Recommendations & Conclusions
11 items
7
Recommendation
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
The benefits of Making Tax Digital to those with simple tax affairs are not clear. The requirement for taxpayers to keep tax records and submit quarterly returns to HMRC digitally is a key part of its 10-year modernisation strategy. From April 2024, HMRC will extend Making Tax Digital to 4.2 …
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The benefits of Making Tax Digital to those with simple tax affairs are not clear. The requirement for taxpayers to keep tax records and submit quarterly returns to HMRC digitally is a key part of its 10-year modernisation strategy. From April 2024, HMRC will extend Making Tax Digital to 4.2 million taxpayers with business and/ or property income over £10,000, including small landlords and sole traders, to meet their income tax obligations. HMRC considers Making Tax Digital is making tax easier, keeping tax in line with the digital age, making business more productive and will provide better data if it needs to introduce further support schemes like SEISS. However, it is far from clear how those taxpayers with the most straightforward tax affairs, such as a retired person with rental income, will benefit from completing quarterly digital self-assessment returns. There is also no guarantee that the software they will need to submit returns digitally on will be readily available or easy to use, although HMRC is confident this will be the case. We question the value of asking the large number of taxpayers with simple tax affairs to take on additional costs and reporting. Recommendation: HMRC should, in its Treasury Minute response, explain how the introduction of Making Tax Digital will be made easier, and less costly, for taxpayers with the simplest and most straightforward tax affairs.
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Government response AI summary
HMRC has worked hard to minimise the costs and maximise the benefits of MTD, committing to free software for the MTD Income Tax Self-Assessment (ITSA) service for those with the most straightforward affairs and working closely with stakeholders to improve the support offering to those …
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HM Treasury
9
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
In its evidence to us, TaxWatch said the legacy of the employment support schemes risks being damaged if more is not done to recover the billions of pounds stolen from them.20 The Association of Accounting Technicians submitted evidence to us in which it said HMRC’s current target for recoveries somewhat …
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In its evidence to us, TaxWatch said the legacy of the employment support schemes risks being damaged if more is not done to recover the billions of pounds stolen from them.20 The Association of Accounting Technicians submitted evidence to us in which it said HMRC’s current target for recoveries somewhat lacks ambition and HMRC needs do more to recover losses from errors and fraudulent payments.21 We asked HMRC how much extra money it would need to get the remaining £4 billion back. HMRC told us that it was not sure whether further spending on recovering employment support schemes payments would provide it with the greatest payback, although it recognised such action might be important for other reasons. We told HMRC that its answer reinforced the impression that it had written off chasing fraudulent payments and errors as too difficult and too resource intensive. It responded that it had made a realistic assessment of what it thought it could recover.22 Error and fraud on research and development tax reliefs
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Government response AI summary
The government agrees no amount of error and fraud is acceptable, but not all money lost to error and fraud is detectable and recoverable, so HMRC will prioritize egregious cases but not actively search for people who made honest mistakes.
