Summary
This inquiry covered four measures within the draft Finance Bill 2023–24: reform of Research and Development (R&D) tax relief, including a merger of the two R&D schemes and the introduction of a new scheme providing tax relief for R&D intensive small and medium sized enterprises (SMEs); a requirement for certain businesses to provide additional data to HMRC; measures dealing with promoters of tax avoidance; and an increase in the maximum prison term for tax fraud.
R&D Reform
The R&D reforms addressed within this report mark the conclusion of an R&D review launched by the Government in March 2021. R&D tax relief is seen by businesses as crucial for supporting and promoting R&D activity in the UK. We therefore welcome the Government’s commitment to simplifying R&D tax relief and continuing to support business investment in R&D. However, we are concerned that the scale and rate of change to R&D tax relief over the last five years has created uncertainty and a lack of understanding about the UK’s R&D tax relief regime, which risks undermining its incentive effect.
While we welcome confirmation from the Government that the R&D tax relief review is now complete, there remain a number of issues that require further clarity from the Government, particularly with respect to subcontracted R&D and subsidised R&D expenditure. It was clear throughout our inquiry that the issue of subcontracted R&D generated the most concern for businesses in a number of sectors. It is important that the Government commits to evaluating the effectiveness of these reforms, especially their impact on incentivising R&D investment.
We make strong recommendations regarding the scale and pace of change in the area of R&D relief over the last few years, as well as the ways in which the Government consults with stakeholders.
HMRC Data Requirements
The draft Finance Bill sets out a new power for HMRC to require additional data from employers and individual taxpayers, in line with the Government’s 10-year tax administration strategy, published in July 2020. It was evident from the start of the inquiry that there was a lack of clarity regarding this requirement. We are concerned at the length of time it took for the Government to clarify to businesses what was required, despite the consultation on this measure going on for more than a year.
We welcome the Government’s clarification that the data required for employees will be the number of hours paid rather than hours worked, as originally stated. However, additional burdens should not be placed on businesses unless there is a compelling reason to do so. HMRC should publish guidance as early as possible in 2024 to help employers and businesses understand the exact data that they will be required to provide, and what this data will be used for.
We consider that the case for requiring employers to provide employee hours data to HMRC has not been made out. We also have particular concerns about the legal basis underpinning these additional data requirements and how the data will be used and have asked the Government for clear explanations on these points.
Tax Avoidance and Tax Fraud
The draft legislation dealing with promoters of tax avoidance contains two measures, one creating a criminal offence where promoters fail to comply with a ‘stop notice’ from HMRC, and the other granting HMRC a new power to apply to the court directly to disqualify directors of a company involved in promoting tax avoidance. There are also provisions doubling the maximum prison term for tax fraud to 14 years.
Promoters
We are pleased to see the Government’s commitment to cracking down on promoters, and it was clear from our evidence that witnesses were generally supportive of the draft legislation on the introduction of a new criminal offence for promoters. Nevertheless, we are particularly concerned about how the legislation aimed at dealing with promoters of tax avoidance schemes can be applied to offshore promoters.
For these measures to prove effective, promoters must perceive that prosecutions, even when conducted against those operating offshore, are plausible and credible. We are also concerned about the lack of independent oversight of the issuing of stop notices and of decisions to prosecute, and we recommend that this be put in place. We make recommendations about wider publicity and communications about this issue to ensure that vulnerable groups are not duped into acting as ‘stooge directors’ for promoters.
Sentencing
The measure increasing the maximum prison term for tax fraud is derived from the 2019 Conservative election manifesto. The Government told us that this measure would send a signal to anyone considering committing tax fraud. However, we remain sceptical that increasing the maximum prison term is the most effective deterrent against tax fraud and consider that HMRC should review its strategy for the prosecution of tax fraud.
Whistleblowers
HMRC operates a whistleblower scheme to encourage and reward whistleblowers to supply information about tax fraud, yet our inquiry highlighted the lack of awareness of this scheme, as well as the lack of incentives for whistleblowers to report this information. For the whistleblower scheme to have an impact, HMRC should publicise it more widely, including on social media platforms, and consider how it might better incentivise whistleblowers to come forward.
Cross-Cutting Issues
Looking ahead, we are pleased to see the amount of consultation the Government has undertaken on the measures discussed in this report. However, we consider that the nature and quality of consultations need to be improved in order to ensure that they are as effective as they should be. In addition, despite the issue of HMRC resourcing being raised in previous Finance Bill Sub-Committee reports, it has become apparent that the situation has continued to deteriorate. If the Government is to continue introducing new legislation that places additional burdens on HMRC, it must ensure that HMRC is adequately resourced in order to fulfil its role and provide taxpayers with the level of service that they expect.