives – budget responses to the COVID-19 pandemic, and support for a transition towards a lower-carbon economy. A number of new, but lesser measures, have also been implemented to support households with the costs of housing.

Over the same period, a number of tax expenditures have been phased out, including the investment credit for childcare spaces. Several tax expenditures had only a temporary status and have ended. However, tax expenditures are typically not included in the federal government’s budget review processes, such as the Comprehensive Expenditure Review.

Institutional arrangements for tax expenditure

Central budget authority

The role of the central budget authority in Canada is shared between two departments: the Department of Finance Canada and the Treasury Board of Canada Secretariat:

• The Department of Finance Canada has overall responsibility in the federal government for the budget, tax policy, financial reporting and intergovernmental fiscal relations. This includes evaluating the relevance and effectiveness of tax expenditures, preparing tax expenditure cost estimates, and monitoring the effects of tax expenditures.

• The Treasury Board of Canada Secretariat is responsible for expenditure management. The President of the Treasury Board tables the estimates in parliament.

Revenue administration

The Department of Finance works with the Canada Revenue Agency, which is responsible for tax administration, including the delivery of numerous tax credits, but also supports policy design and monitoring. The Canada Revenue Agency advises the tax policy branch of the Department on the development of new legislation and on issues during implementation. For new measures, the Canada Revenue Agency will prepare analysis and may develop relevant advice. It will also highlight any problems with compliance and other unforeseen challenges that arise during implementation (Auditor General of Canada, 2015[31]).

Refundable tax credits are usually allocated to and reported by the Canada Revenue Agency, which includes information and performance indicators in its Departmental Plan, and are reported through the Departmental Results reports. Audits of tax expenditures are also linked to the Canada Revenue Agency.

Parliamentary oversight

Parliament has two main standing committees with roles related to tax expenditure:

• The Standing Committee on Finance oversees the responsibilities and spending of the Department of Finance. It oversees economic and fiscal policy, including tax policy and has conducted recent work on CGT and on income inequality.

• The Standing Committee on Government Operations and Estimates oversees the work of the Treasury Board of Canada Secretariat and reviews the budget estimates. It has a mandate to scrutinise statutory programmes and tax expenditures (Lester, 2024[38]).

Tax expenditure approval and execution

While the federal government reports on tax expenditures with a high degree of transparency, there are differences in the way tax expenditures are approved, reported and managed relative to direct expenditure. Table 4 summarises the differences in the management of tax expenditure and direct expenditure. Recommendations to align tax expenditure reporting more closely with direct expenditure have highlighted the challenges of doing so, although incremental improvements in reporting are evident in the federal government’s budget reports.

Table 4. Comparison of direct expenditure and tax expenditure for approvals and reviews

Attribute	Appropriated programme spending	Tax expenditure
Cabinet and ministerial approval	Memorandum to Cabinet, Treasury Board submission	Briefing notes prepared for the Minister of Finance and the Prime Minister
Approval by parliament	Parliamentary scrutiny and approval of Estimates each year by annual appropriation act	Approved in the Budget Implementation Act or other statutes, following full legislative process
Spending limits	Total authorities granted by parliament through an appropriation act, for voted expenditures.	No maximum
Evaluation	Required every five years, according to the Treasury Board Policy on Evaluation	No requirements
Subject to expenditure reviews	Yes	No

Note: Extract, with minor additions

Source: Auditor General of Canada (2015[31])

Procedures for approval and authorisation

The Cabinet makes decisions over direct expenditure, based on advice from the Department of Finance and Treasury Board of Canada Secretariat. In contrast, most changes to tax policy (and therefore most tax expenditures) are decided through separate processes that are co-ordinated through the finance portfolio within the federal government. A consequence of the separate processes is that a request for additional funding by the Canada Revenue Agency to administer a change in tax expenditures would follow a different process from approving the tax expenditure. (Auditor General of Canada, 2015[31]). However, the financial impacts from administrating the change would likely be identified in the relevant policy papers when approving the tax expenditure.

The federal government usually announces significant changes to tax and spending in its annual budget. However, policies may also be announced with through economic and fiscal updates or on an ad hoc basis.

Tax and expenditure policy is authorised through different legal instruments. Direct expenditure is authorised through appropriations (voted expenditure) or other statutes (statutory expenditure). Tax expenditure is authorised through changes to tax laws, such as the Income Tax Act. This is also the case for refundable tax credits which are not appropriated or included in the estimates, even though they are treated as expenditure for accounting purposes.

Tax legislation and other standing legislation is generally subject to more scrutiny from parliament than the appropriation bills, which are approved through an expedited process with limited debate in parliament. In contrast, changes to the Income Tax Act, for example, undergo the full legislative process for a bill, with first and second readings, a committee study and report and a third reading in both the House of Commons and the Senate.

Spending limits and budget execution

There are no firm limits on tax expenditures, including refundable tax credits that are recorded as spending. Overall fiscal policy is guided by medium-term fiscal objectives for government debt and the budget balance, which reflect the net impact of tax expenditure on tax revenue and on public spending, including for refundable tax credits which are included in the government’s accounts. Annual targets for the budget balance and government debt are established through the federal government’s annual budget process.

The federal budget presents the government’s tax and spending plans for the budget year and an additional four years. These plans are revisited in the Fall Economic Statement and subsequent budgets. Tax expenditures are included in the revenue and spending forecasts on a net basis.

Historically the government has taken steps to limit the cost and number of tax expenditures (OECD, 2010[45]). However, tax expenditures are not subject to the same limits as direct expenditure in the budget process. Voted expenditures are controlled within appropriated ceilings. Statutory spending that is included in the estimates is allotted by the Treasury Board during the financial year which provides a basis for expenditure. These allocations are not firm ceilings in the way that they are for voted expenditures. Tax expenditures are similar to statutory spending, in that they are not included in the estimates and do not require “allotment.”

Tax expenditure reporting, evaluation and audit

Identification and estimation

The federal government has a well specified tax benchmark that is used to identify and report tax expenditures and other tax measures and tax credits. Its elements include unit of taxation, taxation period, tax base and tax rate structure, among other features (Department of Finance - Canada, 2025[44]; Robson and Laurin, 2017[46]).

The costs of tax reliefs are estimated using a “revenue foregone” methodology that assumes no behavioural changes and no impact on the economy. Each tax expenditure is estimated individually, and costing does not factor in the interactions between different taxes.

Estimates are determined by the Department of Finance using various models and data. Estimates of PIT and CIT reliefs (including credits administered by the Canada Revenue Agency) are mostly calculated using microsimulation models based on data from tax assessments, tax returns and other sources. Reliefs applied to GST cannot be estimated with a microsimulation model, so are generally calculated using administrative data from the Canada Revenue Agency or the Goods and Services Tax Model maintained by the Department of Finance.

Tax data is typically available for costing with a lag of one year or more. While the timing varies between 12 months and 24 months for each of the main taxes – PIT, CIT and GST – the effect on budget reporting is similar. Estimates of most tax expenditures reported in 2025 use actual data from 2019 to 2022 and are then projected from 2023 to 2026.

Reporting

Tax expenditures by the federal government are reported primarily through an annual Report on Federal Tax Expenditures that is released by the Department of Finance Canada alongside the Main Estimates. The Budget and Fall Economic Statement may include new policy changes to tax expenditures, which are presented together with other tax and spending measures over the full five-year horizon of the budget forecasts. The Budget also includes a detailed summary of new tax expenditure policies in the supplementary information on tax measures. The Annual Financial Report and the Public Accounts disclose information on refundable tax credits which are treated as expenditure for accounting purposes. Other tax expenditures are reported in the net revenue figures. Table 5 summarises some of the main differences in the treatment of tax reliefs in selected budget documents and reports for the federal government as a whole.

