Lords hearing: Minister defends HMRC and pace of change on R&D

During the hearing peers heard that:

• The government would monitor whether additional safeguards are needed for the new promoters offence
• There will ‘probably be a mechanism for a bit of leniency’ in respect of naïve stooge directors
• Some criticism of HMRC over customer service is ‘fair’ but overall the organisation is ‘incredibly effective’
• R&D changes are being rushed in because they are an important part of the government’s ‘push for growth’
• The minister will come back to the committee on how the government checks on the accuracy of estimates of one-off costs to business
• New data collection requirements will be used both for immediate compliance and to refine any future covid-style economic support scheme

Background

The Finance Bill Sub-Committee of the House of Lords Economic Affairs Committee undertakes an annual investigation into selected measures in the government’s draft tax legislation. This year the sub-committee’s inquiry is focusing on four areas within draft Finance Bill 2023-24:

• Reforms to Research and Development (R&D) tax credits which merge the two existing schemes as well as providing a higher rate of payable tax credit for loss-making R&D intensive SMEs
• Measures dealing with the promoters of tax avoidance
• Increasing the maximum prison term for tax fraud
• A requirement on certain taxpayers to provide additional data to HMRC

For a second year in a row the sub-committee is chaired by Lord Leigh of Hurley, a Conservative peer who is also a chartered tax adviser and a chartered accountant.

The sub-committee held its first evidence session for this inquiry on Monday 23 October with witnesses from CIOT and other tax and accountancy bodies. You can read our report on this session here. The second and third evidence sessions took place on Monday 13 and Monday 20 November, with lawyers, R&D specialists and others. You can read our report on that session here.

Written evidence has also been submitted to the inquiry, including by CIOT. You can read this here.

Evidence session – Wednesday 29 November – Government representatives

The final evidence session of the inquiry took place on 29 November, with witnesses:

• Nigel Huddleston MP, Financial Secretary to the Treasury
• Doug Stoneham, Deputy Director of Policy and Technical, Counter Avoidance Directorate, HMRC
• Matthew Henty, Deputy Director, Enterprise and Property Tax, HM Treasury
• Zoë Nettlefield, Deputy Director, Strategic Data Policy, HMRC

Full transcript of this panel session here.

Promoters of tax avoidance

Following introductions, the chair, Lord Leigh, began the session by summarising that he feels there has generally been a ‘warm welcome’ to the direction of travel and the proposals. However, “[s]ome witnesses felt that there was a strong case for letting the civil measures, which have been out for a while, bed down before moving to a criminal sanction.” Would the witnesses agree?

The Financial Secretary said a civil approach can work in many cases, “but the criminal element elevates it to show how important the issue is and how seriously we take it”. Pressed further he said the government would “carefully monitor the situation and see how it goes”. “The signalling is important as well as the process,” he emphasised.

Baroness Valentine said that earlier witnesses had expressed concern that the new offence gives HMRC more powers without additional safeguards. “In particular, they feel that some independent oversight of HMRC’s decisions is necessary. Will you amend the legislation to provide for this?”

The minister once again promised the government will “monitor the situation”, but said there are “decent systems and processes in place already that we are broadly comfortable with”.

Doug Stoneham of HMRC explained further: “Technical experts and senior managers have to agree that it is appropriate to issue a stop notice. Once that process is complete, HMRC solicitors may need to be consulted, but the final decision on whether to issue a stop notice is taken by an independent senior civil servant in HMRC, so outside the Counter Avoidance Directorate where the work is being carried out. Promoters can appeal to HMRC against a stop notice. If HMRC does not agree to withdraw the stop notice, the promoter can go to the tribunal to seek to have the stop notice withdrawn.”

He added that any decision to prosecute or not would be taken by the appropriate prosecuting authorities (the Crown Prosecution Service in England and Wales) rather than in HMRC. HMRC are planning to publish a document setting out all the various safeguards that are in place.

Lord Roborough asked whether the offence would be effective against promoters based offshore.

Stoneham replied that the new powers and the director disqualification measure would give HMRC greater scope to utilise the network of tax treaties the UK has. Also the vast majority of avoidance cases coming through are still related to disguised remuneration schemes, “where there will almost always be a UK footprint in place so that the UK company is able to offer employment services as part of the process.”

