HMRC chief acknowledges expertise gap in R&D claims processing

This report covers exchanges during the second half of the House of Commons Treasury Committee hearing which took place on 24 April 2024, covering topics including HMRC’s remote working policy, the high-income child benefit charge, R&D tax credits, promoters of tax avoidance schemes and online sales reporting.

The first half of the hearing, covering HMRC customer service and telephone helplines, is reported on here.

HMRC: Remote working, salaries and offices

Stephen Hammond (Con) asked about the number of HMRC staff who work from home.

Jim Harra, the Permanent Secretary at HMRC, said that staff are expected to come into the office “at least 60% of the time” as they can learn and collaborate together.

Harra told the MPs that HMRC gets “the same level of productivity” whether help advisers work from home or the office, as the number of calls received remains unchanged. He highlighted that the agency can monitor “when our advisers are online and how many calls they are dealing with” via the telephony system.

Dr Thérèse Coffey (Con) riled Harra with a claim that HMRC staff “have had considerably higher pay rises than the rest of the civil service on the basis of productivity”. “I am this month having to give nearly a third of my staff… a rise so that they can stay with the national living wage,” he responded. “Just in case people were left with the false impression that we pay people very high salaries, that is not the case.”

Coffey also challenged the amount HMRC have spent on new offices, claiming: “you are now having to get the rest of the government to bail you out by coming to share your very flash premises”. Harra argued that HMRC’s new location strategy has made significant savings since 2015 resulting in the agency leading the whole government hub strategy.

Tax repayment agents

Coffey also raised concerns about repayment agents giving bad advice, asking Harra: “What are you doing to close the cowboy tax advisers?”

HMRC’s Permanent Secretary argued that most professional tax advisory firms are doing a “good job” but there is a ‘significant’ minority who are not. He suggested that there has been a particular issue with repayment agents in recent years. “We have been building the best possible self-service options for customers so that they do not feel the need to use those agents unless they really want to”, explained Harra.

He also highlighted that HMRC can and do report agents to their professional bodies for misconduct, “but there is no requirement in this country for a tax agent to be a member of such a body, so there are unregulated agents”.

High-income child benefit charge (HICBC)

Danny Kruger (Con) highlighted changes to the threshold of HICBC and asked whether there is “a process under way for reaching out and communicating with families who may have been caught by the charge before, but now will not be”.

Angela MacDonald, Second Permanent Secretary at HMRC, explained that three different customer groups manage their way through the child benefit service:

1. customers who applied for child benefit but decided not to take payment
2. people who apply for and receive child benefit and then pay the charge
3. people who decided not to apply for child benefit at all rather than be in the tax system

She highlighted that the recent changes take 170,000 families out of HICBC. To assist the first group, in April HMRC launched a new service to help customers opt back in easily, with 1,900 people using the service so far. MacDonald also noted that another 18,000 individuals have reactivated their child benefits through the more traditional route.

Regarding communicating with these customers, MacDonald suggested that HMRC have been very ‘active’, contacting families via different routes including social media and websites such as Money Saving Expert.  She argued that approximately 485,000 families will be impacted by the change.

Asked about the impact of calculating the child benefit on a household basis on the way HMRC works, MacDonald highlighted that HMRC will share a consultation on this issue soon; adding that “It is important that we understand how we go about this in a way that means that we collect data. We are mindful of the particular risks for vulnerability”. She continued that HMRC already collects an ‘awful’ lot of data and suggested that “the challenge is how you put those two pieces of data together, and what makes up a household”.

R&D tax credits

John Baron (Con) expressed concern that HMRC is “putting economic growth and innovation at risk by rejecting legitimate claims for R&D tax relief, delaying payments and clawing back tax credits”.

Jim Harra emphasised the need to achieve the right balance between ensuring that R&D credits achieve their policy objectives “while at the same time protecting the Exchequer from error and fraud, which has recently been reassessed at an unacceptably high level”. He added that HMRC will publish information about its compliance plan soon.

Harra highlighted that HMRC aims to enable legitimate claimants whose claims are accurate to get their R&D payment quickly and easily while preventing non-compliant claims. Harra added, “Most non-compliant claims have some relief due, just not the amount that is being claimed, but some…. were not due any relief at all in our view”.

Baron acknowledged the challenge and asked if HMRC has the necessary resources and expertise to administer these claims. Harra said that there is no backlog of R&D claims and HMRC has increased the resources on R&D about fivefold over the last couple of years. He recognised that expertise in processing R&D claims remains a challenge, saying: “My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise”.

Harra told the MPs that the government had made some changes to help HMRC administer reliefs while managing error and fraud, including the requirement to submit claims online along with supplying additional information about the claim. These changes would allow HMRC to risk-assess the submission and “reduce the extent to which legitimate claimants are caught up in compliance checks that they should not be caught up in”.

Asked whether HMRC seeks third-party expertise on assessing “what is innovative”, Harra answered that experts at DSIT or DEFRA departments help HMRC, adding that “the purpose of setting up the external expert advisory panel is to address the fact that within HMRC we do not have that range of expertise”. He said that HMRC aims to optimise the panel's use to quickly process and approve clear innovation claims while ensuring “more questionable claims” receive appropriate scrutiny from the compliance team.

Promoters of tax avoidance schemes

Dame Angela Eagle (Lab) raised the longstanding issue of the loan charge, suggesting that those who profited by selling schemes “have gotten away scot-free”. Harra reported that there were now a core of 20 or 30 firms “that really promote this avoidance”. Many of them are based offshore and operate online. With the help of the Advertising Standards Authority, some websites have been shut down and others have been forced to amend what they say.

HMRC’s Permanent Secretary highlighted that some umbrella companies which employ agency and contract workers and then post them to clients “are set up as vehicles to push this type of avoidance”. The government plans to introduce a requirement for due diligence checks in labour market chains to address this matter.

Eagle asked about the number of letters HMRC have issued to those affected by the loan charge; Harra, not having the information to hand, promised to write to the committee later.

Eagle then challenged the HMRC boss over the lack of prosecution of “the mis-selling companies that made a fortune over the years selling this stuff”. Harra explained that, generally speaking, the “promoters of the tax avoidance schemes are not liable for the tax. It is not their tax bill; it is the worker’s tax bill”. He explained that the promotion of tax avoidance in itself “is not a criminal offence”.

Eagle seemed surprised to hear this and asked if HMRC could take any action against the promoters that saddled people with the loan charge. Harra answered that: “There is often no sanction we can apply to those people”. However in some cases HMRC have secured convictions and prison sentences for promoters of tax avoidance, he continued, including a single case in relation to disguised remuneration.

Online sales reporting

Dame Harriet Baldwin (Con), Chair of the committee, concluded the session by seeking further information about online sales reporting. She argued that the reporting requirements introduced this year (platforms need to report information on UK based sellers making 30 or more sales a year or who have a turnover of 2,000 euros or more) add “a new complexity” to the tax system.

Harra replied that “more people are now trading online and selling goods online that are liable to tax”. He continued that while online platforms are required to report to HMRC on sales on their platforms in certain circumstances, this will not impact the seller.

Baldwin raised a question about resources invested in processing these reports to which Harra answered: “We will monitor that over time and adjust the limits if we need to”.

Baldwin thanked everyone and said that it would be helpful if HMRC could share their strategic plans with the committee.

You can watch the full session here and read the transcript here