Table 5. Comparing tax expenditures in federal budget reports

	Tax expenditure report	Estimates	Budget	Annual report
Coverage of tax expenditure	Tax reliefs for PIT, CIT, GST	None	Policy changes for all taxes and spending	Refundable tax credits
Costs included	Annual cost of each tax expenditure	None	Cost of changes to tax expenditures	Full cost of refundable tax credits
Economic assumptions	Fall Economic Statement	Fall Economic Statement / Budget forecast	Budget forecasts	Actuals
Forecast coverage	Budget year + 1 year	Budget year	Budget + 4 years	Budget year
Period of costing	Calendar year	Budget year	Budget year	Budget year
Timing	Feb/Mar	Feb/Mar	November*	Oct-Dec

Note: Budget year (April-March). *Starting from the 2025-2026 Budget, Canada shifted the timing of its federal budgets so that the budgets are released in the autumn instead of the spring. The Fall Fiscal Update will instead now be tabled in the spring.

Source: Authors summary based on reports by the Department of Finance Canada and Treasury Board of Canada.

The total cost of each tax expenditure is disclosed separately from the budget in the Report on Federal Tax Expenditures. This report is divided into four main parts.

• Part 1 introduces the key concepts used to identify, categorise and estimate tax expenditures and describes the benchmark tax system.

• Part 2 summarises the main policy changes and along with the estimated cost of tax reliefs over an eight-year period (the 2025 report, for example, covers the period 2019-2026).

• Part 3 describes each individual measure using a standardised template, which includes a description of the tax expenditure, its beneficiaries, its classification, its legal reference, its objective, why it is not part of the benchmark system, its estimation method and its cost.

• Part 4 summarises the results of evaluations and distributional analysis following the requirements of the Gender-Based Analysis Plus.

The Report on Federal Tax Expenditures is often highlighted as an example of good practice for tax expenditures reporting and budget transparency, although it is not always possible for the report to fully align with budget planning or reporting for direct expenditure. Notably, the tax expenditure report covers CIT, PIT and GST, but not all taxes collected by the government, so may have incomplete coverage. The forecast period and estimation on a calendar year basis limits the comparison to the Estimates and the Budget, which are pared on the fiscal year (April-March). The timing of the publication coincides with the Main Estimates, which supports parliament’s scrutiny of expenditure, and includes all announcements from the previous year.

Evaluation

Distributional analysis of federal tax expenditures is a requirement under the Canadian Gender Budgeting Act of 2018 and follows the Gender-Based Analysis Plus framework that is also used to assess other forms of expenditure. While focused on gender, distributional analysis will consider factors, including age, family types, income groups, and place of residence. In 2024, the analysis covered reliefs applied to pension and retirement savings plans, and in 2025 the analysis looked at personal income tax expenditures by gender identity, immigration history, and ethnocultural identity using data from the 2021 Census of Population.

The evaluation of direct expenditure is guided by the Treasury Board Policy on Results, but unlike the Gender-Based Analysis Plus, this policy is not a requirement for tax expenditures (Lester, 2024[38]). Nonetheless, the Department of Finance publishes studies and evaluations of tax expenditures each year. Between 2020 and 2025, the Report on Federal Tax Expenditures typically included two or three studies which sometimes involved distributional analyses, with two evaluations published in 2022 2024, and 2026.The Department of Finance Canada and the Canada Revenue Agency also conduct evaluations of the administrative aspects of tax expenditures (Auditor General of Canada, 2015[31]).

Audit

Along with the annual audit of the federal government’s financial accounts, which includes refundable tax credits, the Office of the Auditor General of Canada conducts performance audits on specific tax reliefs, such as the 2019 audit on tax subsidies for fossil fuels and the 2021 audit of the Canada Child Benefit and Canada Emergency Wage Subsidy. Performance audits have also been used to review the systems for managing tax expenditures, with the last general review conducted in 2015 in the report on “tax-based expenditures” (Auditor General of Canada, 2015[31]).

Case study – Ireland

Tax expenditures in Ireland

The definition of tax expenditure in Irish legislation draws on the OECD’s (2010[45]) definition and describes a tax expenditure as:

a transfer of public resources that is achieved by a) reducing tax obligations with respect to a benchmark tax rather than by direct expenditure, or b) provisions of tax legislation that reduce or postpone revenue for a comparatively narrow population of taxpayers relative to the tax base (ISB, 2013[47]) (Government of Ireland, 2024[48]).

This benchmark is defined by the OECD as comprising:

“The rate structure, accounting conventions, the deductibility of compulsory payments, provisions to facilitate administration and provisions relating to international fiscal obligations” (OECD, 2010[45]).

In its 2009 report, Ireland’s Commission on Taxation identified 130 measures appropriate to the benchmark tax system within five categories. These included measures inherent in the design of the taxation system (i.e. to avoid double taxation), measures that are tax neutral, measures related to the state, court awards, and deductions for expenses incurred in earning income (Daly et al., 2009[49]) (Commission on Taxation and Welfare, 2022[50]).

While there are around 117 active tax expenditure programmes, the ten most expensive make up nearly three-quarters of total revenue foregone. The 10 most expensive tax expenditures under this definition are listed in Table 6. The 2025 Report on Tax Expenditure highlights that data that year were not available for one-fifth of tax expenditures, meaning that the total cost of tax expenditures of EUR 7 070 million listed in Table 6 underestimates the total cost.

Table 6. Ten most expensive tax expenditures

Most expensive tax expenditures, 2024

Tax expenditure	EUR million
Pension Contributions	1 154
Research and Development Tax Credit	976
Exemption of employers’ contributions from employee benefits in kind	956
CAT business relief	430
Medical Insurance Relief	405
Excise Rate on Auto-diesel	385
Employers’ contributions superannuation schemes	323
Health Expenses	243
CAT agricultural relief	237
Help to Buy	185
Total for the 10 most expensive tax expenditures	5 294
Total for all tax expenditures	7 500

Source: (Department of Finance - Ireland, 2025[51])

Recent changes to tax expenditure

The main changes to tax expenditure in Ireland since 2022 refer to the Department of Finance refinement of the master list for tax expenditure to remove measures that it deems to fit more appropriately in the benchmark. This has led to a reduction in the number of tax expenditures from 188 in 2021 (accounting for EUR 7.7 billion in revenue foregone) to 124 in 2023 (accounting for EUR 8.0 billion in revenue foregone) (Government of Ireland, 2024[52]). This process was conducted using a template-based approach in which the majority of questions must be answered ‘Yes’ if the measure is to be deemed a tax expenditure. For example, (Government of Ireland, 2024[52]):

• Does it address a current market failure?

• Has it been reviewed?

• Is it likely to be revoked?

• Is the economic/social rationale unlikely to exist in the future?

• Has it been in place for less than 15 years?

In 2021, Ireland’s Committee on Budgetary Oversight identified tax expenditures as a key area warranting scrutiny and met with experts Dr Michéal Collins from University College Dublin and Dr Barra Roantree from the Economic and Social Research Institute to examine the areas in greater detail. Both Collins and Roantree argued for tax expenditure to be treated as equivalent to direct expenditure, advocating for annual thematic reviews of existing tax breaks and scrutiny of new measures in budget bills, as well as the publication of evaluations before budget day (perhaps alongside the Department of Finance tax strategy group papers) and the establishment of a dedicated tax expenditure unit in the Irish Government Economic Evaluation Service. Collins also noted that while transparency around tax expenditure in Ireland has improved since a 2009 Commission on Taxation, there are still opportunities to strengthen parliamentary oversight (Committee on Budgetary Oversight, 2021[53]).

Institutional arrangements for tax expenditure

Departments of Finance and Revenue

The Department of Finance and the Office of the Revenue Commissioners (often referred to as Revenue) are the main actors regarding tax expenditures in Ireland. Of note, the Department of Finance states that its practice is for tax expenditures to be kept under scrutiny and considered as akin to direct expenditure (Department of Finance - Ireland, 2023[54]).

