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Research and development tax relief, HMRC data requirements, promoters of tax avoidance and sentencing for tax fraud Contents

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Chapter 9: Cross Cutting Issues

303.This chapter covers themes that emerged during our evidence gathering which go beyond the specific measures discussed in earlier chapters. It is intended to highlight issues that recurred across the topics considered and discuss how they might be addressed in the future.

Consultation

304.We were encouraged by the amount of consultation that the Government had undertaken in respect of the measures discussed in this report. There was consultation on each of the subject areas we looked at except (understandably) for the increase in the maximum sentence for fraud, which was both a manifesto commitment and a straightforward change to make. In the case of the measures on promoters and R&D, there had been successive consultations over a number of years, while the consultation on data collection was part of a series of consultations on the Government’s tax administration strategy—allowing the proposed measures to be seen in context. By and large witnesses welcomed consultation even though they were sometimes disappointed by the results.

305.However, we consider that there is scope for improvement in the nature and quality of consultation. Too often, a consultation begins when it appears that the Government has already decided what it wants to do: in those cases, it consults only on how to go about making the changes in question.

306.This approach ignores Stage 1 and even partially pre-empts Stage 2 of the Government’s own Tax Consultation Framework: Stage 1 should be: “setting out objectives and identifying options”, and Stage 2: “determining the best option and developing a framework for implementation including detailed policy design.”433

307.In the case of the additional HMRC data requirement, the lack of clarity about the rationale for collecting the additional data, and how this data would be used, caused a great deal of confusion and uncertainty among our witnesses.

308.In addition, our evidence highlighted the Government’s use of informal consultation to develop policy. For example, the possibility of additional tax relief for R&D intensive businesses was first mooted at Autumn Statement 2022434, with the Government stating that it would work with industry to develop policy in this area. The first public consultation on the new scheme was when draft legislation was published in July 2023—more than four months after the Government set out the detail (in an HMRC technical note)435 and three months after the scheme came into effect. Following that consultation, as discussed in Chapter 3, the qualifying test for R&D intensity was changed. Given that one of those changes—the addition of a grace period—was raised by most of our witnesses in their evidence, it seems likely that this could have been picked up earlier had there been a formal consultation.

309.We note that the Tax Policy Framework recognises the useful role that informal consultation can play in developing policy. That does not mean, however, that it should be used in place of public consultation when designing policy—particularly as, by limiting engagement to a pre-selected group of stakeholders, the Government risks missing out on useful input.

310.The Government should follow its Tax Consultation Framework and start consultations on significant changes at Stage 1.

Introducing changes too quickly

311.Our inquiry showed that witnesses felt that the Government often moved too quickly from initial consultation to setting a timetable for implementation. In relation to the merger of the two existing R&D schemes, discussed in Chapter 4, many of our witnesses felt that the Government had not factored in sufficient time for proper consultation, or to consider the responses received to its consultation on the creation of a single scheme, before publishing draft legislation.436 Ayming concluded: “rushed legislation is rarely good or effective legislation … it would be preferable to take the time to make decisions with due consideration to all relevant factors.”437

312.Witnesses also made the point that there were frequently successive changes in the same area in too short a period. For example, the Law Society considered that it would have been better to wait for the civil measures taken against promoters of tax avoidance schemes to bed in before moving to the creation of a criminal offence of failing to comply with a stop notice438. Similarly, in relation to R&D relief, witnesses told us of the destabilising effect of successive changes to the R&D relief schemes over recent years439, making it difficult for business to take account of R&D relief when planning R&D activity.

313.Another aspect was in setting timetables for implementation that took insufficient account of the preparations taxpayers need to make in anticipation of changes, and the time needed for this. For example, Mr Hart, told us that the timetable for introducing the new data requirements was extremely tight and, the target of April 2025 was undesirable in the absence of: “a strong benefit statement associated with it.”440

314.We also received evidence suggesting that the R&D changes were being rushed, particularly given that, although the merged scheme is to come into effect for accounting periods beginning on or after 1 April 2024, businesses only knew that it would be coming into effect in late November 2023441.

315.Some changes, such as HMRC data collection, require secondary legislation, and most require HMRC to publish guidance to taxpayers detailing how the new legislation will work in practice and what HMRC will expect of taxpayers. We concluded in Chapter 6 that it would have been helpful if the regulations relating to the additional data requirement had been published either in July with the draft primary legislation or at the same time as the 2023/24 Finance Bill—the primary legislation did not contain the detail necessary for a proper understanding of the measure.

