Recommendation 6

HMRC and HM Treasury are far too slow in identifying and responding to some of the most serious problems identified with reliefs, including cases of abuse. In June 2014, we found that the exchequer departments did not respond promptly to unexpected increases in the costs of tax reliefs. In March 2015, we questioned whether entrepreneurs’ relief was value for money given that it was then costing £2 billion more than forecast. Despite our concerns, entrepreneurs’ relief was not fully evaluated until 2017. This evaluation found that at the point they invested only 8% of claimants reported that their behaviour had been influenced by the relief, but this finding was not acted on until the 2020 Budget. Between April 2015 and March 2019, entrepreneurs’ relief cost £11 billion. Companies with a minimal UK presence are abusing the £2 billion research and development relief for small- and medium- sized enterprises by exploiting a change to legislation made in 2012. Although HMRC identified the issue in early 2018, and is planning to introduce a new control that will restrict what companies with a limited UK presence can claim, the abuse is expected to continue to at least 2022–23, partly because of the time to identify and address the issue. HMRC estimates that the amount of money that is claimed through the relief but which would have been excluded by the latest proposed cap has risen from £70 million in 2016–17 to £130 million in 2020–21. This includes both claims that HMRC could challenge as abusive, and other claims where the exchequer was subsidising companies that were not doing research and development in the UK and which the cap would restrict. In 2019, HMRC forecast that introducing a new control on claims could save the Exchequer around £45 million a year. Officials must take the lead when problems with reliefs arise and, where necessary, quickly advise ministers about the action that could be taken. Recommendation: HMRC and HM Treasury should, within 3 months, writ