Both the Departments of Finance and Revenue use the revenue foregone method to estimate the cost of tax expenditures. This method calculates the difference in tax revenue due to tax expenditure provisions, assuming no change in taxpayer behaviour. While the Departments acknowledges that this is unrealistic, the complexity of alternative approaches which attempt to estimate behavioural approaches leads the Departments to continue using its revenue foregone method (Government of Ireland, 2024[48]).

Prior to 2023, the Departments of Finance and Revenue published different annual data on tax expenditures. The Department of Finance maintained that the list published by Revenue was not based on the OECD definition and included elements that should be part of the benchmark tax system, and therefore not tax expenditures. (Parliamentary Budget Office, 2018[55]). Since then, a master list of tax expenditures was created, and is now used both by the Department of Finance for budgetary planning and by the Department of Revenue for statistical reporting. The Department of Finance continues to publish costings in the Report on Tax Expenditures, which aligns to the OECD definition of tax expenditure.

Parliamentary oversight

In 2019, the Oireachtas Committee on Budgetary Oversight published a review of tax expenditure in Ireland. In this, the Committee agreed with a Department of Finance statement that tax expenditure should be seen as equivalent to direct expenditure and stated that they would incorporate the regular examination of Department of Finance evaluations and reviews of tax expenditure into their annual scrutiny programme (Houses of the Oireachtas, 2019[56]).

In this review, the Committee found that 78% of tax expenditures did not have a sunset clause, and 23% had never been reviewed, although it noted that all measures introduced between 2012 and 2015 had sunset clauses. A subsequent review in 2022 found that 75% of tax expenditures did not have a sunset clause, highlighting that minimal change had occurred. The review also highlighted that the complexity of being able to identify how many tax expenditures cost over EUR 25 million.

The 2022 review concluded that the Department of Finance can only review four or five tax expenditures every year. It and is generally understaffed to undertake the amount of work required to review tax expenditures as outlined under their review guidelines. It therefore suggests that the Department of Finance engages with the Department of Public Expenditure and Reform to recruit the appropriate number of staff and resources necessary to review tax expenditures. It further notes that a lack of transparency around tax expenditures presented significant issues, particularly the lack of information around the cost of many tax expenditures (Committee on Budgetary Oversight, 2022[57]). In recognising the recommendations from the 2022 review, the Department of Finance committed to a formal review of the tax expenditure guidelines.

Once enacted, tax expenditures are not subject to regular parliamentary debate and scrutiny, unlike direct voted expenditure (Parliamentary Budget Office, 2018[55]).

Box 3. Commissions on taxation in Ireland

In 2008, the Commission on Taxation was tasked with reviewing the efficiency, structure and appropriateness of the taxation system in Ireland. It published its results in 2009, which included the recommendation that the OECD definition of tax expenditure be adopted. It also highlighted that direct expenditure should generally be used instead of tax expenditure, and reviews on the feasibility of tax expenditure should only occur to correct market failure, to attract mobile investment, and to offset shortcomings in other areas of public policy (Daly et al., 2009[49]).

Since 2014, government policy has been more restrictive than this, stating that a tax expenditure should not be incurred unless it addresses a market failure and then it should only be used where such a tax expenditure is more efficient than a direct expenditure intervention.

In 2021, the Minister of Finance established a separate, but related, body, the Commission on Taxation and Welfare, to review how best the tax and welfare systems can support economic activity and income redistribution. The Commission completed its report in 2022 and made 116 recommendations to improve both systems through a long-term reform programme to make the systems fiscally sustainable, reduce the volatility of revenue sources and to increase the fairness of the systems.

Source: (Commission on Taxation and Welfare, 2022[50])

In its 2022 report, Foundations for the Future, the Commission on Taxation and Welfare (Box 3) highlight that there are several data issues around tax expenditure – in some cases, no data is collected, while in others the manner in which expenditures are costed can understate the cost or impact. The Commission also raised the issues of not accounting for behavioural changes, discussed above (Commission on Taxation and Welfare, 2022[50]).

Tax expenditure approval and execution

Procedures for approval and authorisation

Table 7 highlights differences between direct expenditure and tax expenditure in Ireland in relation to four fiscal control attributes. Generally, approval requirements for direct expenditure are more stringent than for tax expenditure, as much of the guidance on tax expenditure is not mandatory.

Table 7. Comparison of direct expenditure and tax expenditure for approvals and reviews

Attribute	Direct expenditure	Tax expenditure
Cabinet and ministerial approval	Departments must engage in negotiations with DPER, outlining their spending plans. Cabinet gives approval to the budget prior to presentation in the Dáil.	Guidelines for ex ante evaluation, but no approval needed
Spending limits	Subject to 5% National Spending Rule, as well as Medium-term Expenditure Framework ceiling setting requirements.	5% National Spending Rule also accounts for tax cuts but is not legally binding.
Approval by parliament	Voted expenditure (encompassing most services) must be approved by Dáil, while non-voted expenditure is authorised by legislation and so does not	Parliament must approve the Finance Bill, which includes tax expenditures, but single items are not individually approved
Evaluation/spending reviews	Occurs on an annual basis, with DPER identifying select programmes for review	Evaluation framework, although not mandatory

Source: OECD authors’ elaboration.

Tax expenditure reporting, evaluation and audit

Reporting

In Ireland, the government publishes information on the impact of tax expenditures as required by the European Union’s 2011 Budgetary Frameworks Directive (EUR-Lex, 2011[58]).

Each year, as part of the budget, the Irish Government publishes details on the tax policy changes that have occurred in a document named Tax Policy Changes. These changes include both those classified as tax expenditure under the government’s definition (e.g. a 2024 increase to the Incapacitated Child Tax Credit) and those that are not (e.g. 2024 change to the income tax standard rate cut-off point). Each measure includes the estimated cost. Since 2023, the estimates have been calculated collaboratively by both the Department of Finance and Revenue (Government of Ireland, 2024[59]). A chapter in the document provides distributional analysis of the tax policy changes as a whole looking at impact on gross income, and the effective income for different family types, employment types and income groups (Government of Ireland, 2024[59]).

In 2015, the Department of Finance started publishing an annual Report on Tax Expenditure, which provides a comprehensive overview of tax expenditure measures in effect. This report includes (Department of Finance - Ireland, 2025[51]):

• A definition of tax expenditures, and an overview of their importance within the Irish taxation system, as well as their financial and non-financial costs.

• An overview of key best practices for tax expenditures as highlighted by organisations including the OECD, such as the need for regular reporting and reviewing, and how they influence Ireland’s own guidelines for evaluating tax expenditures.

• Estimated costs of the main tax expenditures in Ireland, their evolution over time, and a comparison with other countries, as well as an overview of the methodology for these estimates and related limitations.

• An overview of the ongoing reviews of tax expenditures.

• An annex detailing each tax expenditure and an estimate of its revenue forgone if available.

The Department of Finance also publishes any reviews of tax expenditures that it conducts during the year.

In the 2024 version of the tax expenditure evaluation guidelines, the Department of Finance set out its plan to prepare a description of key information items for each tax expenditure known as a ‘passport’ (Table 8). The first edition of this paper was published in 2025, setting out a tax expenditure passport for each active tax expenditure (Government of Ireland, 2025[60]).

