Peers hear from tax experts on R&D relief

Background

The House of Lords Economic Affairs Committee sets up an annual Finance Bill Sub-committee to consider aspects of the Finance Bill from the point of view of technical issues of tax administration, clarification and simplification.

The sub-committee is this year made up of six members:

• Lord Leigh of Hurley (Conservative) – sub-committee chair, a chartered tax adviser and a former Treasurer of the Conservative Party
• Viscount Chandos (Labour) – who lost his hereditary seat in the Lords in 1999 but was given a life peerage the following year
• Lord Monks (Labour) – a former general secretary of the Trades Union Congress and European Trade Union Confederation
• Baroness Noakes (Conservative) – a former partner at Peat Marwick Mitchell & Co and the first female President of the ICAEW
• Lord Palmer of Childs Hill (Lib Dem) – a chartered accountant, former councillor (London Borough of Barnet) and current Deputy Speaker of the House of Lords
• Lord Turnbull (Crossbencher) – a former Cabinet Secretary and Permanent Secretary at the Treasury and Department of the Environment

This year the sub-committee has decided to focus on the reforms to Research and Development (R&D) Tax Relief in the draft Bill, including whether how effective the changes will be and whether there will be adverse consequences. In addition to taking oral evidence from invited witnesses, the sub-committee invited companies which claim R&D relief, their advisers, business and trade/sectoral organisations, and other interested parties to submit written evidence to the inquiry (deadline 2 November).

The inquiry will produce a report containing conclusions and recommendations. Based on previous inquiries we anticipate this will be published in December or January.

In this first evidence session the sub-committee heard from witnesses from a number of tax representative bodies, divided into two panels –

Panel 1 (4pm)

Charlotte Barbour, Director of Regulatory Authorisations, Institute of Chartered Accountants Scotland (ICAS)

David O’Keeffe, R&D specialist and member of Corporate Taxes Committee, Chartered Institute of Taxation (CIOT)

Richard Jones, Technical Manager in Business Tax, Institute of Chartered Accountants England and Wales (ICAEW)

Panel 2 (4:45pm)

Adam Harper, Director of Professional Standards and Policy, Association of Accounting Technicians (AAT)

Emma Rawson, Technical Officer, Association of Taxation Technicians (ATT)

Jason Piper, Head of Tax and Business Law, Association of Chartered Certified Accountants (ACCA)

You can watch the evidence session here. At time of writing a full transcript is yet to be published but when it is a link will appear here.

Tax experts evidence session

Panel 1

Discussion with the first panel covered areas including how effective R&D relief is in encouraging R&D, whether changes are needed to it, whether it can be simplified and how abuse of the relief can be tackled.

David O’Keeffe told the peers that the compliance process for R&D relief is not unduly onerous, but it is ineffective. Too many claims getting through which shouldn’t get through is tainting the system, he said.

Richard Jones said it was a complex area but there is lots of room for simplification of the relief, in particular better guidance. The more that HMRC can explain how the rules work and what qualifies and what doesn’t the better, he added.

In response to a question from Lord Palmer about whether claiming R&D relief is tax avoidance, O’Keeffe said that claiming relief you are entitled to claim is not a bad thing to do.

Jones explained that some advisers are putting in claims which are ‘speculative at best’. HMRC has limited resource to investigate this.

O’Keeffe said that claims are being put in either through ignorance or error or deliberately which should not be accepted.

Charlotte Barbour said that a lot of smaller businesses are frightened of tax; they think it is complicated. A lot of advisers have reported to us anecdotally that people are complaining about cold calling, commission-based claims, she said.

Turning to abuse of R&D relief Barbour said ICAS had had a lot of contact about this. It puts strain on relationships between tax advisers and their clients when they see other people putting in R&D relief claims that are accepted when they are being advised not to.

Baroness Noakes wondered if it was primarily a problem of people doing cold-calling, not simply of people not being members of professional bodies?

Barbour said that all agents should belong to professional bodies. Her understanding, from looking at the websites of firms putting in these claims, is that they are not members of professional bodies.

Lord Palmer asked about how abuse of R&D relief can best be tackled.

O’Keeffe said he did not think the Finance Bill proposals will be a huge help in tackling abuse. The biggest measure is about providing advance notification. He did not think this would have a significant impact.

Barbour said some of the measures should give HMRC more information which ought to help them decide who to check. So it should in theory help but would not completely resolve the problem. Pre-notification may help, but also may hinder.

Jones agreed. The measures would affect both genuine and non-genuine claimants equally. He can imagine a lot of genuine claimants missing out.

How can abuse best be tackled? Greater resources for policing the relief, said Barbour, as well as having agents you can rely on. Agents who subscribe to professional body requirements and abide by Professional Conduct in Relation to Taxation operate at a certain standard.

O’Keeffe said the process has encouraged people to make claims that shouldn’t be made so the key thing is this process. However he would not want to encourage a ‘draconian clampdown’ which would defeat the purpose of the relief itself. Measures like advance notification, telling HMRC who the adviser is, may do something but won’t go all the way. The process needs tidying up so advisers and claimants have a genuine fear their claim will be looked into.

Jones said HMRC could divert more resources into investigating agents they have suspicions are issuing non genuine claims.

Lord Turnbull, the former Permanent Secretary, called R&D relief abuse “a major, major financial scandal”. In 2014-15 £1.4 billion was paid out. Last year it was £4.6 billion. Over that time the economy has been essentially stagnant. It is implausible that R&D has grown by that much. He suggested there has been a great complacency in letting through claims.

