Another record year for Rockstar Games Tax Relief (RGTR)

9th May 2022 by Alex Dunnagan

Rockstar Games has revealed that they claimed £68.4m in Video Games Tax Relief (VGTR) in 2020-2021, equivalent to 38% of the entire amount of VGTR paid out that year. The amount Rockstar are claiming is rising every year, taking the total the US-owned company has claimed to a staggering £205m.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced. ^[1]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading We now have one company claiming almost double that in a single year.

The 2020-2021 accounts of Rockstar Games UK Limited (previously Rockstar North) were published last week, just three months late, after the 2019-2020 accounts were published over a year late in January.

	2016	2017	2018	2019	2020	2021	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£9,399,572	£43,138,711
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£64,359,515	£243,003,247
VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£68,376,369	£204,981,384
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£73,831,443	£286,421,578
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£0	£67,500,000

While the Edinburgh-based company is responsible for developing some of the most profitable games of all time, its corporate structure ensures that it sees almost none of that profit returned to the UK. ^[2]The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, https://www.taxwatchuk.org/reports/gaming-the-tax-system/

Not content with hundreds of millions of pounds in VGTR, Rockstar’s latest accounts reveal the extent of Research and Development Expenditure Credits the company is claiming – £304k in 2020-2021, £1.46m in 2019-2020, and £970k in 2018-2019, for a total of £2.73m over the past the three years. The previous years show how much expenditure they classed as R&D, but no figures are given for the actual amount of relief claimed.

Rockstar’s latest figures provide just another example of how Video Games Tax Relief has gotten out of hand, becoming a large corporates subsidy worth hundreds of millions of pounds a year.

HMRC’s creative industry statistics commentary for the 2020-2021 year states:

In the year ending March 2021, the majority of claims tend to be for smaller amounts, with 47% of all claims being for £50,000 or less; however, these claims are only responsible for 2% of the total amount paid out. Claims over £500,000 account for 87% of the total amount paid out. This proportion has increased from the previous year.

In order to receive VGTR, a game has to be accredited as “Culturally British” by the BFI. Since the introduction of the relief in 2014 through to 31 March 2021, 1,239 games received this certification. ^[3]This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at … Continue reading ^[4]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, only two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

A total of £624m for all VGTR claims had been paid by March 2021, with £205m of it going to Rockstar. The result is that Rockstar has managed to claim a third of the total amount paid out whilst only being responsible for 0.16% of the games receiving the relief.

It’s worth bearing in mind that when this relief was introduced, the intent was to provide targeted support for games that were “culturally British”, and to help smaller publishers create games that might not be economically viable without the relief.

The staggering amounts paid out to Rockstar Games was raised by Lord Prem Sikka in February of this year, speaking during a debate on the Finance (No. 2) Bill, he said:

“According to its accounts, it has claimed £136.6 million in total in tax relief over the years. It has paid no corporation tax at all but has paid £67.5 million in dividends. Where exactly did those dividends come from? They came from picking the pockets of the British taxpayer. There is no other explanation for this. It does not seem to me that these kinds of tax reliefs are monitored. No evidence is provided by any government department to show what exactly the benefit to the UK economy is of this American company receiving all these tax reliefs.” ^[5]The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; … Continue reading

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

The amount of relief paid out to video game developers in 2020-2021 increased by 48% compared with the previous year.

Despite the odd dissenting voice, there is very little scrutiny of this corporate subsidy that is spiralling out of control. To the best of our knowledge, the government has no plans to review this relief. Expect the next batch of statistics to reveal even more money paid out, and for Rockstar’s 2022 accounts to reveal yet another increase in the amount they are claiming.

References[+]

References
↑1	“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑2	The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, https://www.taxwatchuk.org/reports/gaming-the-tax-system/
↑3	This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2021 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑4	For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/
↑5	The figures used by Lord Sikka are to 31 March 2020. The full text from the debate is available on Hansard here; https://hansard.parliament.uk/Lords/2022-02-22/debates/03EF4CEF-04DE-4374-BE48-BADAF2F06D4C/Finance(No2)

HMRC Investment Announced

11th April 2022 by Alex Dunnagan

A step in the right direction, but more to be done

£161m investment in HMRC compliance work – set to bring in an additional £3bn over next five years
New 50 strong HMRC team tackling R&D fraud to be in place by 2023

Fraud within the tax system costs the UK tens of billions of pounds a year,^[1]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/ with HMRC recently put under intense scrutiny on their record of tackling the problem. ^[2]HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/ Arguments can be made about the strategy HMRC pursues in tackling tax fraud, but ultimately, everything the department does comes down to resources available as a result of government decisions on investment.