Table 8. The Department of Finance’s Tax Expenditure Passport

	Key information items
1	A description of the history of the tax expenditure including - introduction, sunset clause and reviews
2	Classifications of the type of tax, i.e. corporate and personal tax
3	Information on the number of targeted beneficiaries
4	Information on the legal reference of the provision
5	Description of policy objective and market failure being targeted
6	Reasons why the measure is not part of the benchmark tax system
7	Source of data – i.e. from administrative returns or other
8	Revenue forgone for the most recent year available
9	Results of the latest evaluation
10	Number of claims and exchequer cost over previous 5 years

Source: (Government of Ireland, 2024[52])

The Department of Finance’s Tax Expenditure Report 2021 estimated that 7% of all tax expenditures have no published data, and in several cases, the available information is significantly outdated. This is often because the legislation at the time tax reliefs were introduced did not require such data to be gathered, or because publishing the data could risk identifying a small number of taxpayers, conflicting with Revenue’s duty to maintain taxpayer confidentiality. Due to the self-assessed nature of tax returns, such data may not become available for at least two years. The 2021 provides an important baseline for building on the information available on tax expenditures (Commission on Taxation and Welfare, 2022[50])

Box 4. Tax expenditure reporting practices in the European Union

In a 2014 report, the European Commission identified 19 EU Member States that regularly reported on tax expenditures. Several common reporting practices were identified across these Member States, including:

• Reporting is typically annual, by the Ministry of Finance, the Ministry for the Economy or the tax authority.

• Some publish tax expenditure data with other budget documents, while others publish them separately.

• While the revenue foregone method is the most common calculation approach, there are significant variations within this, including whether revenue is estimated on a cash or accrual basis and how different tax expenditures are categorised.

• A few countries (e.g. France, Spain and Sweden) link tax expenditures to the expenditure side of their budgets.

• Some countries send their reports on tax expenditures to their parliament.

Sources: (Parliamentary Budget Office, 2018[55]; European Commission, 2014[61])

Evaluation

The Department of Finance published its first guidelines for evaluating tax expenditures in 2014, outlining best practices for both ex ante and ex post evaluations. These guidelines clarified the role of tax expenditures within the Irish policy framework and defined when they could be considered appropriate policy tools. They described how the Department should assess tax expenditures and emphasised various evaluation criteria, including deadweight loss, displacement effects, and opportunity costs, and recommended regular review timelines based on the scale of each scheme.

While these guidelines envisaged that all tax expenditures would be examined over a five-year time period, this has not been possible. The 2022 Commission on Taxation and Welfare estimated that 63% of tax expenditures by value (2019 estimates) included in the annual reporting by the Department of Finance had not been reviewed in the seven years since the introduction of the annual reporting of expenditures (Commission on Taxation and Welfare, 2022[50]).

In 2024, the Department published updated guidelines, with a variety of changes including (Government of Ireland, 2024[52]):

• Adding several questions for consideration for both ex ante and ex post evaluation (Table 9).

• Modifying the proportionality thresholds so that level 1 now covers schemes between EUR 5 and 20 million, level two between EUR 20 and 100 million, and level 3 above EUR 100 million.

• Developing a template approach, a tool allowing measures to be clearly identified as tax expenditures and distinct from the benchmark.

These guidelines set out best practice but are not legally required. Indeed, the guidelines state that due to data, resource and time constraints, not all evaluations will be able to meet the standards set out in these guidelines. However, there is a legal requirement for tax expenditures with a sunset clause to be reviewed by the end of the sunset period.

A number of tax expenditure reviews occur over the course of each year, with tax expenditure evaluation work generally carried out by the tax division within the Department of Finance, and the Irish Government Economic and Evaluation Service. These are generally published alongside Tax Strategy Group papers or published alongside the subsequent budget. In 2025, this included 11 tax expenditure reviews, examples of which include (Government of Ireland, 2025[62]):

• Proposed Extension of the Income Tax Relief for Retrofitting Landlords

• Proposed Extension of the Income Tax Exemption for Households for Profits from the Micro-generation of electricity.

• A review of the reduced rate of Universal Social Charge for Medical Card Holders.

Table 9. Key evaluation questions in 2024 evaluation guidelines

Questions in bold were added to the 2024 version of the guidelines

Ex ante evaluation	Ex post evaluation
What is the objective of the tax expenditure?	Is the tax expenditure still relevant?
What market failure is being addressed?	How much did the tax expenditure cost?
Is a tax expenditure the best approach to address the market failure?	What was the impact of the tax expenditure?
What economic impact is the measure likely to have?	What was the impact of the tax expenditure from an equality perspective?
How much is it expected to cost?	What was the impact of the tax expenditure from an environmental perspective?
What impact is the tax expenditure likely to have from an equality perspective?	Was it cost efficient?
What impact is the tax expenditure likely to have from an environmental perspective?	What additional data would be necessary to improve future reviews?
Are the data collected sufficient for the purpose of reviews?

Source: (Government of Ireland, 2024[52])

Case study – The Netherlands

Tax expenditures in the Netherlands

Prior to 2018, in the Netherlands the Ministry of Finance used a definition of tax expenditures that distinguished between various different types of tax expenditures. However, following a review the Dutch government decided to use a broad guideline to identify tax expenditures, rather than establish a concrete benchmark (Ministerie van Financiën, 2022[63]). As of 2024, one regulation is considered a tax expenditure if (Rijksoverheid, 2024[64]):

• The regulation has an intended policy objective (e.g. encouraging a specific activity), separate from the general objective of the tax instrument to which the regulation applies,

• The regulation ultimately results in an intended loss of government revenue, whether or not considered in conjunction with related regulations in the same area.

In 2025, the Ministry of Finance identified 195 tax expenditures which represent a significant revenue loss to the government. These tax expenditures totalled EUR 166 billion (2024), equivalent to about 15% of GDP (Rijksoverheid, 2024[64]). Figure 5 shows the most recent data on the top 10 by estimated cost.

Figure 5. Top 10 tax expenditures by cost

Note: This information shows an overview of the predicted budgetary impact of the top ten tax expenditures in 2027.

Source: (Ministry of Finance, 2026[65]).

Some of these large tax expenditures are not recorded in the same way in other OECD Member countries, including those examined in this paper. For instance, this includes the employment tax credit (arbeidskorting) and general tax credit (algemene heffingskorting), two of the largest measures reported. In both cases, these tax expenditures were added to the overall list of tax expenditures following a report by the Court of Audit, which stated that these tax expenditures are used to influence disposable income and income distribution, which can be considered policy goals, and therefore should be considered policy (van Opstal, 2024[39]).

Recent changes to tax expenditure

Since 2010, governments in the Netherlands have generally reduced the number of tax expenditures rather than increase them. This was likely influenced by the Dutch fiscal consolidation agenda, in which the government made efforts to bring the budget deficit within the fiscal rules of the European Union Economic Governance Framework, including by broadening the tax base and curbing certain major tax expenditures, such as the mortgage interest deduction (Kickert, 2015[66]).

The government also redefined several tax expenditures, for example, in the 2011 Budget Memorandum, several tax expenditures were no longer included in the tax expenditure statement as they did not serve an instrumental purpose (Ministerie van Financiën, 2022[63]).

The Netherlands has several measures to reduce the cost of tax expenditures for higher earners. These are intended to combat what is known as the upside-down subsidy effect, where higher earners tend to benefit to a greater extent from tax expenditures due to their higher tax liability. This approach first came into being for mortgages specifically, where, starting in 2014, the maximum deduction rate for the top income bracket was cut by 0.5% percentage points. In 2024, the scope of this policy was clarified, with it extending to several other deductions including expenses for specific health care costs, SME profit exemption, and self-employed persons deduction (Belastingdienst, 2025[67]).

Other initiatives that contributed to reducing the cost of tax expenditures were from the reports published in 2020 and 2022.

• In 2020, the Ministry of Finance published a report that examined options for simplifying the tax system. It warned that once tax expenditures are incorporated into the tax system, it can be difficult to remove them, particularly as the fiscal framework for tax schemes is less stringent than that of expenditure schemes. It underlined the importance of being able to remove ineffective schemes, and as such recommended only introducing tax expenditures that are able to be evaluated (Ministerie van Financiën, 2020[68]).

