Source · Select Committees · Public Accounts Committee
Recommendation 6
6
HMRC and HM Treasury are far too slow in identifying and responding to some of...
Conclusion
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
Government Response
Not Addressed
HM Government
Not Addressed
6: PAC conclusion: 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. 6: PAC recommendation: HMRC and HM Treasury should, within 3 months, write to the Committee to explain how they will accelerate their response when reliefs are costing much more than expected, are subject to abuse, or are not achieving their objectives. 6.1 The Government agrees with this recommendation. Target implementation date: Autumn 2020 6.2 The government agrees that it is important to quickly identify when and why reliefs deviate from their expected impact. The government already keeps tax reliefs under review and takes action where appropriate – for instance in the recent changes to Entrepreneurs’ Relief, now Business Asset Disposal Relief – and there are changes to reliefs in most Finance Bills. 6.3 Tax changes are considered at fiscal events where Ministers take decisions on priority actions required in the tax system and bring these forward to Parliament to consider. As part of this process, officials already provide Ministers with an overview of cost and effectiveness across reliefs and identify areas where there is a case for action. Going forward, HM Treasury and HMRC will provide more detailed advice to Ministers on cost trends of tax reliefs, alongside the annual tax relief cost publication. 6.4 The departments take a range of steps in response to abuse, HMRC uses ‘spotlights’ on Gov.UK to warn of concerns about avoidance with regards to individual reliefs. On R&D specifically, HMRC has used funding provided by the November 2017 Budget to increase the number of compliance staff in its R&D team by 100 full time equivalent (FTE). From 1 April 2019 returns which make or amend a claim for R&D relief must be made in a CT600 accompanied by a tax computation. HMRC meets with its Research and Development Consultative Committee approximately twice a year, which provides opportunities to communicate with stakeholders, and also to work together with them on problematic issues. 6.5 HM Treasury and HMRC are committed to providing timely, high quality advice to Ministers on the tax system, in line with the objectives of Ministers and the Department. HM Treasury and HMRC have committed to set and publish criteria for evaluating tax reliefs and consider indicators for increasing understanding of the value of tax reliefs, both of which will support future Ministerial advice.