Finance Act 2024 – round-up of CIOT, ATT and LITRG input

Finance Bill 2023-24, now enacted as Finance Act 2024, contained a number of measures which CIOT, our Low Incomes Tax Reform Group (LITRG) and our sister body, the Association of Taxation Technicians (ATT), had called for. These included making full expensing permanent, relaxations to the cash basis to make it more attractive and enabling taxes already paid by workers who were incorrectly categorised as outside the scope of off-payroll working rules (also known as IR35) to be offset against the tax due from their deemed employer.

Less happily, we had concerns of various kinds about a range of the measures in the Bill. These included a number of aspects of the R&D tax credits merger (though we supported the overall principle of the merger) and what we regarded as inadequate safeguards in relation to a new criminal offence of failure to comply with a stop notice. Additionally we raised questions about measures including legislation enabling HMRC to expand their information-gathering from businesses and self-employed people.

CIOT, ATT and LITRG together provided 12 briefings and representations to the MPs considering the bill, to support the scrutiny process and highlight possible flaws and areas of uncertainty. We also briefed members of the Labour Treasury Team in person early in the Bill’s passage. During debate on the Bill the three bodies were mentioned a collective total of 25 times, with our evidence cited on 10 different aspects of the Bill. Both the Financial Secretary and the Shadow Financial Secretary described our input as ‘invaluable’.

Committee of Whole House

Committee of Whole House debate was structured around three groups of clauses and schedules picked out by the Opposition for special attention.

Full expensing and R&D

The first group covered two significant changes relating to corporation tax - making permanent full expensing for expenditure on plant and machinery equipment, and a new, merged research and development (R&D) scheme replacing the current R&D scheme for small or medium-sized (SME) businesses and the R&D Expenditure Credit for larger companies.

Shadow Financial Secretary James Murray praised the ‘excellent team’ at the CIOT and ATT for their representations on the Bill. Citing these, Murray asked the government to clarify when it would publish a planned consultation on leased assets, whether it could clarify the definition of plant and machinery, and what proportion of businesses are ineligible for full expensing because they are partnerships.

The Financial Secretary, Nigel Huddleston, said in his closing remarks that the consultation would be launched ‘shortly – in early 2024’ (it was launched on 6 March) and that further guidance would be provided on what is defined as plant and machinery. He told MPs that it “includes things such as computers, printers, office equipment, vehicles, vans, lorries, tractors, forklift trucks, tools, ladders and drills, and equipment such as excavators, compactors, bulldozers and so on.” He added that the annual investment allowance of £1 million “covers the investment needs of almost all unincorporated partnerships”.

Murray also raised CIOT and ATT points on the R&D relief changes. He observed that CIOT “has pointed out that the government’s plans are ‘less a merger than the shifting of most SMEs into a revised scheme based on an ‘RDEC’ approach, with the SME scheme remaining for a smaller group of R&D intensive SMEs.’” He noted that ATT “has pointed out the impact this may have, saying that ‘the introduction of new rules to define R&D intensive SMEs and the possibility of companies moving in and out of the two regimes as their expenditure profile changes will arguably result in an overall increase in the complexity of the R&D relief regime, rather than simplification.’”

The minister did not respond directly to these points in his summing up, but had earlier said that the R&D changes would ‘simplify the system’ and defended the separate regime for R&D intensive SMEs as “promoting the conditions for enterprise to succeed”. 

Avoidance and evasion

The second group of clauses and schedules debated in Committee of Whole House were badged as covering ‘avoidance and evasion’, though they also included amendments to the legislation passed in the previous Finance Act implementing the OECD Pillar 2 rules around a global minimum rate of corporate tax.

Clause 32 and schedule 13 of the Bill would enable HMRC to bring disqualification action against directors of companies involved in promoting tax avoidance. James Murray drew attention to evidence from CIOT and LITRG, who had raised questions about making sure this power was targeted and used correctly: “These questions arise because of cases where the true promoters of tax avoidance schemes recruit others, often vulnerable or naive individuals, to be directors of the company involved, thereby shielding themselves from any action.” Murray said that LITRG had provided ‘powerful examples’ of where young or vulnerable people can be recruited “without understanding what they are getting into’.

Murray also highlighted that LITRG had pointed out that a reference to ‘managers’ had removed since the draft legislation. He asked the minister why this was. Sadly the Exchequer Secretary, Gareth Davies, who was replying to this debate for the government, did not answer this or any of Murray’s other points on clause 32 in his wind-up speech.

