Finance Bill in the Lords: Minister acknowledges problems over R&D relief checks

Concerns of CIOT and other tax professionals over R&D credits were put to the House by Lord Leigh of Hurley. These covered both the extent of HMRC powers to remove a claim from a tax return and the current difficulties being faced by many genuine R&D claimants.

The Parliamentary Secretary for the Treasury, Baroness Penn, opened the debate, emphasising that the Bill implements the tax measures required to continue “improving and simplifying our tax system to ensure it is fit for purpose”. Highlighting numerous new measures introduced in the Bill, she said that the government would like to deliver a tax system that this ‘simple, fair and fit for purpose’. Baroness Penn added that the Treasury and HMRC have put simplification at the heart of their policy-making, summarising that the Bill supports enterprise and growth.

Lord Sikka (Lab) said that the Bill diminished people’s incomes further by continuing the freeze on personal allowance and income threshold. He maintained that the Bill is unfair as it continues the taxation of salaries at rates between 20 and 45 per cent while capital gains are taxed at between 10 and 28 per cent. He asked why the government is taxing workers so highly.

“There is a sleight of hand on corporation tax”, said Lord Sikka, noting that it has been predicted that only 10 per cent of companies will pay the increased rate. Referencing HMRC’s report of tax-gap figures, Lord Sikka pointed out that the HMRC has failed to collect £36 billion of taxes for the year 2021-22, as a result of avoidance, evasion, fraud and error. He accused the government of not providing adequate resources to HMRC and wondered what the government’s response is to these figures.

Lord Sikka accused the government of being ‘soft on tax cheats’, noting that in response to a written question he had tabled, the minister had said that only eight enablers who devised tax abuses — accountants, lawyers, bankers — had been prosecuted in the last two years. “[D]espite strong court judgments, [the government] have failed to investigate, fine or prosecute even one of the big accounting firms,” he complained.

Chartered Tax Adviser and Conservative peer, Lord Leigh of Hurley, who served this year as chairman of the Economic Affairs Finance Bill Sub-Committee, raised the issue of R&D credits, the topic of his sub-committee’s investigation. He asked the minister to have regard to the comments of CIOT, particularly in respect of the new powers that HMRC has to remove a claim.

“I am all in favour of giving HMRC new powers to stop suspected fraud but, as I read the wording, it seems flawed,” said Lord Leigh. “For example, there is no right of appeal. We all want to stop the ambulance chasing that we have seen by rogue operators seeking credits for clients and then taking a percentage of the amount that is claimed. However, there remains concern about the nature of the additional information to be required and, of course, HMRC’s ability to capture and process all this.”

Additionally, he cited a CIOT letter to HMRC sent this week, which raises the way that R&D inquiries are being conducted by individuals and small business compliance teams, as well as how penalties are being assessed and inquiries are being concluded. He read out CIOT’s comment that: “We are receiving a significant number of reports from our members about the difficulties that are being encountered in practice and they have provided numerous examples of unfairness and negative taxpayer/agent experience in their interactions with the ISBC team in respect of R&D”. He said he would ensure the minister received a copy of the letter (something CIOT has since facilitated).

Lord Leigh also discussed the taxation of multinationals, where he welcomed the government’s support for the international move to deal with base erosion and profit shifting on a two-pillar basis. He stated: “I accept the argument made by CIOT and others that pillar 2 may not necessarily generate more tax for the UK coffers, because multinationals may just raise the lower tax rates they currently pay in other countries. However, that does not mean that this is not the right way forward; it is the right way forward.”

Lord Eatwell (Lab) expressed his concerns about the impact of lifetime allowance abolishment on inheritance tax and asked the minister to provide some figures in relation to the scheme. He urged the minister to confirm whether this tax giveaway has been funded by the government’s increased borrowing.

Lib Dem Treasury spokesperson Baroness Kramer also raised the issue of tax credits for R&D. She expressed disappointment that the government has removed the support to a wide range of SMEs, saying that the Bill brings in a tax credit scheme for SMEs that are heavily engaged in R&D while ignoring other SMEs that had planned on an understanding that the old scheme would be available to them. Baroness Kramer said: “The flip-flopping which this policy represents is one of the reasons for the pervasive uncertainty that is undermining growth in the UK economy” and asked the minister whether there will be a broader review on R&D relief.