• In 2022, the Advisory Group on Fiscal Policy (Studiegroep Begrotingsruimte), an advisory body responsible for providing recommendations on budgetary rules for the upcoming cabinet term, released a report stating that unlike direct expenditure, tax expenditures are not well regulated once implemented. This means that their budgetary impact is not monitored, and changes are relatively unlikely to occur regardless of whether the scheme ends up costing more or less than expected. It stated that it would be desirable for tax expenditures to be considered on the expenditure side of the budget, especially in cases where they have many characteristics of a subsidy (i.e. the tax incentive for fuel-efficient cars), although it acknowledged that in practice this is difficult to implement (Ministerie van Financiën, 2022[63]).

Institutional arrangements for tax expenditure

Coalition governments

The Netherlands has a tradition of forming coalition governments, and it is standard practice for fiscal parameters and policies to be set as a part of the coalition agreement. This includes an expenditure framework, which sets out the maximum allowable expenditure in a year, and a revenue framework, which aims to keep the tax burden (although not tax receipts) constant. These frameworks provide the boundaries within which the government can then implement fiscal policy. Tax expenditures are considered within the revenue framework. This generally requires that if there is a new tax relief, there must be a compensating increase elsewhere, so that the net effect is neutral or consistent with the framework (Ministry of Finance, 2024[69]).

The Advisory Group on Fiscal Policy plays a major role in the development of these frameworks. Its reports are sent to parliament and published, generally receiving media attention.

Budget authorities

The main body responsible for taxes in the Netherlands is the Ministry of Finance. As such, it is the primary body responsible for tax expenditures, including their regulation, enforcement, and evaluation. The Tax Policy Division within the ministry is responsible for preparing the costings in the budget memorandum and the annexes on tax expenditures within the budget, using data from the Tax Authority and other sources such as Statistics Netherlands. (van Opstal, 2024[39]).

The CPB also plays an important role to review the costing of new tax expenditure policies by the Ministry of Finance. It also provides analysis of policy proposals during negotiations over the coalition agreement; and is represented in the Advisory Group on Fiscal Policy (van Opstal, 2024[39]).

Line ministries

While the Ministry of Finance is responsible for determining what counts as a tax expenditure, and setting the methodology for estimating and reporting them, administration of tax expenditures is split between the Ministry of Finance and the line ministries. Table 10 demonstrates how these tax expenditures are divided amongst ministries.

Table 10. Ministry responsibility for tax expenditures

Number of tax expenditures under the responsibility of different ministries

Ministry	Number of tax expenditures
Ministry of Finance	44
Ministry of Social Affairs and Employment	27
Ministry of Infrastructure and Water Management	12
Ministry of Economic Affairs and Climate Policy	9
Ministry of Education, Culture and Science	5
Ministry of Agriculture, Nature, and Food Quality	4
Ministry of Health, Welfare and Sport	3
Ministry of Justice and Security	2
Ministry of the Interior and Kingdom Relations	2
Ministry of Defence	1
Ministry of Foreign Affairs	1
Ministry of Finance (via employee insurance schemes)	9

Note: Based on the list of tax expenditures reported in Annex 11.

Source: Annex 11 of the National Budget.

Parliamentary oversight

The Standing Committee for Finance is the main standing committee responsible for changes to tax law. When a proposal to change tax law is sent to parliament, it is first discussed in this standing committee before then being debated in parliament. If parliament votes on an amendment to the proposal, it is included in the tax law (van Opstal, 2024[39]).

Parliamentary amendments have led to both reductions and increases of tax expenditures. For example, in the 2022 tax plan a proposal for the abolition of a tax expenditure for small breweries was included, but was withdrawn after an amendment by the House of Representatives (Ministerie van Financiën, 2023[70]).

Tax expenditure approval and execution

Table 11. Overview of approval processes for direct expenditure vs tax expenditure

Aspect	Direct expenditure	Tax expenditure
Cabinet/Ministerial Approval	Spending limits formed March-May based on ministries’ funding requests. Draft budgets prepared in June by ministries and checked by the Ministry of Finance. Final budgets submitted in August using CPB’s Outlook.	New tax proposals with budgetary impact decided in the same period (March–May), where expenditure and revenue are interconnected. Finalised in August alongside ministry budgets.
Parliamentary Approval	Ministry budgets presented to parliament on Budget Day. Parliament discusses, may amend, and approves them. Each ministry must submit an explanatory memorandum covering intended policies and spending instruments.	New tax expenditures are presented in the Tax Plan, submitted to parliament with the budget. Government must provide annexes analysing expected take-up, effects, and budgetary consequences. Tax expenditures are included in ministries’ budgets but listed separately. Explanatory notes are not required; ministries instead refer to the Tax Plan.
Spending Limits	Subject to fixed expenditure ceilings under the Medium-Term Expenditure Framework (MTEF). Expenditure must remain within these limits.	No overall expenditure ceiling, but some specific schemes have fixed annual budgets. Tax expenditures are included in the revenue framework rather than the expenditure framework.
Evaluation/Review	Direct expenditures are generally scrutinised more closely. Ministries must justify them in explanatory memoranda, and outcomes are reviewed in annual reports and audits.	New/changed tax expenditures must undergo an assessment framework and be abolished or adjusted if negative. Ministries must report tax expenditures annually. Evaluations listed in annexes to the budget.

Source: OECD authors’ elaboration.

Procedures for approval and authorisation

Any new tax proposals with budgetary consequences are proposed through the Tax Plan, which is submitted to parliament alongside the budget. The Competency Act 2016 requires that when using tax expenditure provisions as policy instruments, the government provides analysis on these policies to parliament. This is done through two annexes to the budget discussed in the “Reporting” section below.

Tax expenditures are authorised by parliament through individual bills for each ministry. This commences between July and August, when the Ministry of Finance sends a budgetary overview of tax expenditures to the departments, which ministries use to insert the correct tax expenditure data into their own budgets. Each ministry’s budget is divided into policy articles, which for direct expenditure list the spending instruments (e.g. subsidies, grants, and loans) and their budget figures. However, tax expenditures are considered to be outside accounts (extra-comptable) and as such are listed after the direct expenditure section, with the following text included:

In addition to the instruments mentioned in this budget article, there are tax regimes that relate to this policy area. The table below shows the budgetary importance of these schemes. The figures are taken from the corresponding annex ‘Tax arrangements’ in the Millions Note. For a description of the schemes, the objective, the forecast basis, a reference to the last evaluation carried out and a programming of evaluations for future years, see the Annex to the ‘Explanatory Memorandum on Tax Schemes’. (Rijksfinancien, 2025[71])

Each ministry must also put forward an explanatory memorandum for their budget, which gives an explanatory overview of their policies and what they intend to achieve. However, this is only required for direct expenditure. For tax expenditure, ministries simply need to refer to the Tax Plan. A more general explanatory note also exists for the budget as a whole, which provides an overview of more general government priorities. While it mostly concerns itself with direct expenditure, it a tax expenditure serves multiple purposes across different ministries, it must also be included.

Under Dutch fiscal rules, the Ministry of Finance must assess how changes in the tax rate affect the erosion or growth of that tax base. However, because a large number of tax expenditures are monitored continuously, the Ministry’s annual overview assumes that taxpayer behaviour remains unchanged. Once a specific tax expenditure comes under political scrutiny, the underlying estimates are updated to account for behavioural responses, which can lead to substantial revisions of the reported figures (Rijksoverheid, 2024[64]).

Spending limits and budget execution

In the Netherlands, incoming cabinets traditionally commit themselves to a set of detailed fiscal rules, laid down by letter to parliament. These include fiscal rules on tax expenditures, but do not have a formal legal status. This includes the development of an expenditure limit and a revenue framework, where tax expenditures are included within the revenue framework. The budgetary development of tax expenditures is monitored annually in the Budget Memorandum, and are included both in budgets and in annual reports.