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HM Treasury
11
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
The cost of R&D tax reliefs has grown by 241% over the last four years to reach £9.3 billion in 2020–21 (Figure 1). In 2019, UK companies claimed tax relief on £47.5 billion of R&D spending; 83% more than the Office for National Statistics’ (ONS) estimate of privately financed business …
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The cost of R&D tax reliefs has grown by 241% over the last four years to reach £9.3 billion in 2020–21 (Figure 1). In 2019, UK companies claimed tax relief on £47.5 billion of R&D spending; 83% more than the Office for National Statistics’ (ONS) estimate of privately financed business R&D spending in the UK. HM Treasury has said that while this gap is partly explained by companies being able to claim tax relief for activity taking 16 Q 70, HM Treasury, Budget 2021, Protecting the jobs and livelihoods of the British people, 3 March 2021, HC 1226, para 2.61 17 Qq 72, 78–79 18 Note from the HM Revenue & Customs, received 22 December 2021. 19 Qq 100, 144, 149 20 Written Evidence HMP0004-Tax Watch, para 63 21 Written Evidence HMP0002- Association of Accounting Technicians, para 2.3, 3.34 22 Qq 140–142 23 C&AG’s Report, para 18, 4.28 12 HMRC Performance in 2020–21 place overseas, this does not account for the full difference. The difference was also much smaller in 2015, when spending claimed for R&D reliefs had been 35% higher than ONS’s estimate.24 Figure 1 Cost of R&D tax reliefs Year Expenditure £m (Note 1) % change since 2016–17 2016–17 2,737 – 2017–18 2,879 5% 2018–19 4,866 78% 2019–20 8,770 220% 2020–21 9,325 241% NOTES Expenditure is the total for the two R&D schemes. Source: HMRC, Annual Report & Accounts, 2016–17, 2017–18, 2018–19, 2019–20 and 2020–21
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Government response AI summary
HMRC is carrying out further analysis to understand the reasons for the growing cost of Research & Development (R&D) tax relief, including sectoral analysis of the number and average value of claims, and is working with the Office for National Statistics (ONS) to better understand …
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HM Treasury
14
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
We asked HMRC how much of the increase in the cost of R&D tax reliefs was down to abuse. HMRC said monitoring was difficult because over time R&D tax reliefs had become increasingly generous and thus an increase in claims would be expected. It also said that claims have consistently …
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We asked HMRC how much of the increase in the cost of R&D tax reliefs was down to abuse. HMRC said monitoring was difficult because over time R&D tax reliefs had become increasingly generous and thus an increase in claims would be expected. It also said that claims have consistently exceeded forecasts, and it had therefore tried to understand the reasons why. We asked HMRC about the nature of fraud it had identified and whether there were trends in particular types. In response, HMRC focused on the role of advisers who, it said, approach businesses and suggest, incorrectly, that some expenditure can be recharacterised as R&D to get tax relief. HMRC explained that when it challenges a claim, it can find the adviser has gone and the business does not know a great deal about the rationale for the claim. HMRC confirmed that it had a watchlist of advisers that it was worried about. It said the list would be of great benefit to it when claimants are required to disclose who helped them with their claim.26
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Government response AI summary
The government agrees with the Committee’s recommendation and plans to implement R&D reform measures, including a cross-cutting team focused on abuse, digital claims with more detail, a customer education program, and enhancements to HMRC’s risk profiling.
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HM Treasury
18
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
We raised our concerns with HMRC that the impact of COVID-19 will make it difficult to make like for like comparisons of its performance. HMRC agreed that there will be distortions but said it would do its best to be transparent. It also said it will look at how it …
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We raised our concerns with HMRC that the impact of COVID-19 will make it difficult to make like for like comparisons of its performance. HMRC agreed that there will be distortions but said it would do its best to be transparent. It also said it will look at how it can present as clear a picture as possible and it would consider how to identify its performance on deferred cases.30
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Government response AI summary
The government agrees with the Committee’s recommendation and states that HMRC took on significant additional responsibilities during the pandemic and will report compliance activity in the Annual Report and Accounts.
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HM Treasury
19
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
HMRC’s annual report shows that it spent over £1.5 billion on compliance activities in 2020–21.31 The rate of return from those activities varied across HMRC’s five customer groups in 2020–21 (Figure 2). Returns were highest from large businesses, with average yield of £60 for each £1 HMRC spent on compliance, …
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HMRC’s annual report shows that it spent over £1.5 billion on compliance activities in 2020–21.31 The rate of return from those activities varied across HMRC’s five customer groups in 2020–21 (Figure 2). Returns were highest from large businesses, with average yield of £60 for each £1 HMRC spent on compliance, and wealthy individuals (£16 to £1). Returns were much lower for compliance spending on individual customers (not included in the wealthy group) and small businesses. 27 Qq 136–138, HM Treasury, R&D Tax Reliefs Report, November 2021 28 C&AG’s Report, para 7, 1.22–1.23 29 Qq 18, 44–45 30 Qq 45, 50 31 HMRC, Annual Report & Accounts 2020–21, pages 42 and 43 14 HMRC Performance in 2020–21 Figure 2 HMRC’s compliance yield and spend by customer group 2020–21 Customer group Estimated Estimated spend on Average rate of compliance yield compliance activities return (ratio of yield from HMRC (to nearest £10 to spend) activities (to nearest million) £0.1 billion) Individual customers 2.6£bn 410£m 6.3:1 Wealthy individuals 3.0£bn 190£m 15.8:1 Small businesses 5.3£bn 480£m 11.0:1 Mid-sized 3.1£bn 260£m 11.9:1 businesses, charities and public bodies Large businesses 13.2£bn 220£m 60:1 Total £27.2bn £1,560m 17.4:1 Source: HMRC, Annual Report & Accounts 2020–21, pages 42 and 43
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Government response AI summary
The government agrees with the Committee’s recommendation, and HMRC are funded to reduce the tax gap through core ‘business as usual’ funding and additional “spend to raise.