316.The importance of timely guidance was raised by BIA in relation to the R&D intensive scheme. BIA was concerned that, although the scheme was in effect, nothing had been published on how the test of R&D intensity would apply in practice, which it said would impact SMEs’ ability to forecast cashflow as they could not identify whether they would be in or out of the new scheme.442

317.In setting a timetable for the implementation of a measure, the Government must take full account of the steps taxpayers need to take to prepare for the change and the support HMRC needs to provide for this. Regulations and guidance relevant to changes should be published as early as possible, and with a timetable that ensures sufficient time for proper consultation on regulations before the measure takes effect.

Underestimating the cost of change

318.HMRC’s cost calculations and methodology have been a recurring theme in recent Finance Bill Sub-Committee inquiries443. Mr Henty explained that there is: “an established methodology for business-customer costs. It is a forecast based on a set of assumptions”.444

319.However, as we discussed in Chapter 6, with reference to the cost to businesses of the new HMRC data requirements, HM Treasury and HMRC need to be transparent about what these assumptions are. On R&D, as discussed in Chapter 4, we were particularly disappointed that no estimate of the impact on businesses was published until Autumn Statement 2023, despite the possibility of a merged scheme coming into force from 1 April 2024.

320.On the other hand, when estimates are provided in a timely fashion, as discussed in Chapter 6, in relation to employee hours data, witnesses often question their accuracy—suggesting that HMRC has underestimated the costs involved.

321.The Government needs to revisit its standard model for costing and ensure that HM Treasury and HMRC conduct a meaningful dialogue with stakeholders about what businesses need to do to prepare for any change, including being transparent about any assumptions made.

Resourcing and performance

322.Throughout our inquiry, witnesses questioned how HMRC would cope with measures that put additional strain on its capacity, such as changes to the R&D schemes and the introduction of criminal prosecutions for promoters. Various tax professional bodies wrote to the Chancellor on 1 March 2023: “we increasingly hear from our members about the severe delays, business disruption and frustration that has become a regular occurrence when dealing with HMRC.”445 In September 2023 CIOT published the results of a survey showing that there was: “deep dissatisfaction with HMRC’s service levels”446 and, in evidence to the Public Accounts Committee in October, it said that: “HMRC’s service levels have been, and remain, the single greatest concern expressed by our members for at least the previous eighteen months.”447

323.Although the Financial Secretary assured us that HMRC was adequately resourced to cope with the new measures, he said as a: “constituency MP I hear concerns expressed all the time about HMRC’s performance”. He acknowledged that: “it is a very difficult job” and that: “some of the criticism and some of the customer service points are fair, because I have seen them in a constituency role, but we are working on it.”448

324.During this inquiry, HMRC announced a further curtailment of its telephone services, limiting the categories of inquiries it would deal with in the run-up to the filing deadline of 31 January 2024 for income tax self-assessment returns—one of the busiest periods of the tax year for individuals and agents.449 This followed an earlier closure of the service from 12 June to 4 September 2023.

325.The Financial Secretary assured us that HMRC’s resources have been increased and are monitored. Nonetheless, we note that successive Finance Bill Sub-Committees have raised the question of HMRC resourcing in recent reports, yet the situation seems to be getting worse. It is counter-productive to keep introducing new legislation placing additional burdens on HMRC if the department is already unable to provide a satisfactory level of service to taxpayers.

326.The Government should review resourcing for HMRC not only in relation to individual measures but also to ensure that taxpayers receive the level of service they have a right to expect.

Concerns about increasing HMRC powers

327.In general, witnesses were supportive of proposed extensions of HMRC powers where a good case for the extension was made. However, concerns focussed on whether additional powers were needed—in the case of requirements to collect employee hours data—or appeared not to be accompanied by adequate safeguards—such as the new criminal offence for promoters of avoidance schemes and the disqualification of directors. This has also been a familiar theme in recent reports by successive Finance Bill Sub-Committees450, who have consistently taken the view that increases in powers must be accompanied by appropriate safeguards, including mechanisms independent of HMRC. This is particularly so in the context of: “falling levels of trust in HMRC and wider government tax policy in recent years.”451

328.We consider that proper safeguards in these cases are essential both for the protection of taxpayers and because safeguards are necessary to secure buy-in from stakeholders and voluntary compliance by taxpayers.

329.Against a backdrop of increased distrust of HMRC and the Government’s tax policy in recent years, the Government must ensure that additional powers for HMRC are tempered by appropriate safeguards for the taxpayer.

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