Background
The House of Lords Economic Affairs Committee appoints a Finance Bill Sub-Committee each year to inquire into the draft Finance Bill. The Sub-Committee’s inquiries focus on technical issues of tax administration, clarification, and simplification rather than on rates or incidence of tax.
The report
The report covers the Government’s draft Finance Bill 2022-23. The draft Bill was published on 20 July 2022 and the report covers its Research and Development (R&D) tax relief reforms.
The Sub-Committee heard evidence that in recent years there has been an escalation in the abuse of R&D tax relief which has led to a loss of revenue. The relief was subject to large-scale organised criminal attacks and the activities of rogue advisers which involve targeting small companies, often persuading them to make invalid claims. In its most recent accounts His Majesty’s Revenue and Customs (HMRC) estimated the amount of error and fraud in its two R&D schemes at £469 million.
The Bill proposes legislative changes to combat this abuse, including the requirement to provide HMRC with more detailed information about the nature of a claim, naming any tax adviser involved in preparing claims and requiring that claims should be endorsed by a senior officer of the company. It also introduces a requirement to give pre-notification of an intention to make a claim.
Key recommendations
The reports main conclusions and recommendations are:
- Legislative changes within the draft Finance Bill 2022-23 are not effective in isolation and that improvements to HMRC’s compliance capability are also required. This includes a more focused and targeted approach to identifying suspect claims, greater expertise and potentially more resource.
- Fraud and error could be mitigated before claims are made if HMRC improved the support it provides to businesses. This includes both its guidance and communications to increase understanding of the scheme and expanding its existing Advanced Assurance process for claims by small and medium enterprises (SMEs).
- The Sub-Committee welcomes the extension of the range of qualifying expenditure for which R&D relief is available to include cloud computing and data licensing costs. It also welcomed the Government’s proposal to include pure mathematics within the scope of the definition for R&D.
- That the Government introduces some form of transitional relief for expenditure on specialised resource, which is not available in the UK, particularly for contracts which have already been entered into.
- BEIS and HMRC should work together on a new awareness campaign aimed at providing SMEs with accurate information about what is, and as importantly, what is not R&D.
Chair’s comments
Lord Leigh of Hurley, Chair of the Finance Bill Sub-Committee said:
“R&D investment, which tax relief supports, makes an important contribution to the UK’s economy and productivity. But fraud and error are costing the taxpayer over £450million each year.
“HMRC’s plans for tackling this problem will not succeed if it doesn’t also improve its compliance capability.
“The Government should use its review of R&D tax relief as an opportunity to look beyond the initial measures within the draft Bill and hold an open-ended consultation on how the scheme can be improved. This will be integral to future proofing the UK’s competitiveness as a hub of R&D activity.”
Further information