Lord Stevenson of Balmacara asked if the government would consider amending the legislation so that it focuses more on the controlling minds behind the avoidance activity, and provides a reasonable exemption for those who might be called stooge directors.

The minister said this was a good point, and one he has discussed with his team. He accepted there are probably some naive individuals who are trapped or taken advantage of, though anybody taking on such a role has a responsibility to know what they are letting themselves in for. “There will probably be a mechanism for a bit of leniency in the processes and in any criminal sanctions at a later stage,” he said.

He added that the mechanism “will allow us to go after the shadow directors and controlling minds as well, but stooge directors are a real problem, and it is not one or the other”. Responding to Lord Palmer of Childs Hill he said there was a particular need to get tougher on “the serial offenders of worst abuses”.

Sentences for tax fraud (and resourcing of HMRC)

Lord Altrincham asked the minister about a lack of evidence about what deterrent value the maximum sentence for fraud may have. The minister said this measure was a manifesto commitment and “an important signal of how seriously we take these crimes and offences”. However, he does believe it will be effective.

Lord Rooker asked whether HMRC has the resources to deal with more resource-intensive prosecutions and investigations, taking a dig at HMRC’s performance more generally in the process. The Financial Secretary defended HMRC’s work saying that while, as a constituency MP, he hears concerns “expressed all the time about HMRC’s performance and so on”, it has “a very difficult job”, that other countries’ tax authorities have similar problems and that HMRC is “incredibly effective in what it does”.

He continued: “You will hear me defend HMRC staff a lot, because they are incredibly hardworking, intelligent, bright, dedicated people. Some of the criticism and some of the customer service points are fair, because I have seen them in a constituency role, but we are working on it.”

Turning to compliance, the minister said the return on investment (ROI) for those who work in this area (what they bring in versus their salary) is ‘compelling’.

“Over the next few months, we will focus on things like what the ROI will be and the business case for enhancing these activities if we add more resources… Are they sufficiently resourced? Yes. I have had conversations with the leadership of HMRC. That is one of the questions every time we do an Autumn Statement or a fiscal event: are we adequately resourced to do the things that we have just announced? We have to be confident that we are, and the OBR and others look at this.”

Doug Stoneham said that in the criminal space HMRC focus on cases “where there is particularly serious fraud and where criminal sanction is appropriate, where there is a need to send a strong deterrent message or where the civil powers are not sufficient to establish the truth”. In 2022-23, HMRC secured 218 convictions for tax fraud offences, which represented a 90% conviction rate, he added. 

Research and development schemes reform

The longest part of the session was spent on the government’s proposed R&D changes. The chair began by asking about the thinking behind the R&D intensive scheme, why the government had decided to move the cut-off from 40% to 30% and why they thought that a cut-off was more appropriate than a slope.

Matthew Henty of the Treasury said the scheme was designed to support roughly 20,000 SMEs (now 25,000 with the reduced cut-off) “on the basis that they were most reliant on the cash flow from the payable credit of the SME scheme in their business planning and their long runways — for example, in biotech — to profitability or to any sale. The intention was to target that as closely as possible.”

He acknowledged that a cut-off meant a binary process. “It is potentially possible to implement something that is a bit more gradual, but that always brings its own bits of complexity.” Probed further by the chair on whether the government was open to moving to a graduated system if feedback suggests the cut-off is a problem, Henty said only that he noted there were trade-offs involved. A graduated system would be more complicated.

Lord Roborough probed further on why R&D intensive relief will continue as a separate relief even after the merger comes into effect. “How can having two different models for R&D relief be described as simplification?”

The Financial Secretary said going from three to two reliefs (presumably regarding the intensive relief as part of the status quo rather than this reform) was in itself is a simplification. “The SME loss-making R&D niche area is unique, which gives us the ability to target, he said, saying industry had asked for it.

Henty said that merging “the PAYE, the subcontracting and all that stuff into one set of rules that will apply to everyone in the same way” is “demonstrably simpler”.

Lord Stevenson of Balmacara asked about the tight timescale for the merger. “Have you thought about postponing this? Witnesses have told us that they would like to see this whole thing put back to 1 April 2025.”

The Financial Secretary said the merger was an important element of the government’s push for growth, “so we want to implement it as soon as reasonably possible”. Henty emphasised that it would be for accounting periods after 1 April: “the feedback I have had… is that [this] has made a big difference to the big companies that are facing the most change through the merged scheme because of the subcontracting rules in particular.”