O’Keeffe noted that the ONS has just revised methodology for measuring business expenditure on R&D (BERD), revising significantly the gap between its measure and the expenditure R&D relief is claimed on. There is that side of it, but also claims are being allowed through that shouldn’t be.

The committee explored why HMRC might consider it was not cost-effective to review more claims. Barbour suggested it could be because we are looking at a lot of small claims. Sometimes start ups grow, their claims become bigger, and at that stage HMRC challenge them.

Could the R&D claims process be modernised, asked Lord Chandos.

Jones said he would like to see more integration in a company’s tax account with HMRC – this would help to remove some of third party agents coming in to help with R&D claims.

O’Keeffe agreed integration is the thing. The process is only digital because it is submitted online, there are still going to be multiple forms to be completed. The changes are going to complicate the system, he said. More focus needs to be put on identifying claims that are potentially at risk of being overstated. We want to see a more effective process of triaging claims, building on HMRC’s risk assessment process, looking at both taxpayers and their advisers. Asking for advisers to be named is ‘a fantastic idea’ so long as that information is going to be used for the triage system.

With regard to focusing relief on R&D carried out in the UK, O’Keeffe said that the key thing is that where a company is currently using resource overseas for R&D because the expertise is there, that time is given for companies to bring that resource to the UK.

Panel 2

The second panel were questioned on awareness and accessibility of R&D relief, as well as abuse of the relief and the proposal for pre-notification.

 Emma Rawson said awareness was ‘a bit of a mixed bag when it comes to smaller companies’. There is a bit of a lack of understanding of what is meant by R&D. ATT would support HMRC doing more to raise awareness. If businesses understand more about what is R&D and what isn’t that might make it less likely they will fall into the clutches of unscrupulous agents.

Adam Harper thought the situation was improving but levels of awareness among SMEs were still insufficient. AAT would also suggest that the work being undertaken around regulation of the agent market would improve this. Two thirds of compliance errors are down to the one third of agents who are unregulated, he said.

Responding to a question from Lord Turnbull about whether the definition of eligible R&D has changed, Rawson said that the core definition has not changed, but because of the wide range of activities being undertaken it has to be flexible.

Lord Palmer asked about the quality of the guidance available from HMRC and BEIS on R&D relief.

Harper said there was criticism of guidance both for being too complex and too brief. There should not be a variance between what HMRC is looking for and what regulated agents are committed to, ie people paying the right amount of tax at the right time.

Jason Piper said the feedback he had received was that there are elements of BEIS guidance which are clear and others which are ambiguous, particularly in relation to software. The increasing importance of software within design and development of what would traditionally be thought of as hardware is becoming a more contentious area, as businesses develop software licensing models and so on.

Baroness Noakes asked about the advantages and disadvantages of making digital claims. Rawson said business and advisers are used to operating digitally. Piper said when HMRC are getting all claims digitally it should be easier to analyse and compare them.

Lord Monks asked about the new requirement on companies to pre-notify relief.

Rawson said ATT have serious concerns. We don’t think it will do much to tackle abuse or errors. It will put another hurdle in the way which will impact on individual claimants. It won’t be enough to put off the minority of agents who use high pressure sales techniques – they are likely to change their approach to meet pre-notification deadlines, she thought. On the other hand smaller and newer businesses who need support in the early days from R&D relief are the most likely to lose out.

Harper and Piper shared these concerns.

Lord Chandos asked about other measures that could be introduced to tackle abuse.

Rawson suggested there should be some way for regular tax advisers to report where they see inappropriate promotional materials or become aware of dubious practices.

Piper noted that the Netherlands and France both operate voluntary pre-approval processes. The UK advanced assurance programme is not well-understood, he suggested. The big benefit of schemes such as those in France and the Netherlands is that if a taxpayer engages in this in good faith it takes them out of the bucket of potentially fraudulent claims.

Baroness Noakes asked whether there are any barriers to reporting inappropriate practices now?

Rawson replied that it happens informally at present. A member will come to her and she will use HMRC contacts she has through her work to forward it on to them. ATT have suggested it to HMRC but had no response.

Rawson explained that the current situation put professional body members in a difficult position. They abide by PCRT. There are agents out there who don’t. Clients may have engaged an R&D specialist who prepares an inappropriate claim, then asks their regular agent to put in a tax return. This puts the member in a difficult position with their client, telling them why they can’t reflect it in the return. You also get clients who come to the member saying ‘why didn’t you tell me I could claim?’ The answer is often: you can’t.

Harper agreed. He added that the wider risk is that for those businesses that have got bad advice it will impact on their perception of the general market for tax advisers and accountants. The argument that anyone giving tax advice should have to be a member of a professional body is driven by the consumer interest, he said.

The committee explored whether a distinction could be drawn between agents who charge on a time basis and those who operate ‘no win no fee’. The witnesses felt it was not an absolute distinction that the first were good agents and the second were bad, but it could feed in to risk profiling.

Lord Turnbull asked whether advisers had reported that HMRC is getting tougher with its compliance checks, and they are not getting things approved that in the spring they might have done.

Harper said AAT had not heard that though they have not specifically asked. Rawson said ATT have had members contact them about delays in payments. This comes down partly to HMRC resourcing and also HMRC having to pause processing of genuine claims because of having to focus on stopping fraudulent claims getting through.

The inquiry will continue with a session on Monday 7 November with representatives of business bodies.