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Improve consultations and resource HMRC better, say Lords


A report into the draft Finance Bill 2023–24 by a House of Lords sub-committee has raised concerns over a lack of consistency in the consultation process, the ongoing resourcing problems at HMRC and has urged the government to not add more complexity to the R&D tax relief.

1st Feb 2024
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A new report from the Economic Affairs Finance Bill sub-committee has called for the nature and quality of consultations to be improved and has highlighted that HMRC’s resourcing problems have only deteriorated since its last report. 

These cross-cutting issues were raised in the sub-committee's new inquiry into the Finance Bill 2023-24, which focused on four measures: the reform of Research and Development (R&D) tax relief, the requirement for businesses to provide HMRC with more data, measures to deal with promoters of tax avoidance, and the increase in the maximum prison term for tax fraud. 

The report also highlighted the significant role R&D tax reliefs can play in driving the economy, and while the sub-committee welcomed the merger of the two current schemes, it also shared concerns about undermining the incentive through additional complexities, encouraging the government to not make any further changes. 

To ensure the schemes are successful, the report argued that the government should release clear guidance and an education campaign on the implementation of the merged scheme, and in particular for the R&D intensive relief ahead of the next tax year. Otherwise the committee is concerned the reliefs will achieve the impact the government intends. 

Improvement needed in consultations

Meanwhile, the sub-committee was pleased by the number of consultations which preceded the measures featured in the Finance Bill, including successive consultations over a number of years in the case of the clampdown on avoidance promoters and R&D, but it still had questions about the quality of the consultations.   

“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,” said the report. 

The sub-committee extended this criticism to the new power for HMRC to require additional data from employers and individual taxpayers. It raised concerns about the length of time it took for the government to clarify to businesses what was required, despite a consultation on the measure going on for a year.  

In the report, the sub-committee said: “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.”

HMRC data collection

HMRC told the sub-committee that the data on employee hours would provide information on whether employers are paying national minimum wage and national living wage, as well as NI contributions.

The sub-committee questioned instead whether some of the additional information was already collected by Companies House and HMRC could not access it. 

Speaking to AccountingWEB, Lord Leigh of Hurley, the chair of the sub-committee and a chartered accountant, said: “Companies House is now much more digitised than it ever used to be and therefore it should be possible [for HMRC] to get seamless information from Companies House without troubling the taxpayer. Secondly, we don't think [HMRC] has done a proper impact assessment on the time and cost to companies to collect the information that they're seeking.” 

Although pleased HMRC is now looking to obtain information on the hours paid rather than hours worked, Lord Leigh noted that collecting information on hours paid is “not really part of HMRC’s brief”.  

“We're not convinced that they understand the cost and time that's going to take for many companies who are frankly focusing on other issues right now.”

Introducing changes too quickly

Another consultation complaint was that in some cases the government moved too quickly from initial consultation to the full timetable for implementation. In the case of the merger of the R&D scheme, the report referenced concerns from witnesses that the government had not factored in sufficient time for a proper consultation or considered the responses before publishing the draft legislation. 

The sub-committee found that introducing changes too quickly, especially with the amount of change with the R&D relief in recent years, has made it “difficult for businesses to take account of R&D relief when planning R&D activities”. 

The report also highlighted individual concerns about setting tight timetables without taking into account the amount of preparation needed for taxpayers. Using the example of the HMRC data collection requirement, the sub-committee heard complaints that the deadline of April 2025 would be extremely tight, especially in the absence of “a strong benefit statement associated with it”.

HMRC resources

The inquiry also explored the strain the new measures in the Finance Bill would have on HMRC’s resources, particularly the changes to the R&D schemes and the introduction of criminal prosecutions for promoters. 

The report referenced the recent CIOT survey into HMRC’s service levels, which documented the severe delays and business disruption caused by dealing with the Revenue. Despite the financial secretary’s assurance that HMRC’s resources have increased and are monitored, the sub-committee was not convinced and noted that 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,” noted the report. 

As said elsewhere in the report: “If the government is to continue introducing new legislation that places additional burdens on HMRC, it must ensure that HMRC is adequately resourced to fulfil its role and provide taxpayers with the level of service that they expect.” 

Cracking down on tax avoidance

The committee also backed plans to crack down on promoters of tax avoidance, but it was worried that the legislation wasn’t aimed at catching offshore tax promoters. 

Lord Leigh also advised accountants to make sure that innocent people don’t become ‘stooge directors’ of companies. “There are some people who are encouraged by rogue companies to become directors of companies just to tick boxes. That is a dangerous position for people and accountants should be advising members of the public to be careful about accepting opportunities of a directorship because there may be malicious intent behind it.” 

R&D tax relief

The opening two chapters of the report are dedicated to R&D; the first focuses on the government’s review of the tax relief and the second chapter shifts then to the intensive scheme for small and medium enterprises. 

The sub-committee welcomed the end of the government’s review of R&D, as announced in the Autumn Statement, noting that “Businesses need time to adjust to all the recent changes to R&D relief.”

The committee said the number of significant R&D changes over the past five years has led to a perception of “instability in the UK’s R&D tax relief regime” which has “undermined” the intended incentive of the regime. The report noted that the postponement of the government’s final decision on the single merged scheme only added to the uncertainty around the scheme. 

The sub-committee has advised the government to not make any further changes to the scheme for the medium term. 

Lord Leigh emphasised to AccountingWEB: “The tax relief is an important part of the way the government can help businesses expand and invest so now the scheme is in place and it's been put through two budgets, leave it alone and let it settle down.”

The report also highlighted a lack of awareness around the R&D intensive scheme. “There needs to be a media campaign so that people are aware and British businesses can benefit from this is quite generous scheme. It is an appropriate scheme but they need to be aware of it so they can use it to maximum effect.”

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