While most media coverage of the Chancellor’s Spring Statement last month focussed on the cost of living crisis, one announcement that appears to have flown under the radar is an extra investment in HMRC’s compliance work and a new team tackling the abuse of R&D. Though these actions won’t see the eradication of tax fraud in this country, they are certainly a positive move.

HMRC Compliance

HMRC is set to see an additional £161m of funding for its compliance work, which is expected to generate more than £3bn in additional revenues over the next five years. With such a healthy return on investment, why isn’t more being spent on compliance?

The March 2021 Spring Statement revealed that refocusing attention on covid fraud would lead to less tax being collected until 2023-24 as staff were moved from other areas of compliance work. ^[3]Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020.

The 2022 Spring Statement sets out additional compliance resources for HMRC and suggests that the £161m investment will bring in an additional £3bn. HMRC is expecting an additional £18 in tax revenues for every £1 spent.

It was announced in December last year that the DWP is set to receive £510m for additional compliance work to tackle fraud and error, with the expectation that this will “deliver savings” of £3.15bn by 2026-27.^[4]See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/ The amount of fraud in the benefits system is far smaller than that in the tax system, and the predicted return on investment is £6 for every £1 spent – 1/3 of the ROI for tax compliance. The question the government needs to answer is: why is more being spent on benefits compliance, which results in a lower return on investment?

New R&D team to tackle abuse of reliefs

In the run-up to the Spring Statement there were a number of rumours that the Chancellor was about to overhaul the way in which R&D reliefs worked.^[5]Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014 In his Mais lecture of February 2022, Sunak stated that that “in spite of spending huge and rapidly growing sums, clearly it [R&D] is not working as well as it should.”

However, when it came to the statement, very little new was actually announced. There was talk of legislation on overseas R&D expenditure and the inclusion of cloud computing costs, but for the most part the message was that we should wait until Autumn for further developments. The Chancellor said, “the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.” This is not the first time we have been told to wait and see. The Autumn Budget 2021 referred to combating the abuse of R&D tax reliefs “later in the Autumn”. It appears the can has been kicked further down the road.

In November 2021, a treasury report on R&D Tax Reliefs referred to “the creation of a new cross-cutting team focussed on abuse.” ^[6]R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf The Spring Statement also mentioned this “new cross-cutting HMRC team”, but failed to give any further detail. TaxWatch approached HMRC for more information, and we were told that the aim was for the team to be set up by 2023. An HMRC spokesperson said:

“We are committed to tackling error and fraud within R&D Tax reliefs. We are creating a 50-strong team, working right across HMRC, to further support the ongoing work in this area.

“This new team and the other measures announced in the Autumn are designed to tackle abuse and boundary pushing while limiting the impact on compliant businesses.”

It’s likely that these 50 will be moved from elsewhere within HMRC, rather than being new staff altogether. Details should become clearer throughout the year, and there is a realistic possibility that this new team will somehow involve the fraud investigation team.

The creation of this new team is a step in the right direction. If the team functions well and is able to target the right cases for inquiry, we may start to see HMRC begin to make serious progress against the egregious abuse within the R&D system. Watch this space.

References[+]

References
↑1	The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/
↑2	HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/
↑3	Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020
↑4	See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/
↑5	Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014
↑6	R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf

Organised Crime in the Department of Health and Social Care supply chain

7th March 2022 by Alex Dunnagan

TaxWatch is calling on the Department of Health and Social Care (DHSC) to investigate the fraudulent use of Mini Umbrella Companies in DHSC’s procurement process.

TaxWatch has written to the Department of Health and Social Care (DHSC) multiple times asking what has been done about apparent abuses in the department’s procurement process.

MUCs are used when an agency divides its contractor workforce into a series of small companies, fraudulently claiming that each company is an independent entity. This can cut their annual Employers’ NICs liability by up to £4,000 per employee by claiming Employment Allowance which is intended to help legitimate small businesses. The act of setting up a mini umbrella company is in itself not illegal.

A recent HMRC publication on Umbrella Companies stated that:

“MUC fraud is perpetrated by organised criminals [emphasis added]. It presents a threat to the UK Exchequer and creates an uneven playing field for those employment businesses and umbrella companies who follow the rules. Workers in MUCs usually do not know who their employer is and may not be aware of their entitlement to employment rights. They can be moved regularly between MUCs to help maximise profits from the fraud.”^[1]Call for Evidence: Umbrella Company Market, HM Treasury, HMRC, Department for Business, Energy & Industrial Strategy, November 2021, … Continue reading

The scandal first emerged in 2015 when the BBC Today Programme revealed Anderson Group, then one of the recruitment industry’s most high profile companies, was found to be promoting an abusive scheme.^[2]BBC uncovers ‘aggressive’ tax avoidance scheme, BBC, 29 May 2015, https://www .bb c .co.uk/news/business-32914372