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HM Treasury
20
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
We asked HMRC whether it would generate more revenue if it concentrated more of its compliance activities on large companies and less on small businesses and individuals. It told us that payback was a key factor when deciding how to deploy its resources, but not the only one. HMRC added …
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We asked HMRC whether it would generate more revenue if it concentrated more of its compliance activities on large companies and less on small businesses and individuals. It told us that payback was a key factor when deciding how to deploy its resources, but not the only one. HMRC added that the marginal yield from additional compliance spending would not necessarily be as high as average yield. It also told us that its compliance work had to cover all aspects of the tax gap and that small businesses account for a large proportion of that gap. It explained that tackling non-compliance in small businesses was quite expensive and thus the rate of return is lower. It also said it constantly adjusted the amount of resource that it put into the directorates that cover its different customer groups.32
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Government response AI summary
HMRC stated payback was a key factor when deciding how to deploy its resources, but not the only one, adding that the marginal yield from additional compliance spending would not necessarily be as high as average yield.
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HM Treasury
21
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
In its evidence to us TaxWatch argued for a substantial investment in tax compliance to ensure that public confidence in the tax system is maintained and enhanced.33 In its evidence, the Association of Accounting Technicians (AAT) argued that HMRC should undertake more audits of taxpayers, and, in its evidence, Unchecked …
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In its evidence to us TaxWatch argued for a substantial investment in tax compliance to ensure that public confidence in the tax system is maintained and enhanced.33 In its evidence, the Association of Accounting Technicians (AAT) argued that HMRC should undertake more audits of taxpayers, and, in its evidence, Unchecked UK called for targeted audits of large businesses.34 Both TaxWatch and AAT referred to research published by Warwick University in April 2021 into the effects of tax audits. AAT said the research suggests that undertaking more audits of taxpayers reduces evasion, avoidance, and error, and thus increases tax revenue.35 Given this evidence, and the high returns across HMRC’s compliance activities, we asked HMRC about its plans to expand its compliance activity. In response, HMRC explained why it had deferred compliance activity in 2020–21 while protecting revenue. It did not outline any plans to invest more in its compliance activities or whether it had made a case to HM Treasury to do so.36 HMRC did however tell us that in spending review 2021, it had “been given some money for spend to raise. I think it’s £30 32 Q39 33 Written Evidence HMP0004-Tax Watch, para 66 34 An audit involves a tax official undertaking a review of a tax return to ensure that the information that has been entered is correct. 35 Written Evidence HMP0002- Association of Accounting Technicians, paras 3.14–3.16 and Written Evidence HMP0003- Unchecked UK, para 29 36 Q 43 HMRC Performance in 2020–21 15 million, £60 million, £90 million over the three years.” HMRC said it would be working with HM Treasury to determine the best thing to spend that money on.37 £90 million is the equivalent of around 2% of the £4.3 billion cost of running HMRC in 2020–21.38 Tax avoidance
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Government response AI summary
HMRC is funded to reduce the tax gap through core ‘business as usual’ funding and additional “spend to raise
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HM Treasury
23
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
We are concerned about how taxpayers are protected from those who promote avoidance schemes, and the financial damage that can follow if taxpayers unknowingly enter unlawful schemes. We therefore asked HMRC what progress it had made in pursuing the promoters of illegal schemes. It told us its strategy for tackling …
