R&D tax changes risk deterring business investment, Lords report warns

The House of Lords Economic Affairs Finance Bill Sub-Committee has published a report today (February 1) raising concerns over the Government’s upcoming changes to R&D tax relief schemes.

The report warns that proposed reforms risk adding complexity and disincentivising vital business investment in R&D if sufficient guidance is not provided in advance.

While welcoming the Government’s completion of its review into R&D tax reliefs, the Sub-Committee highlighted worries over new requirements for businesses to provide additional data to HMRC. It questions whether some data requests relate to the stated purpose of tax collection and management.

The Sub-Committee also voiced scepticism that doubling maximum prison sentences for tax fraud will act as an effective deterrent, recommending instead that HMRC review its prosecution strategy in this area.

R&D plays a significant role in driving economic growth and supporting business productivity and the report welcomes the Government’s commitment to tax relief for these activities.

However, it is essential that the reforms – the merger of the two current R&D schemes, and the introduction of a new R&D tax relief scheme for R&D-intensive SMEs – do not introduce additional complexity to the tax relief structure, which the committee believes would disincentivise business investment in R&D.

The sub-committee was pleased to hear confirmation from the Government that the R&D tax relief review, which was started in 2021, was now complete. This will give businesses the time they need to allow these reforms to bed in.

However, to make a success of the schemes, they need to receive clear guidance on the implementation of the merged scheme and, particularly, the R&D intensive relief well in advance of the start of the next tax year in April.

The report notes a general lack of awareness of these reforms and recommends that HMRC undertakes an education campaign to set out the implications of the merged scheme for businesses. If these steps are not taken, the committee is concerned that the reforms will struggle to achieve the impact the Government hopes for.

“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,” said Lord Leigh of Hurley, Chair of the Economic Affairs Finance Bill Sub-Committee.

“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.”

Additional data

The sub-committee heard evidence about the level of uncertainty around the requirement for businesses to provide additional data to HMRC. The draft legislation states that the collection of this additional data may only be used for the collection and management of specified taxes.

HMRC told the sub-committee that data on employee hours will help to provide them with more intelligence on whether employers are paying National Minimum Wage and National Living wage, as well as allowing them to assess National Insurance Contributions.

The sub-committee does not consider these to be relevant to the stated purposes and it questions whether these provisions would be enforceable.

The sub-committee was concerned that some of the additional information required is already collected by Companies House, but cannot be accessed by HMRC. The Government should improve the compatibility of its systems to facilitate appropriate data exchange, thereby avoiding additional burdens on businesses.

“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,” said Lord Leigh of Hurley.

Cracking down on tax fraud

The draft legislation contains two measures that deal with promoters of tax avoidance.

The first is the creation of a criminal offence for promoters who fail to comply with a ‘stop notice’ issued by HMRC, and the second gives HMRC a new power to apply to the court directly for the disqualification of directors of a company involved in the promotion of tax avoidance.

The sub-committee welcomes the Government’s commitment to cracking down on tax fraud, but it questions the efficacy of these measures in addressing offshore promoters of tax avoidance.

At the same time, the report emphasises the need for better safeguards in relation to HMRC’s new powers in respect of the disqualification of directors in tax avoidance cases.

The proposed doubling of the maximum prison term for tax fraud was a 2019 Conservative Party manifesto commitment. The sub-committee questioned the need for this policy and its effectiveness as a deterrent against tax fraud.

The report notes the lack of any analysis of the effectiveness of the current prosecuting and sentencing regimes in such cases and recommends that HMRC reviews its prosecuting strategy for tax fraud, particularly in light of a sharp decline in the number of prosecutions in recent years.

“The sub-committee was sceptical about whether increasing the maximum prison term is the most effective deterrent against tax fraud,” said Lord Leigh of Hurley.

“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.”