Highlighting the abolition of the lifetime allowance, Baroness Kramer suggested that the government should have looked into a much more targeted approach to fix this problem. The £1 billion a year could then be used to address Britain’s wider labour shortage problems.

Baroness Kramer outlined an email that she has received from the Local Government Association where they regretted that the Bill has not been used to deal with issues relating to the implementation of the building safety levy. The government have broadened its scope to cover all development while the levy was originally designed to deal specifically with high-rise development activity. She added that, as it stands, “309 local authorities [have] to set up separate, individual processes to act as a collection and administration agency for the Levy, [but] with all funds raised being returned to Government.” She described this as “hugely inefficient and very unreasonable”.

The Labour spokesperson, Lord Livermore, urged the government to close loopholes in the windfall tax on oil and gas giants, and regretted that no action has been taken about non-dom status in the Bill. He claimed that the government is helping rich people to avoid paying their fairer share of tax while they keep their wealth overseas.

Lord Livermore continued his remarks by saying that no measures have been introduced to reduce the tax burden on working people or making the tax system fairer – instead, the government has decided to abolish the lifetime limit on tax-free pension saving. He said this “opens up an inheritance tax loophole, whereby it is now possible to accumulate unlimited sums within a pension fund and pass them on entirely free of inheritance tax.”

Lord Livermore also raised the Bill’s proposal to reduce air passenger duty for domestic flights, where he thought the government was failing to spend public money wisely: “[W]hen the cost of inaction on climate change grows by the day, it is baffling that this is the government’s priority for spending public money.”

Responding to the debate for the government, Baroness Penn thanked peers for their contributions to the debate and said that the government’s number one priority at the moment is to reduce inflation.

In response to Lord Leigh’s comments regarding the OECD pillar 2 rules, the minister said that Pillar 2 will boost the international competitiveness of the UK as “it places a floor on low and no tax rates that have been available in some countries.” She confirmed that the Financial Secretary will provide a further update on Pillar 2 implementation as part of the upcoming fiscal event in the autumn.

Replying to Lord Leigh’s comments on R&D relief, the minister said: “He asked whether I would have regard to the Chartered Institute of Taxation’s detailed comments, in particular in respect of the new powers HMRC has to remove a claim. While it is correct to assert that customers do not have a right of appeal, they do have a new statutory right of representation to provide HMRC with evidence within 90 days if they think the claim has been removed in error. They also retain the right to apply for judicial review if they do not think HMRC has applied the process correctly.”

Baroness Penn said that presently there are high levels of non-compliant claims in R&D tax reliefs and advised members that HMRC has ‘increased the action it is taking’ and is addressing more of the non-compliance. “As part of this, it has been rapidly upscaling its numbers of people, and this can sometimes come with teething problems. HMRC ensures that less experienced caseworkers can call on technical support or specialist advice from more senior colleagues. HMRC will continue to work with stakeholders to ensure that the department is managing checks professionally and in line with the HMRC charter, and I would happily hear any further representations by my noble friend or others on how we can ensure that we are delivering in this area.”

Regarding the government’s resources for HMRC, Baroness Penn explained that they will receive a £0.9 billion cash increase over the Parliament from £4.3 billion in 2019-20 to £5.2 billion in 2024-25. This budget includes funding to address avoidance, evasion and other forms of non-compliance and to deliver a modern tax system.

On non-doms, the minister suggested that ‘a fair but internationally competitive tax system’ is required, which would bring in talented people and investment that contribute to growth. “Reforming the non-dom regime could potentially damage the UK’s international competitiveness”, she said.

Answering Baroness Kramer’s question about the abolition of the lifetime allowance, the Minister said that a more targeted approach would not be suitable in these situations because of the time that it would take to implement these policies. She added that introducing targeted measures for each profession would not be an ‘effective way’ to address the challenges across different workforces.

You can read the full debate here.

The Bill is scheduled to receive Royal Assent on Tuesday 11 July.