This group also included discussion of the new strict liability criminal offence for failing to comply with a stop notice issued by HMRC in relation to a tax avoidance scheme. The Shadow Financial Secretary highlighted that CIOT had raised concerns “that the decision to issue a stop notice, and thereby determine that a criminal act may have been committed, will rest entirely with HMRC with no external oversight. To make sure that appropriate safeguards are in place, I understand the Chartered Institute has proposed that failure to comply with a stop notice should be a criminal offence only if judicial approval for the issue of the notice has been obtained first. Alternatively, at the very least, the Chartered Institute of Taxation has made it clear that HMRC’s internal governance overseeing the issuing of stop notices must work effectively.”

Responding, the Exchequer Secretary assured the shadow minister that there are ‘robust governance processes and safeguards in place’, including reviews and appeals, while any criminal sentences will be decided by the courts.

Additionally, with regard to clause 34, which relates to the construction industry scheme and gross payment status, James Murray raised CIOT concerns about the ‘disproportionate effect on the cashflow and reputation of subcontractors’ if they were to lose gross payment status as a result of minor VAT compliance failures. He asked for the minister’s reassurance “that the Treasury will engage with the industry, including the Chartered Institute of Taxation, to make sure that the regulations are effective.”

The Exchequer Secretary did not respond to these points in his wind-up speech.

VAT and excise

The final group of clauses debated at Committee of Whole House related to VAT and excise.

Clause 27 seeks to clarify UK primacy on VAT and excise law following the passage of the Retained EU Law (Revocation and Reform) Bill. Labour’s Shadow Economic Secretary, Tulip Siddiq, pointed out that, in a consultation response, CIOT had highlighted “a number of concerns about the proposals, pointing out that the significant complexity in interpreting this draft legislation risks undermining the certainty it seeks to deliver. Specifically, the CIOT points out that the distinction drawn in the legislation between disapplication and the quashing of UK law as a result of EU law, and interpretation, ‘might in practice be insufficient to achieve the desired result’.”

The minister did not address these particular points in his brief reply to the debate.

Relevant briefings for Committee of Whole House debate –
CIOT briefing on changes to Corporate Taxes
ATT briefing on Full Expensing
ATT briefing on changes to R&D credits
CIOT briefing on avoidance and fraud measures
LITRG briefing on promoters (company directors)
CIOT briefing on VAT and excise law

Public Bill Committee

The remaining clauses were dealt with in two sittings of the public bill committee.

Creative industries

Discussing a number of measures related to the creative industries, Shadow Financial Secretary James Murray raised an issue highlighted by CIOT in our representation to the committee on these clauses, asking the minister to provide assurances to the creative sector “that they can expect stability and certainty when it comes to these new expenditure credits, to encourage long-term investment and competitiveness”.

The Financial Secretary, Nigel Huddleston, responded that “tax legislation should never remain static because the nature of the economy and the world changes all the time. It is therefore always appropriate to change relevant tax legislation”. But he acknowledged that “[s]ignalling and giving stability and assurance to the industry is important”.

Pension lifetime allowance

Addressing clause 14 and schedule 9, which abolish the pension lifetime allowance (LTA), James Murray noted that CIOT “had expressed concerns that the legislation in the Finance Bill on the abolition of the LTA is different from that which was published for consultation last summer.” At nearly 100 pages the legislation is two and a half times the size of the original legislation published last summer, he explained. “With such a great degree of apparent change between the draft and final versions, there are of course likely to be many questions about details of the version before us, and about the Government’s intent. For example, the Chartered Institute of Taxation notes that the pension commencement excess lump sum aspect of the legislation that replaces the current lifetime allowance excess lump sum charge should be revised to meet the policy intent.”

Murray also cited CIOT comments in relation to the need to give more notice of changes to pension schemes and individuals. “The CIOT notes that, for example, defined contribution pension schemes need to provide information to members about options for retirement at least four months ahead of nominal pension age. That means that scheme communications for those retiring in April this year would need to be clear and updated by December last year.”

Responding to the debate the minister said that the “vast majority of the 100 pages of legislation he talked about remove references and concepts associated with the lifetime allowance. When we make changes, we need to remove references, and that was the bulk of the work.”

Cash basis

Discussing the extension of the cash basis (clause 16), Murray asked whether the minister had any concerns about some businesses being unsuited to the new system. “The Chartered Institute of Taxation has expressed concerns that conducting accounts on a cash basis fulfils the need to report to HMRC, whereas businesses that report on an accrual basis serve several purposes, including for loans and profitability. Could the minister explain what assessment he has made of the suitability of the cash basis for the full spectrum of businesses, including small businesses? Connected to that point, could the Minister explain what consultation he has carried out with businesses and sector groups since the autumn statement about the measure ahead of its implementation in 2024-25?”

