R&D tax relief changes must come with clear guidanceby
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.
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.
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.
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Howard Leigh co-founded Cavendish Corporate Finance in 1988 following several years working as a Chartered Accountant specialising in taxation and M&A.
Howard served as Chairman of the Faculty of Corporate Finance of the ICAEW, earning him the Faculty’s Outstanding Achievement in Corporate Finance Award in 2008.
He was elevated...