In recent iterations, these fiscal rules have specifically referred to tax expenditures, including that all new tax expenditures on the revenue side must undergo an assessment, and that if a tax expenditure is evaluated negatively, it should be abolished or adjusted. It also underlines that tax expenditures are included in its revenue framework, and requires that ministries account for tax expenditures on an accrual basis (Tweede Kamer der Staten-Generaal, 2024[25]).

There are no formal expenditure ceilings for tax expenditures as a whole. However, the budget rules prescribe the use of an assessment framework for new (or amended) tax expenditures. Furthermore, some tax expenditures differ from regular income measures by having a set annual budget. As a consequence, their spending must be monitored during the year, and they must be suspended when the budget limit comes into sight. For example, the Environmental investment deduction and the arbitrary depreciation of environmental investments have an annual budget that for 2025 has been set to EUR 189 million and EUR 20 million, respectively.

Tax expenditure reporting, evaluation and audit

Reporting

Information on tax expenditures is reported through an annex in the budget memorandum (Annex 4) as of 2026, released in September each year (Ministerie van Financiën, 2024[72]). This generally consists of a summary analysis and a description of each tax expenditure.

The summary analysis provides an overall summary of tax expenditures, a costing of major tax expenditures, and a discussion of notable developments. This is discussed in terms of the budget year and the previous five years. In addition, the report provides costings for new policy measures in the budget, covering the current year, budget year and the next three years. The Annex excludes analysis of measures with a fiscal impact under EUR 5 million, measures required by European Union legislation, and measures for which data is unavailable for costing or where reporting would introduce a disproportionate administrative burden. Changes in costing are categorised based on whether they were endogenous to the policy (e.g. where the growth of the tax base increased the cost of the relief), or the result of policy changes or technical adjustments (Ministerie van Financiën, 2024[72]).

The annex also provides a qualitative description of tax expenditures. It covers a larger set of measures. The information provided on each measure is set out in Table 12.

Table 12. Structure of detailed reporting on tax expenditures

Row	Summary content
Measure	Name of the tax expenditure measure
Description	Describes the tax reliefs
Objective	Summarises the main purpose of the measure
Ministry	Identifies the ministries responsible for the tax expenditure policy (usually the ministry of finance and a line ministry)
Law	Gives the law and relevant clauses that establish the tax expenditure measure
Evaluation	Lists the most recent evaluation of the measure
Sunset clause	Notes whether the law includes a sunset clause and when it will apply.
Basis for estimation	Describes the main source of data and models used to prepare the estimates. It also explains which estimates are forecasts and which are based on actual tax data.

Source: Authors’ summary based on Ministerie van Financiën (2024[73]).

Evaluation

Each year, the government sends a policy letter to the Council of Ministers, which indicates the matters that should be considered in their decision making around the implementation of the budget. This letter includes proposals for tax expenditure measures, which are to be accompanied by an evaluation using the Fiscal Arrangements Review Framework. This is led by the Ministry of Finance, but will usually involve the line ministry responsible for the policy area. It comprises several questions, including why a tax subsidy is preferable to a direct subsidy, and whether evaluation of the measure is sufficiently ensured (Rijksfinancien, 2025[71]). A new tax expenditure should only be considered if all questions in the Framework can be answered in the affirmative.

The Netherland’s fiscal rules also require that the government regularly evaluate tax expenditures once they are implemented. This results in an evaluation calendar by the Ministry of Finance that is published annually, and details the specific tax expenditures (Ministerie van Financiën, 2024[74]). The evaluations can be conducted by a variety of actors, although the department on whose budget the tax expenditure is listed is ultimately responsible for a timely completion of the evaluation. Generally, tax expenditures are subject to evaluation every 4-7 years, but in practice there is leeway around this. The rules list a number of accepted exceptions, such as when there is little new information since the last evaluation. It also lists criteria for prioritisation, which are the general availability of data, the arrival of new information, the existence of policy interest, and the estimated cost of the tax expenditure.

A negative evaluation is presumed to lead to either abolition or improvement of the respective tax expenditure. When deviating from this rule, the Minister of Finance is required to provide an explanation to parliament. If the evaluation shows that a spending instrument would provide a preferable alternative, then the presumption is that the tax expenditure will be replaced by that alternative. Again, any deviation from this requires the Minister of Finance to provide an explanation to parliament. Finally, if it is difficult or impractical to conduct an evaluation, then the Minister of Finance must provide parliament with an explanation as to how this will be mitigated. In reality, the evaluation agenda has led to a large number of negative or inconclusive evaluations. As of 2022, only 7% of tax expenditure evaluation results were positive, while 22% were negative and 32% inconclusive, often without policy consequences (Kranendonk and Wagteveld, 2022[75]).

Audit

The Court of Audit has an extensive history of reviewing tax expenditure in the Netherlands. For example, it publishes Insight into tax relief schemes (zicht op belastingverlichtende regelingen), and an annual report known as the State of National Accountability (staat van de rijksverantwoording) which regularly examines tax expenditure. The 2020 and 2021 audits found areas for improvement regarding the use of tax expenditure. Of note, the Court concluded that tax expenditure provisions were used too often and too easily. It further found that the assessment framework was insufficiently applied and its monitoring inadequate. Moreover, the obligation to evaluate was not always met (van Opstal, 2024[39]).

The Court of Audit also found several deficiencies in the tax expenditure system from ad hoc reporting. For example, one report found that parliament does not have a periodically updated view of the number and size of tax regimes, providing an impetus to expand Annex 9 in the budget memorandum. (Ministerie van Financiën, 2022[63]). In a more recent report (National Audit Office, 2025[76]), the Court of Audit recognised the information included on tax expenditures in budget documents, stating that it offers substantial insight into the budgetary significance and effects of the measures.

Case study – United Kingdom

Tax expenditures in the United Kingdom

As of 2024, the United Kingdom identified 1 190 tax reliefs and recognised only 344 of them as tax expenditures. The official statistics differentiate between structural and non-structural reliefs, and each is reported separately. Structural reliefs are integral to the tax system, while non-structural reliefs are designed to advance economic or social objectives and are most commonly associated with the concept of a tax expenditure (HM Revenue and Customs, 2024[77]). As of the January 2026 data, 90 non-structural reliefs have been costed for the 2025-2026 year.

The United Kingdom does not take a benchmark approach in its identification of tax expenditures, with the IMF (2016[78]) describing the approach as “pragmatic and policy-oriented”. HM Revenue and Customs (HMRC) (2024[77]) notes that its categorisations “remain under continuous review.”

The fiscal costs of tax expenditures are driven by a relatively small number of policies. The top five largest tax expenditures make up 58.7% of the cost of the 90 non-structural tax reliefs most recently costed by HMRC, and the next five bring the total cost to 74.1%. These ten largest non-structural tax reliefs are laid out in Table 13.

Table 13. Ten largest non-structural tax reliefs in the United Kingdom

As per HMRC’s January 2026 figures

Tax Type	Tax Expenditure Provision	Amount, GPB billion
Income Tax	Registered pension schemes	33.5
Capital Gains Tax	Private residence relief	32.9
VAT	Food	27.4
National Insurance Contributions	Contributions to, and benefits from, registered pension schemes	25.6
VAT	Construction and sale of new dwellings (includes refunds to do-it-yourself builders)	14.6
Income Tax/Capital Gains Tax	Individual Savings Accounts	9.7
National Insurance Contributions	Employment Allowance	7.4
VAT	Domestic fuel and power	7.0
VAT	Domestic passenger transport	5.8
Corporation Tax	Research and development tax reliefs: R&D Expenditure Credit	5.4

Source: (HMRC, 2026[79])

Recent changes to tax expenditure

Recent forecasts show that estimates of total tax expenditures have grown for all of the major taxes (HM Revenue and Customs, 2024[80]). This growth in tax expenditures is partly explained by the rise in tax collection, as tax revenues have generally risen as a share of GDP since the early 1990s. However, policy changes have also played their part. Between 2017 and 2019, the government created seven new tax expenditures and removed four, but also extended or restricted 47 other reliefs in the same period (National Audit Office, 2020[13]).

