Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud
Chapter 1: Introduction
1.The Finance Bill Sub-Committee is appointed by the Economic Affairs Committee on an annual basis to consider the technical issues of tax administration, clarification and simplification arising from the draft Finance Bill. In recognition of the House of Commons’ financial privilege, the Sub-Committee does not inquire into rates or incidence of tax.
2.This year our inquiry covered four measures within the draft Finance Bill 23–24, published on 18 July 2023. They are:
- The reforms that merge the two existing Research and Development (R&D) schemes as well as providing tax relief for R&D intensive Small and Medium-sized Enterprises (SMEs);
- A requirement for certain businesses to provide additional data to HMRC;
- The measures dealing with promoters of tax avoidance; and
- An increase in the maximum prison term for tax fraud.
3.The R&D reforms, which involve the merger of the two existing R&D schemes, as well as the introduction of a scheme for R&D intensive SMEs, follow an R&D review launched by the Government in March 2021. The draft Finance Bill proposes an additional tax relief for the most R&D intensive loss-making SMEs. It also proposes combining the current SME R&D and Research and Development Expenditure Credit (RDEC) schemes into a single, simplified scheme providing an above the line1 tax credit—which we refer to in this report as the ‘merged scheme’.
4.On 22 November 2023, the Autumn Statement announced that the merged R&D scheme would be applied to accounting periods starting on or after 1 April 2024. The Economic Affairs Committee usually publishes the report prepared by the Finance Bill Sub-Committee shortly before the Autumn Statement and the publication of the Finance Bill itself. However, the Finance Bill 2023–24, which was expected in the Spring, was published on 29 November 2023.
5.The measure requiring certain taxpayers to provide additional data to HMRC follows a consultation, launched in July 2022, which proposed a number of different options for improving the range of data that HMRC collects and uses. Under the draft legislation, employers, owner-managers, and the self-employed will be required to provide additional information. This will include the submission of employee hours paid via Real Time Information PAYE reporting, as well as showing dividend income received by owner managers from their own companies separately in their Self-Assessment return and the percentage share they hold in their companies.
6.The measures dealing with promoters of tax avoidance aim to counter and penalise the activities of promoters, and build on anti-avoidance measures introduced in the Finance Act 2021 and Finance Act 2022.2
Box 1: ‘Above and below the line’
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In simple terms, above the line costs are the standard routine costs a business incurs in its normal operations. They are subtracted from revenue to calculate gross profit. Below the line costs, on the other hand, are unexpected or non-repeated costs not included in the above the line calculation. These are deducted from gross profits to calculate the net profit. In the context of the subject matter of this report, RDEC tax relief for larger companies is an above the line credit, meaning that it is applied to the company’s profit before that profit is taxed. This can then be shown as income, increasing the company’s stated profitability. It also increases predictability (as it excludes one-off or unexpected costs from the calculation) enabling the company to forecast its cashflow more effectively. By contrast, tax relief and tax credits under the current SME scheme are applied below the line. This means that they are not taxable (as they are applied after tax), thus providing a better representation of the core operating performance of the business (by not inflating income). |
7.We took written and oral evidence from business organisations, tax professionals, professional advisory firms, law societies, academics, and individuals. We also heard evidence from His Majesty’s Revenue and Customs (HMRC), His Majesty’s Treasury (HM Treasury) officials, and the Financial Secretary to the Treasury, Nigel Huddleston MP. We are grateful to all those who provided evidence and would like to thank them for their time. We would also like to thank our two specialist advisers, Sarah Squires and Robina Dyall for their invaluable advice, insight, and support throughout the inquiry.
This report
8.The first part of this report covers the reforms to the R&D tax relief regimes; Chapter 2 discusses the background, Chapter 3 the introduction of the R&D intensive scheme for SMEs, Chapter 4, the introduction of the R&D merged scheme, and Chapter 5, the subcontracting and subsidy arrangements under the merged scheme. We then turn to the three other measures: Chapter 6 covers HMRC’s new data requirements for employers, Chapter 7 explores the measure dealing with promoters of tax avoidance, and Chapter 8 deals with the proposed doubling of the maximum prison term for tax fraud. Finally, in Chapter 9, we discuss the common themes that have emerged across the four measures.
1 See Box 1.
2 Finance Act 2021, section 121; Finance Act 2022