Responding, the Financial Secretary emphasised that no-one is being forced to use cash accounts. “A business can still choose the method of accounting that best suits its circumstances, but the government encourage businesses to use the simpler cash basis where appropriate. However, we of course recognise that many businesses will still benefit greatly from the advice and information provided by an accountant drawing up full accruals accounts, so the government have set the cash basis as the default to make it easier for businesses to use the simpler regime. All a business will have to do to opt out of that is tick a box on their tax return, so it is fairly simple and straightforward in terms of choice.”

Off-payroll working

Clause 17 gives HMRC the power to make regulations offsetting tax paid by workers and intermediaries on income from IR35 rules against subsequent PAYE liabilities of their deemed employer. This was something CIOT had been calling for.

James Murray commented on this in his remarks, noting that the CIOT “had argued for this set-off to be legislated for since the off-payroll working rules were first introduced seven years ago. Could the Minister explain why it has taken the government so long to act after the problem was first identified by a respected industry body?”

Blaming the complexity of the legislation, the minister said the government had needed to ‘work through’ these issues thoroughly. HMRC has undertaken “a significant amount of informal consultation with key stakeholders to explore a legislative solution to this issue,” he told the committee. The government “are grateful for the constructive feedback” they have received.

Data collection

Clause 35 relates to data collection, requiring employers, shareholders and self-employed people to provide additional information to HMRC. The Shadow Financial Secretary expressed concern that it would mean “large costs” for businesses. In doing so he cited CIOT: “The Chartered Institute of Taxation has conveyed its concerns that it seems unrealistic that the average transitional costs to businesses of providing the data on employee hours will be just £18.42. Does the Minister believe that the costings are accurate for businesses that will need to plan for the new requirements?”

Responding, the minister stood by the government’s estimate of the one-off cost to business of the change (about £35 million in total), adding the opinion that the ongoing cost “should be negligible”.

Final remarks

Finally, in his last committee stage contribution, the Shadow Financial Secretary thanked the clerks and his fellow committee members, and also “the Chartered Institute of Taxation, the Low Incomes Tax Reform Group, the Association of Taxation Technicians and the ICAEW, whose input has been invaluable.”

The Financial Secretary also thanked stakeholders for their ‘invaluable input’: “Some have provided specific input recently in the form of written submissions to this stage of the process, but many have participated over many years in extensive formal and informal consultations. I put on record our deep gratitude and thanks to all those who have taken their responsibilities and interests incredibly seriously, providing great input into this Bill to date.”

Relevant representations for Public Bill Committee debate –
CIOT representation on creative reliefs
CIOT representation on employment taxes (inc pension lifetime allowance)
CIOT representation on the cash basis
LITRG representation on the cash basis
CIOT representation on tax returns (information)
LITRG representation on penalties

Report stage

At report stage the government introduced an amendment to address an issue CIOT had flagged up in our committee stage briefing in relation to transition rules for the new R&D regime. This relates to situations where two (or more) companies are involved in the same R&D but one is on the old regime and one on the new.

The minister explained that the amendment would provide that, “for temporary double claims, the R&D credit will go to the claimant in the old system until both have started new accounting periods.” Additionally, “to avoid a temporary gap where no company can claim, the legislation will be amended to ensure that subcontractors can claim where their customer is still in the old system”.

Summaries of, and links to, our reports on Finance Bill 2023-24 debates

MPs support Finance Bill at second reading (13 Dec 2023)

MPs backed the Finance Bill at second reading by 291 votes to 54, with SNP and Liberal Democrat MPs voting against the Bill and Labour abstaining.

Finance Bill: Committee of Whole House preview (published 9 Jan 2024)

Finance Bill Committee of Whole House debate (10 Jan 2024)

MPs agreed measures related to full expensing and R&D tax relief, the Pillar Two global tax agreement, heating oil rebates, VAT and excise law and evasion and avoidance measures.

Finance Bill: Public Bill committee preview (published 15 Jan 2024)

Finance Bill 2023-24 Public Bill Committee (16 Jan 2024)

MPs agreed the remaining clauses in the Finance Bill with just three hours debate, including changes to support for the entertainment industry, abolition of the pension lifetime allowance and changes to business reporting requirements.

Finance Bill – Report Stage preview (published 31 Jan 2024)

Finance Bill: report stage and third reading (5 Feb 2024)

The Finance Bill completed its report stage and passed its third reading this week, with MPs agreeing to clauses and amendments relating to the electricity generator levy, R&D and creative sector reliefs.

Finance Bill in Lords - pensions, service levels and non-doms in spotlight (21 Feb 2024)

The Finance Bill successfully passed through the House of Lords. During the discussion, peers debated changes to R&D relief, the complexities of pension taxation, HMRC customer service levels and how much scrapping non-dom tax status would raise. In accordance with precedent no amendments were tabled to the Bill in the Lords and no votes were held.