One significant change to the tax expenditure system was the use personal tax credits as an alternative to transfer payments for individuals within the welfare system. This approach was implemented in 2003 and ended in 2025. It was replaced by means-tested benefits as part of rolling-out of the new Universal Credit. However, HMRC continues to provide other tax credits, including for R&D and for high-end TV productions (Kennedy, 2005[81]; NAO, 2024[82]).

The Parliament has raised questions over the complexity of the tax system, as the complexity has increased through the creation of reliefs that are not subsequently reformed or withdrawn (House of Commons Treasury Committee, 2023[83]). The 2011 and 2012 Budgets stated that the government would abolish 7 and 28 tax reliefs respectively (National Audit Office, 2020[13]). There have also been notable reforms to both personal and company tax credits in recent years. However, the view in parliament remains that there are stronger incentives to create tax reliefs than to remove them (House of Commons Treasury Committee, 2023[83]).

The Office for Budget Responsibility (OBR) has also raised the risks associated with the level of transparency and scrutiny of tax expenditures, particularly in its 2019 Fiscal Risks Report (National Audit Office, 2020[13]). This has not been a significant theme of subsequent reports on fiscal risk sustainability, and OBR’s concern has eased as HMRC has published further costings.

Institutional arrangements for tax expenditure

HM Treasury

HM Treasury has broad responsibilities for economic and fiscal policy. A 2014 Parliamentary hearing stated that there is accountability to parliament for tax through both the Treasury and HMRC Accounting Officers, and that there is parliamentary scrutiny on both tax administration and underlying policy and design (HM Treasury, 2014[84]). HM Treasury officials advise ministers on the effectiveness of tax policies and the impact on the economy, the public finances and on the overall coherence of the tax system. They share the function for tax policy with HMRC, working together to predict the impact of changes to tax expenditure and produce statistics on tax reliefs (National Audit Office, 2020[13]). HM Treasury usually takes the lead responsibility in developing policy reforms (HM Treasury, 2025[85]).

HM Revenue and Customs

HMRC is the revenue administration for the United Kingdom. It works alongside HM Treasury with policy development and leads on tax policy maintenance and implementation (HM Treasury, 2014[84]). The department publishes the official statistics on tax expenditures and is responsible for the evaluation of tax expenditure policies and administration. This role includes identifying and costing tax expenditures, as well as the monitoring and evaluation of several specific tax expenditure policies (Sinfield, 2025[86]).

Tax expenditures are generally managed as part of the administration of each tax head. Some tax expenditures are managed separately if they require specialist knowledge or involve significant payments. In 2016, HMRC created a central team to oversee the management of tax reliefs. This team identified tax reliefs and the officials responsible, and established both compulsory guidance for work on tax reliefs and a framework to record information on tax reliefs consistently across HMRC (National Audit Office, 2020[13]).

Line ministries

As mentioned above, there are clear lines of accountability for tax through both the Treasury and HMRC Accounting Officers, although ultimately Ministers are responsible to Parliament for tax measures. Even refundable tax credits, which are included in the estimates and accounts as an expenditure, are mostly recorded in the budget for HMRC, not the line department. However, HM Treasury and HMRC will seek inputs into tax expenditure policies from relevant departments and may also collaborate closely during policy implementation.

Office for Budget Responsibility

The OBR is an independent fiscal institution with responsibilities for fiscal forecasting, assessing fiscal risks and commenting on progress against the government’s fiscal targets. It decides when and how to incorporate the impact of tax changes, including tax expenditures, on the economy in its macroeconomic forecasts (Pope, Tetlow and Advani, 2023[87]).

Parliamentary oversight

The House of Commons exercises oversight of tax and spending through a number of committees. The Treasury Committee, which scrutinises tax policy, and the Public Accounts Committee, which considers the management of tax expenditures.

There have also been several cases of ad hoc Parliamentary reviews of tax expenditures leading to governance reforms. In 2020 the Public Accounts Committee held an Inquiry into tax expenditures on the basis that there were insufficient tests of effectiveness and value for money of tax expenditures. In its response, government agreed with the Committee that it should establish criteria to determine which reliefs to evaluate and noted HMRC would aim to publish more information where the cost of reliefs deviated from forecast.

The United Kingdom Treasury Committee also released a report in 2023 calling for increased scrutiny and simplification of the tax expenditure system. This report highlighted concerns that the system is overly complex and lacks sufficient transparency, and emphasised the need to ensure tax expenditures are clearly justified and deliver value for money.

Tax expenditure approval and execution

There are a number of notable differences in the way tax and spending policies are approved and executed. The fiscal year runs from 1 April to 31 March, while the tax year starts a few days later on 6 April and runs until 5 April. Tax expenditure policy is mostly decided through the annual budget and finance bill, under the responsibility of HM Treasury and HMRC. In contrast, direct expenditure by departments is planned through a periodic “Spending Review” and authorised each year through a Supply and Appropriations Bill, for which each department’s accounting officer is responsible to parliament.

Table 14. Overview of approval processes for direct expenditure vs tax expenditure

Criteria	Direct expenditure	Tax expenditure
Cabinet/Ministerial approval	Planned through spending reviews led by HM Treasury, responsibility for execution lies with each department’s accounting officer.	Decision-making process occurs through the fiscal events process. Cabinet is informed of tax changes in the morning of Budget.
Parliamentary approval	Authorised annually through the Supply and Appropriation Bill, based on Estimates. Scrutiny by portfolio committees. Modifications rare in practice	Authorised mainly through the Finance Bill, initiated by government. Receives multiple readings and scrutiny (Committee of the Whole House, Public Bill Committee). Changes are possible in secondary legislation if delegated powers are legislated for.
Spending limits	Governed by Departmental Expenditure Limits (multi-year ceilings set in Spending Reviews) and Annually Managed Expenditure (forecast-based, binding once approved).	No specific overall limits on number or cost of tax expenditures beyond general fiscal objectives incl. welfare cap.
Evaluation/Review	Departments must publish Annual Reports and Accounts reviewed by Parliament. Includes objectives, performance, and audited financials.	HMRC tracks monthly data and compliance risks. Since 2017, monitoring framework. HMRC and HM Treasury publish reports, but no regular structured parliamentary scrutiny. HMRC and HM Treasury maintain a tax reliefs evaluation plan.

Source: Authors

Spending reviews and budgets

The government sets multi-year limits for all departments through periodic spending reviews. These limits (ceilings) are guided by the government’s fiscal objectives and revenue forecasts, which are prepared and published by the OBR. The 2025 Spending Review set ceilings for a four-year period, with plans to revisit these after two years. As it currently stands, these spending reviews do not consider tax expenditures.

Legislative authorisation

There is no one single process for reviewing tax and spending by parliament, and parliamentary authorisation also works differently for voted and non-voted spending, such as tax credits. These differences in procedure are partly mitigated by the important role that the Treasury Committee plays in leading the scrutiny of both the spending review and budget.

Ministers generally announce tax reliefs through fiscal events, which are legislative changes made once a year, in the Autumn. However, the legislative process for tax reliefs is not the same as for expenditure, as Parliament applies different procedures to them. In several cases, tax policy proposals in the budget are adopted through the Finance Bill However, others go through bills introduced by other departments, which are not necessarily in the Finance Bill. By contrast, most expenditures are authorised through the Estimates cycle that involves a Supply and Appropriation Bill. These have different parliamentary procedures, with the Finance Bill generally receiving more intensive legislative scrutiny and debate than the appropriations.