The sub-committee spent some time discussing subcontracting. Henty said there is “a strong economic case for giving R&D relief to the decision-making body, the company that has the project to resolve a scientific or technological uncertainty. The risk of determining who would do it through things like nominations is that you end up with bargaining power contracts, and things like that, that are not following the substance”.

Lord Rooker asked about the costs for businesses from the merger, noting the government’s estimate is a one-off cost of £7 million.

Henty said the costings “used a set of modelling for how long it takes people to familiarise themselves with a change. Here, we are expecting it not to be about the change of system but about familiarising yourself with new rules as a one-off cost. The estimate is based on established methodology for business-customer costs”.

Does anybody ever go back after two or three years and check whether cost estimates are accurate, wondered Rooker. Henty thought this happened on occasion. Rooker asked him to write to the sub-committee with an example of a one-off cost to business, where estimates have been subsequently checked to see whether they were accurate.

The minister weighed in too, saying this was “a valid and fair point” and agreeing to come back to the sub-committee on this. Noting his own business background and previous role as a business minister he stressed the importance of engaging extensively with businesses and particularly considering the impact of measures on small businesses. But he emphasised that many of these changes were being made at the request of businesses.

Finally the peers asked whether HMRC are doing enough to publicise the changes. The minister and Treasury official said there had been a fair amount of publicity and stressed engagement with industry bodies, accountancy bodies and agents as a route to getting information out.

Data collection

Questioning around data collection focused on what use the government would make of the information and the burden of collecting it on taxpayers.

Focusing on employee hours data, Baroness Valentine asked whether HMRC need it for tax purposes and whether they are intending eventually to share it with other departments or agencies.

The Financial Secretary emphasised the importance of data protection, saying HMRC will only be sharing information with other departments “where necessary and appropriate”, but did not offer any specifics on this.

The minister and Zoë Nettlefield of HMRC explained that this measure had two main purposes – for use in the event of another covid-like situation and to provide ‘nudges’ ‘to help customers get their tax right’.

The minister explained that during the pandemic, “[w]e were not always able to distribute the [economic support] money in the way we would have liked, because we did not have some quite obvious things that everybody assumed we had on what businesses do, where they are, what their operations are, and so on.”

In the nearer future, Nettlefield added, the data will be used “in the nudges and prompts territory, upstreaming that compliance activity, encouraging customers. Where we can see particular characteristics of particular activity we can give them a prompt earlier to encourage them to declare income appropriately so that we get that intervention earlier, which reduces downstream costs and more intensive compliance activity.”

Nettlefield confirmed that the data collected on hours will be contractual hours or the number of hours paid, if it is an hourly paid individual.

Lord Roborough asked about costs for this measure, noting the one-off cost for businesses of implementing the new requirement on employee hours is estimated at £35 million, but most witnesses had thought that this was a significant underestimate.

The minister said HMRC were “asking for information that most companies ought to hold already”. He noted that it could have been more onerous: “Originally, there were a lot more elements of additional data collection to be considered, but we have honed it down to these three areas”.

Nettlefield said HMRC were refining the costings, and will publish an updated version when they publish the draft regulations in the new year. However the feedback they are getting is that there is “a bit of an up-front cost but it is not enormous”.

Lord Altrincham wondered whether it was really necessary to burden employers and taxpayers with providing this data: “Could some of it be obtained from other sources within government?”

Nettlefield acknowledged that, “for all three data items that we are legislating for, they are to a large extent collected already.” However the government are aiming to collect it in a more useful way. Hours worked is currently gathered in bands, she said, providing very poor data. If you receive dividends, you have to put that on your self-assessment return already, but the government are adding the requirement for those who are owner-managers of businesses and receive dividends from those companies. Start and end dates of trade are already on the SA return but it is a non-mandatory field, which again means the data is very poor.

Lord Leigh asked about using Companies House data on dividends. Nettlefield replied that HMRC looked at this. However, “to be able to match that data appropriately we would probably need Companies House to collect more data so that we had the right identifiers to be able to bring that across and match it to HMRC’s systems. Given that people are already submitting dividend data in their ITSA tax return, it is just a small addition, and the additional burden is minimal.”