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The House of Lords Economic Affairs Finance Bill Sub-Committee has published its report on the following measures included in the Finance Bill 2023-24:
- the reform of research and development (R&D) tax relief, including the introduction of a new merged scheme and the separate scheme for R&D-intensive SMEs;
- the requirement for certain businesses and taxpayers to provide additional data to HMRC;
- measures dealing with promoters of tax avoidance; and
- an increase in the maximum prison term for tax fraud.
The report also covers cross-cutting themes that emerged during the process, including HMRC resource issues.
The Tax Faculty provided written and oral evidence to the sub-committee and this is referred to extensively in the report. The sub-committee’s key findings are summarised in the sections below.
Frank Haskew, Head of Taxation Strategy, ICAEW Tax Faculty, said:
“We very much welcome the sub-committee’s report, which picks up on many of the concerns raised by the Tax Faculty and others during the Finance Bill process. While we recognise that the House of Lords has limited ability to change matters in a Finance Bill, the sub-committee has made several important recommendations, which taken together would help to improve the operation and administration of the measures, assist taxpayers and ensure there is proper scrutiny of measures that have a draconian impact, for example the issue of stop notices. We also welcome the comments on more cross-cutting measures, especially in relation to HMRC’s resourcing and the need to consider the impact of measures on HMRC’s operational efficiency and effectiveness to ensure that services do taxpayers do not fall further.”
Reform of R&D tax relief
The sub-committee is concerned that recent changes to R&D tax relief have created uncertainty and a lack of understanding. This risks undermining the incentive effect of the regime. The sub-committee agrees with the Tax Faculty that a start date of 1 April 2024 is too early for the merger of the current R&D schemes. Instead it recommends that the start date is delayed so that it applies from a company’s first accounting period starting on or after 1 April 2025.
The sub-committee is also disappointed that the separate regime for R&D-intensive SMEs was developed without the benefit of formal consultation. The Tax Faculty believes that setting up a separate regime is an unnecessary complication, and that the level of a company’s R&D intensity is not a good measure of whether it deserves more government support. The sub-committee recommends that the government monitors the operation of the scheme to ensure it is appropriately targeted and achieves its policy objectives.
Requirement to provide additional data to HMRC
The report highlights the lack of clarity around what information is required from employers and recommends that HMRC publishes guidance as soon as possible. The Tax Faculty believes that this measure will place an additional compliance burden on employers without resulting in accurate information being received by HMRC. The sub-committee agrees that HMRC’s case has not been made out, and that additional burdens should not be placed on businesses unless there is a compelling reason to do so. The sub-committee has asked the government for clear explanations of the legal basis underpinning the requirements and how the data will be used.
Promoters of tax avoidance and increased prison term for tax fraud
The sub-committee shares the Tax Faculty’s concerns regarding how the measures can be applied to overseas promoters and has called on the government to provide greater clarity. The report recommends independent oversight, external to HMRC, of the issuing of stop notices leading to criminal prosecution. The sub-committee is sceptical that increasing the maximum prison term is the most effective deterrent against tax fraud. It considers that HMRC should review its strategy for the prosecution of tax fraud.
The report notes that some issues recurred across the topics, including: the nature and quality of consultation; the time allowed for taxpayers to prepare for and adapt to changes to the tax system; and HMRC resourcing. The sub-committee believes it is counter-productive to place additional burdens on HMRC if it is already unable to provide a satisfactory level of service to taxpayers. The sub-committee has called on the government to review resourcing for HMRC, not only in relation to individual measures but also to ensure that taxpayers receive the required level of service.
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