Concerns have been raised that UK tax reliefs ran out of control during the 2018/19 period.
A report published by the National Audit Office (NAO) suggests that non-structural tax reliefs – often referred to as tax expenditures – such as tax credits for companies’ research and development (R&D) costs and income tax relief on pension contributions are not monitored properly, neither is their full economic impact.
“I think HMRC approaches this from a sort of anti-avoidance point of view – there are people claiming who aren’t entitled. The wider question is as to whether it’s getting value for money, and there needs to be in consultancy, perhaps through the Treasury committee,” says John Cullinane, CIOT tax policy director.
The Committee of Public Accounts in 2018 concluded that HMRC did not assess whether many tax reliefs resulted in value for money, which resulted in the government increasing the oversight of expenditures and further assessment of their impact, according to the report.
HM Treasury will consider the findings released by the NAO to improve its monitoring of tax expenditures.
“The Government welcomes the detailed recommendations from the NAO, and we will be considering how they can be used to continue to improve the management of tax expenditures on an ongoing basis,” said a spokesperson via email.
“HMT works closely with HMRC in policy partnership, keeping all tax reliefs under review as part of the normal Budget process.”
The report states that certain tax expenditures set by the government cost far more than forecasts, such as R&D credits. When assessing expenditure credits introduced in 2013, it was found that costs exceeded the forecasted amount by 50 percent or more.
Another key issue stressed by the NAO is the increased levels of abuse of R&D tax reliefs.
“In 2017 and 2018 HMRC identified more tax at risk from poor-quality R&D claims, and from abuse by companies with a limited UK presence,” according to the report. “In 2018 HMRC substantially increased its estimate of tax at risk from the R&D tax expenditures to a level which indicated further action was required.”
HMRC’s centralised R&D team previously recognised that the scheme was subject to issues of compliance by small to medium size companies and has since addressed attempted fraud and pursued investigations, according to the report.
The NAO claims that time allocated to these investigations has led to only moderate evaluation of the impact of R&D credits, and abuse is likely to rise until at least 2022-23. Time attributed to the centralised R&D team for training purposes will also impact the effectiveness and rapidity of its response to R&D tax relief claims of poor quality.
New 2020 cap
A cap on R&D tax reliefs was outlined in the 2018 budget and is slated to go live from April this year.
Companies will have until 2022-23 to demand relief from tax for accounting periods beginning in the 12 months before April 2020 – a rule which aims to save the Exchequer £45m per year, states the NAO’s report.
Stuart Weekes, partner in corporate tax at Crowe UK, suggests the government needs to be more specific about the types of companies that are granted reliefs.
“The government has identified that abuse and poor-quality claims have increased the cost of the R&D schemes so, to mitigate this, it has proposed to restrict certain claims. To do so, it may need to consider only allowing certain advisers to make claims for R&D tax credits (ie an accreditation system), or only accept claims that have involved those advisers,” he says.
“Any changes need to balance the need to prevent tax abuse with ensuring tax reliefs are accessible. The R&D start-up businesses of today may be the global tech giant of tomorrow and needs tax incentives to help it get there.”
Disregarding the benefits of R&D
James Tetley, national head of R&D at RSM, believes the tone of the report disregards the benefits of the R&D schemes for companies, particularly small to medium size businesses.
“It almost suggested that the R&D tax relief is a loophole and linked it in with some other areas of legislation and skipped on to the fact that there is known abuse of the regime. All of which is true, there is known abuses of the regime, but HMRC drafted a legislation to close that loophole. It is something that they are tackling and absolutely should tackle,” he says.
“The commentary from the NAO overlooked the significant benefit on a whole host of sectors in the UK, and that we really should be championing at as business confidence has taken a bit of a knock over the last six months, with all the changes around the EU. It seems like a key lever that the UK could be pulling to say ‘We are absolutely open for business. We are absolutely open to encouraging enterprise in the UK, and we support innovation.”
Tetley claims that R&D tax reliefs should be pursued by the government in order to attract innovation and boost the British economy.
“HMRC and HM Treasury should absolutely continue to pursue them. I think they could go further and make them even more beneficial. We should be encouraging businesses to grow in the UK, the PAYE and National Insurance take will increase and as a proportion of that the amount they give away in R&D tax credits you would hope would also increase as well,” he says.
“The idea of tax relief giving a lot of money is not necessarily a bad thing. So long as they are encouraging the right behaviours.”