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R&D tax relief changes must come with clear guidance

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The government has work to do to make sure that businesses are not put off by changes to R&D tax relief, writes Lord Leigh of Hurley, Chair of the Economic Affairs Finance Bill Sub-Committee.

1st Feb 2024
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The House of Lords Economic Affairs Finance Bill Sub-Committee, which I chair, has today published its report considering four different measures from the draft Finance Bill 2023-24.

Our report examines reforms to Research and Development (R&D) tax relief, the requirement for businesses to provide additional information to HMRC, measures dealing with promoters of tax avoidance, and the increase in the maximum prison term for tax fraud.

R&D plays a significant role in driving economic growth and supporting business productivity and our report welcomes the government’s commitment to tax relief for these activities. However, it is essential that the reforms – the merger of the two current R&D schemes, and the introduction of a new R&D tax relief scheme for R&D-intensive SMEs – do not introduce additional complexity to the tax relief structure, which we believe would disincentivise business investment in R&D.

We welcome the government’s confirmation that its review into R&D tax relief, which started in 2021, is now complete. Businesses now need a period of stability to allow these reforms to bed in. But to make a success of the schemes, they also need to receive clear guidance on the implementation of the merged scheme and, particularly, the R&D intensive relief well in advance of the start of the next tax year in April.

Our report also notes a general lack of awareness of these reforms and recommends that HMRC undertakes an educational campaign to set out the implications of the merged scheme for businesses. If these steps are not taken, we are concerned that the reforms will struggle to achieve the impact the government hopes for.

Data concerns

Witnesses highlighted the level of uncertainty around the requirement for businesses to provide additional data to HMRC. The draft legislation states that the collection of this additional data may only be used for the collection and management of specified taxes. However, HMRC told us that data on employee hours will help to provide them with more intelligence on whether employers are paying the National Minimum Wage and National Living Wage, as well as allowing them to assess National Insurance Contributions. We do not consider these to be relevant to the stated purposes and thus question whether these provisions would be enforceable.

We are also concerned that some of the additional information requested is already collected by Companies House but is inaccessible to HMRC. We recommend that the government improve the compatibility of its systems to facilitate appropriate data exchange, thereby avoiding additional burdens on businesses.

Crackdown on tax fraud

The draft legislation contains two measures that deal with promoters of tax avoidance. The first is the creation of a criminal offence for promoters who fail to comply with a ‘stop notice’ issued by HMRC, and the second gives HMRC a new power to apply to the court directly for the disqualification of directors of a company involved in the promotion of tax avoidance.

We welcome the government’s commitment to cracking down on tax fraud a longstanding concern for successive Finance Bill Sub-Committees. Nevertheless, our report questions the efficacy of these measures in addressing offshore promoters of tax avoidance. At the same time, we emphasise the need for better safeguards in relation to HMRC’s new powers in respect of the disqualification of directors in tax avoidance cases.

The proposed doubling of the maximum prison term for tax fraud was a 2019 Conservative Party manifesto commitment. However, we are sceptical about the need for this policy and its effectiveness as a deterrent against tax fraud. Our report notes the lack of any analysis of the effectiveness of the current prosecuting and sentencing regimes in such cases and recommends that HMRC reviews its prosecuting strategy for tax fraud, particularly in light of a sharp decline in the number of prosecutions in recent years.

We believe that our conclusions and recommendations mark a constructive way forward for enhancing the success of the reforms included in this year’s Finance Bill and hope that the government will consider them carefully.

Replies (3)

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By FactChecker
01st Feb 2024 16:57

The problem is simple (and redolent of a lot of similar problems in the finance arena) - in that a truism has been advanced ("R&D plays a significant role in driving economic growth and supporting business productivity"), but then shibboleths are attached to it without any attempt at determining a causal relationship (or lack of it).
And who are the authors of most of the claimed needs/benefits/etc ... why the promoters of schemes and services (abetted by some accountants).

There are undoubtedly major (often international) businesses for whom the ultimate decision on whether to greenlight an R&D project (and under which jurisdiction) will be subject to consideration of the tax impact. Note 'consideration', not 'determination'.

However the vast majority of UK businesses operate at a 'purer' level of decision-making ... where the business needs and opportunities/risks are what drive investment decisions, which are then referred back to advisers for how to best structure things with regard to cashflow/tax/etc.
Or as they used to say, the horse pulls the cart - the cart doesn't push the horse!

So it was a surprise to me over the last few years to see how many previously fairly conservative businesses were happy, after being approached by scheme promoters, to 'put the cart before the horse' - or in other words to retrospectively consider whether anything they did last year could be dressed up as R&D in order to belatedly claim the tax credit/relief.
Less of a surprise was the howls of anguish when HMRC announced that in future the intention to claim would need to be notified *before* the work was undertaken.
But it's not clear to me what has happened to that promise - I fear it may be being watered down?

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Replying to FactChecker:
Ivor Windybottom
By Ivor Windybottom
02nd Feb 2024 12:05

The pre-notification of a claim before the R&D happens would totally change the landscape and would effectively mean it could be treated as a grant, rather than being pushed through Corporation Tax.

It would become another form of Innovate UK grant and while this may be preferable to weed out fraudulent claims it would certainly deter many valid claims, to the detriment of the UK economy.

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By JimLittle
03rd Feb 2024 22:51

What constitutes R&D is subjective and the threshold has been low hence it has been so widely abused. Come claims have just been so outlandish and tantamount to fraud but nothing has been done to the promoters or HMRC have the bandwidth to inquire into each claim. R&D promotor have very vivid imaginations and sure they could even make up something for my accountancy practice and claim R&D !

I am surprised it has taken so long to even implement the notification window and justification for R&D which only came into effect last year.

There should be clear guidance what constitutes R&D and what isn't R&D. The problem at the minor very small tweaks to say a product range are eligible for R&D claim. R&D should be where a business does something so innovative on a large scale that is unique. Make it harder to claim and HMRC should vet each claim but of course poor HMRC are already struggling even with inquires.

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