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We are concerned about how taxpayers are protected from those who promote avoidance schemes, and the financial damage that can follow if taxpayers unknowingly enter unlawful schemes. We therefore asked HMRC what progress it had made in pursuing the promoters of illegal schemes. It told us its strategy for tackling tax avoidance was two-pronged. It wants to reduce both the supply of schemes from tax advisers and the demand for them from taxpayers. HMRC considers it has been successful in driving the respectable end of the tax profession out of offering tax avoidance. It said what remains is a core of about 20 or 30 promoters many of whom are based offshore and hide behind complex corporate structures. HMRC told us that it had extensive powers for tackling promoters, and the government has recently announced further powers to enable HMRC to act more quickly against providers. It said it was using its full range of powers, from criminal investigation and prosecution through to using insolvency law and the Advertising Standards Authority to try and drive promoters out of the market. It also said that the location of promoters offshore did not deter it from bearing down on them.41
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Government response AI summary
HMRC continues to build on the strategy outlined in ‘Tackling promoters of mass- marketed tax avoidance schemes’ published in March 2020, including raising awareness and helping taxpayers steer clear of avoidance through targeted communications and early interventions, and refreshed their ‘Tax avoidance – don’t get …
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HM Treasury
30
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
HMRC’s Making Tax Digital initiative is central to its 10-year modernisation strategy. It requires taxpayers to keep tax records and submit returns digitally. HMRC introduced Making Tax Digital for VAT first. The largest VAT traders provided digital returns in 2019, and the smaller ones are being required to do so …
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HMRC’s Making Tax Digital initiative is central to its 10-year modernisation strategy. It requires taxpayers to keep tax records and submit returns digitally. HMRC introduced Making Tax Digital for VAT first. The largest VAT traders provided digital returns in 2019, and the smaller ones are being required to do so by April 2022.54 HMRC now plans to extend Making Tax Digital to income tax self assessment. From April 2024, 4.2 million taxpayers with business and/or property income over £10,000, including small landlords and sole traders, will be required to submit digital returns each quarter. HMRC had intended to introduce this extension to Making Tax Digital from April 2023 but decided to delay by a year because of the impact of the pandemic and stakeholder feedback.55
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Government response AI summary
HMRC has worked hard to minimise the costs and maximise the benefits of MTD, committing to free software for the MTD Income Tax Self-Assessment (ITSA) service for those with the most straightforward affairs and working closely with stakeholders to improve the support offering to those …
Read full response →
HM Treasury
32
Conclusion
Thirty-Seventh Report - HMRC Performanc…
Acknowledged
We were concerned about the impact of Making Tax Digital on the smaller taxpayer, such as a retired person with rental income from one property. We noted that other administrative tax changes, such as on-line self-assessment, have not provided expected benefits to taxpayers because of problems with software.58 We pointed …
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We were concerned about the impact of Making Tax Digital on the smaller taxpayer, such as a retired person with rental income from one property. We noted that other administrative tax changes, such as on-line self-assessment, have not provided expected benefits to taxpayers because of problems with software.58 We pointed out that it felt like Making Tax Digital might lead to small taxpayers serving HMRC rather that HMRC serving them.59 We asked HMRC how Making Tax Digital would benefit small taxpayers. HMRC noted that its evaluation suggested that VAT traders found that Making Tax 50 Qq 120, 125–126 51 Q 131 52 C&AG’s Report, para 1.32 53 HMRC, HMRC quarterly performance report: July to September 2021, November 2021 and HMRC, HM Revenue and Customs Outcome Delivery Plan: 2021 to 2022, July 2021 54 C&AG’s Report, paras 2.28, 2.31 55 HMRC, Policy paper Extension of Making Tax Digital for Income Tax Self-Assessment to Businesses and Landlords, 23 September 2021 and HMRC, Guidance Using Making Tax Digital for Income Tax, October 2021 56 Q 54 57 Qq 61–62 58 Qq 56–57, 65 59 Q 62 18 HMRC Performance in 2020–21 Digital had made dealing with their tax affairs easier. HMRC also pointed out that self- employed taxpayers with income under £10,000 a year would not be mandated to be part of Making Tax Digital.60
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Government response AI summary
HMRC noted that its evaluation suggested that VAT traders found that Making Tax Digital had made dealing with their tax affairs easier, and pointed out that self- employed taxpayers with income under £10,000 a year would not be mandated to be part of Making Tax …
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HM Treasury