Lords: Businesses need guidance ahead of R&D relief changes

The recommendations were made by the House of Lords Economic Affairs Finance Bill Sub-Committee in its report on the Draft Finance Bill, published this week (1 February). The committee also questioned the effectiveness of plans to punish the promoters of tax avoidance schemes.

Written and oral evidence from the Chartered Institute of Taxation and the Association of Taxation Technicians was referenced more than 60 times in the report, on matters including the timescale for R&D relief schemes, the accuracy of data gathering and stronger punishments for tax avoidance.

R&D reliefs

The report said it is essential that reforms to R&D relief, including the merger of the two current schemes and the introduction of a new relief for R&D-intensive SMEs, do not introduce additional complexity, and that clear guidance is available ahead of the start of the next tax year in April.

Both CIOT and ATT raised concerns over the proposed new R&D relief scheme. Emma Rawson, a technical officer for ATT, said uncertainty and short timescales will make it “hard to plan” for businesses. She said: “In our view, for R&D relief to act as an incentive to investment and innovation, it needs to be something that you can factor in and plan for, not something that is nice to have that you end up with at the end of the year.”

Rawson added that a lack of clarity over the definition of “R&D intensive” could lead to “boundary pushing, manipulation or even abuse”, while the creation of another relief following the merger of the current schemes would not be a simplification. She said: “New rules to define R&D intensive SMEs and the possibility of companies moving in and out of the two regimes … will result in an overall increase in the complexity of the R&D relief regime, rather than simplification.”

Ellen Milner, CIOT’s director of public policy, agreed that more discussion is needed, including a proposed notification system for subcontractors who are unable to claim R&D relief. She said: “The outcome of the Government’s deliberation following these discussions and the proposed way forward should be the subject of further consultation.”

Lord Leigh of Hurley, Chair of the Economic Affairs Finance Bill Sub-Committee, said: “Businesses will be pleased that the Government’s review of R&D tax relief has been completed and that they can now plan ahead with some much-needed certainty. However, the Government still has a lot of work to do in terms of the early publication of the regulations and guidance relevant to changes and a realistic timetable.”

HMRC data gathering

The sub-committee said measures to gather more data on employees and companies, such as the number of hours worked by salaried employees, should also avoid imposing additional burdens on businesses. One suggestion was to improve data sharing with other public forums such as Companies House.

ATT said data on hours worked will be “quite difficult to gather”, while there is also the risk that an employer “who is purposefully and egregiously not paying minimum wage” could “massage” their figures.

With the Government estimating that providing employees hours data will cost employers £35 million in one-off set up costs, with “negligible” on-going costs, Ellen Milner said the CIOT is “mystified” about how HMRC have calculated this number and expects the real-life costs to be “significantly higher”.

Lord Leigh added: “The sub-committee believes that additional cost and time burdens should not be placed on businesses unless there is a compelling reason to do so.”

Tax evasion and fraud

While the sub-committee welcomed the Government’s commitment to cracking down on tax fraud, it questioned how effective this would be in addressing offshore promoters of tax avoidance, stressing the need for safeguards in HMRC’s new powers to disqualify company directors in tax avoidance cases.

The ATT called for the provision of tax services in the UK to be subject to professional regulation, arguing that if this happened, “the issues surrounding the promotion and marketing of tax avoidance schemes would not arise—or at least could be countered more swiftly and effectively”.

CIOT added that disqualification may not always be appropriate, especially in the cases of “stooge” directors. “the level of culpability of the director concerned should also be considered,” it said, and that if the individual “has little or no knowledge or involvement in the promotion of the scheme, that would tend to suggest that disqualification may not be an appropriate sanction.”

The sub-committee added that while a proposal to double the maximum prison term for tax fraud was a 2019 Conservative Party manifesto commitment, this may not be an effective deterrent against tax fraud.

Lord Leigh said: “The sub-committee was sceptical about whether increasing the maximum prison term is the most effective deterrent against tax fraud. We were also concerned by how the legislation aimed at dealing with promoters of tax avoidance schemes would be applied to offshore promoters, which we know deliberately place themselves in locations that don’t have tax treaties and extradition agreements with the UK.”

Read the full report here.