The government can also make minor changes to existing tax expenditures through regulations; under authority Parliament has previously granted in Finance Acts or other statutes. These are usually used for technical or administrative adjustments and allow for more limited parliamentary scrutiny. In a few cases, such as with national insurance contributions and VAT, certain tax thresholds may also be altered through regulation. However, most substantive changes to what is taxed and at what rate are made through a Finance Act (which occurs annually) or other primary legislation.

Spending limits and execution

There are two constraints on tax expenditures in the United Kingdom’s fiscal framework – the government’s fiscal objectives and the welfare cap. However, beyond these general limits on fiscal policy, there are no restrictions on the overall cost or number of tax expenditures. The use of sunset clauses for specific policies is also rare (House of Commons Treasury Committee, 2023[83]).

Most governments since the 1990s have set fiscal objectives for the budget balance, public debt or both. In principle, this sets an overall constraint on fiscal policy, including the revenue impact of tax expenditures. However, regular changes to the fiscal targets since 2009 means that they have not been binding on the government’s long-term fiscal strategy (Pope, Hourston and Sangha, 2024[88]).

Since 2014, a portion of expenditure that included personal tax credits has been subject to a parliamentary approved “welfare cap” that is set in cash terms at the start of each parliamentary term with a margin to allow for forecast uncertainty. Since 2025, personal tax credits and work credits have been consolidated into universal credit, which is still subject to the welfare cap. If spending exceeds the welfare cap and margin, the government must either justify the breach, enact policies to cut forecast spending or request parliament to increase the level of the cap (Keep, 2025[89]).

Within these general limits on fiscal policy, control over tax expenditures is exercised by HM Treasury and HMRC through regular monitoring, with additional oversight from the OBR. In 2017, HM Treasury introduced a framework for monitoring tax expenditures valued over GBP 40 million per year with specific policy objectives. HMRC also created a framework with 57 questions to guide the management of tax expenditures, helping to document information in a consistent way, including on costs, public awareness and promotion of the tax expenditure and monitoring and evaluation arrangements (National Audit Office, 2020[13]).

Once enacted, tax expenditures are generally not subject to regular parliamentary scrutiny. By contrast, government departments must publish annual reports and account for expenditure, which must be sent to Parliament and examined by parliamentary committees. These reports set out objectives, past performance, risk management, and audited financial statements.

Identification and estimation

Since 2019, HMRC has dedicated additional resources to costing previously uncosted tax reliefs, prioritising non-structural reliefs. As such, the number of uncosted reliefs was reduced by around 100 measures between 2020 and 2024, meaning over three quarters of tax expenditures now have costs estimated (Sinfield, 2025[86]).

HMRC (2024[77]) describes its costings as “estimates of the amount of relief which is claimed and subsequently granted each year”. As in other countries, it notes that the estimates may not reflect the actual revenues that the government would collect if the tax expenditure policy were abolished, which reduces the comparability with public spending figures. Unlike the official statistics, policy costings published with the budget do factor in behavioural assumptions or interactions between policies (National Audit Office, 2020[13]).

Tax expenditure estimates are accompanied by an “uncertainty rating” associated with each tax expenditure in the official statistics and for policy costings that accompany the budget. This uncertainty may be rated low, medium, or high, where a high uncertainty rating means there is little, incomplete or poor-quality data behind the estimate. Official statistics also explain the reasons why some tax expenditures are not costed, or why a costing is not disclosed even it if is available to the government (HM Revenue and Customs, 2024[77]).

Reporting, evaluation and audit

Reporting

Changes to policies on tax reliefs are generally accompanied by a detailed policy costing and a tax information and impact note that provides further information on the purpose, administration and impact of tax policy changes. The full estimated costs of tax expenditures are then reported through the official statistics on tax reliefs published by HMRC. The statistics are discussed in two separate reports for structural and for non-structural reliefs, both of which are usually published in December (Pope, Tetlow and Advani, 2023[87]).

The report on non-structural reliefs analyses the coverage of reporting and the headline statistics on the cost and number of reliefs. It provides a list of all tax expenditures that have been identified with a description of each measure. The list of uncosted measures explains why a costing could not be provided. The list of costed measures provides the estimated cost, either for a single year or over a six-year period with a note on the assumptions used and information on the number of claimants (HM Revenue and Customs, 2024[80]).

Most of the content that accompanies the official statistics on non-structural reliefs is focused on a subset of policies. In 2024, the headline statistics analysed 107 tax reliefs which had a cost available for the most recent tax year (2023-2024). A more detailed description and analysis discusses 37 tax expenditures, with an explanation of the measure, its cost and how this has changed over a six-year period, a brief distributional analysis and a summary of relevant research and evaluations.

The timing of the publication of the official statistics on tax expenditures is generally too late to influence the main debates over the Budget and subsequent Finance Bill. For example, Parliamentary scrutiny of the 2024 Autumn Budget would have relied on figures published in December 2024, covering the period up to April 2025.

Evaluation

Tax policy evaluations are typically run by HMRC. In 2020, HMRC published a tax reliefs evaluation criteria, focusing specifically on non-structural tax reliefs. The criteria were as follows (National Archives, 2024[32]):

• The annual cost of a relief.

• Whether the relief has already been evaluated recently.

• Whether the relief’s design has recently changed substantially.

• Whether the relief’s data makes an evaluation methodologically feasible (this includes whether sufficient time has passed for a large enough body of data to be generated).

• Whether an evaluation’s results would be usable and timely to feed into strategic decision making.

Evaluations can also consider whether the relief is achieving its stated objective, and indirect effects, such as what other behaviours a relief may incentivise, and its impact on the wider economy.

However, a number of limitations have constrained evaluations in the past HMRC has a limited budget for evaluation that covers all of the department’s responsibilities. In 2019-2020, this budget was around GBP 2 million. Furthermore, the budget for evaluation of tax reliefs specifically is ring-fenced. The department has also noted that some tax expenditures are difficult to evaluate because they have multiple or unclear objectives or because the objectives are not easily assessed (National Audit Office, 2020[13]).

The lack of systematic evaluation of tax expenditures was a key finding of the National Audit Office evaluation in 2020 and subsequent recommendations by the Public Accounts Committee (National Audit Office, 2020[13]). Since 2021, HMRC (2023[90]) has published a tax reliefs evaluation plan and a list of tax expenditures that are currently being evaluated. The report on non-structural tax expenditures has also added a brief summary of relevant research and evaluations for major tax expenditures (HM Revenue and Customs, 2024[80]). Additional commentary on the performance of specific tax reliefs is available in the annual report published by HMRC. In 2024, the National Audit Office stated that HMRC and HM Treasury had taken steps to further improve the evaluation system through the introduction of a join review framework setting out the work teams are expected to carry out throughout the lifecycle of the tax expenditure (Sinfield, 2025[86]).

The monitoring framework established by HM Treasury in 2017 assesses value for money. By 2019, the assessment process had covered 63 tax expenditures (National Audit Office, 2020[13]).

Audit

Tax expenditures that are classified as expenditure, including a number of tax credits, are included in departmental accounts and audited by the National Audit Office. Most of these are discussed in the audit report for HMRC.

The National Audit Office has also conducted three performance audits into the management of tax reliefs by HM Treasury and HMRC. The first two audits were published within 6 months of each other in 2014, and reviewed the landscape of reliefs and how these were managed (National Audit Office, 2014[91]; 2014[92]). This was followed in 2020 by a further audit on “The management of tax expenditures”.

Other performance audits have explored specific tax expenditures or policies that make use of tax expenditures. Examples include the 2019 audit of “Business support schemes”, 2021 audit on “Environmental tax measures” and 2024 value for money audit on “Tax measures to encourage economic growth”.