HMRC’s Fraud Investigation Service has taken action in order to combat MUC fraud, including working with government departments to raise awareness, and stresses that it is the responsibility of the business using temporary labour to undertake necessary and proportionate due diligence checks.^[3]Mini umbrella company fraud, HMRC, 10 May 2021, https://www.gov.uk/guidance/mini-umbrella-company-fraud

In May of last year, a BBC Radio 4 File on 4 documentary revealed that more than 40,000 people from the Philippines have been recruited to front MUCs in the UK.^[4]Britain’s Ghost Companies, File on 4, 11 May 2021, https://www.bbc.co.uk/sound s /play/m000vwtm File on 4 went on to reveal that some staff at G4S run Covid test centres have been employed by subcontractors using MUCs. We know of no legitimate purpose for the usage of these MUCs by those subcontractors.

As the G4S contract for these centres will ultimately have been provided by the DHSC, then it is the responsibility of the DHSC to seek assurances from those in the supply chain that fraudulent activity will not be conducted. HMRC guidance states that any business utilising temporary labour should “be aware of the potential dangers posed to their business by mini umbrella company fraud in their supply chain”.

The Department of Health & Social Care clearly states in its terms for a short-form contract that the supplier, in this case G4S, must

“comply with the Income Tax (Earnings and Pensions) Act 2003 and all other statutes and regulations relating to income tax, the Social Security Contributions and Benefits Act 1992 (including IR35) and National Insurance contributions”.^[5]Short-form contracts, Department of Health & Social Care, March 2020, … Continue reading

In this case the G4S appears to have sub-contracted some of the work to agencies that appear to have used MUCs. G4S said that when this usage of MUCs came to its attention, HMRC was notified, and that all payments to agencies included appropriate NICs. ^[6]Anna Meisel and Angus Crawford, Thousands recruited to front UK firms in ‘tax dodge’, BBC News, 10 May 2021, https://www.bbc.co.uk/news/uk-57021128

We have written to the DHSC several times over the past six months, though have received no response.

A G4S spokesperson said: “To deliver these services, G4S works with employment agencies which are Recruitment and Employment Confederation accredited and members of the government’s Crown Commercial Service (CCS) Framework.”

It said their payments to agencies include all of the appropriate national insurance contributions – and all staff working on the G4S contracts pay their national insurance contributions correctly.

Photo by Ricardo Resende on Unsplash

References[+]

References
↑1	Call for Evidence: Umbrella Company Market, HM Treasury, HMRC, Department for Business, Energy & Industrial Strategy, November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037093/Umbrella_Company_CfE_Final.pdf
↑2	BBC uncovers ‘aggressive’ tax avoidance scheme, BBC, 29 May 2015, https://www .bb c .co.uk/news/business-32914372
↑3	Mini umbrella company fraud, HMRC, 10 May 2021, https://www.gov.uk/guidance/mini-umbrella-company-fraud
↑4	Britain’s Ghost Companies, File on 4, 11 May 2021, https://www.bbc.co.uk/sound s /play/m000vwtm
↑5	Short-form contracts, Department of Health & Social Care, March 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/876546/DHSC_short-form_contract.pdf
↑6	Anna Meisel and Angus Crawford, Thousands recruited to front UK firms in ‘tax dodge’, BBC News, 10 May 2021, https://www.bbc.co.uk/news/uk-57021128

TaxWatch launches annual report on state of tax administration

11th February 2022 by Alex Dunnagan

TaxWatch is today launching its annual report which seeks to provide an independent analysis of the performance of the government in carrying out the vital role of administering and enforcing the tax system.

The report draws together a number of facts and figures from various sources, including HMRC’s annual reports and tax gap reports, Freedom of Information requests, and other publicly available data. It is hoped that the report will become a valuable resource for the media, politicians and the public.

The intention is that the report will be delivered on an annual basis.

Summary of our report

The United Kingdom left the European Union at the end of January 2021, just as Covid-19 was beginning to spread around the world. Brexit saw the UK leave the EU customs union, the single market, and the VAT area. This has required an entire new system of customs arrangements for the UK, necessitating at least £1bn in investment. With the UK Government phasing in border controls on imported goods over 2021 and 2022, the burden is only increasing as time goes on.

Shortly after leaving the EU, in response to the pandemic the UK entered a lockdown, with all but essential workers either furloughed or told to work from home. HMRC officers had to adapt to home work, all while the courts system was placed on a temporary hiatus, causing a significant backlog.

HMRC was tasked with rapidly implementing large-scale coronavirus support schemes, supporting incomes as well as businesses. These schemes, while drawn up and administered quickly in order to protect jobs while the country ground to a halt, unfortunately, have seen wide-scale abuse costing billions of pounds.

The timings of Brexit coupled with the pandemic has resulted in tax administration in the UK facing a difficult task without equal in modern times, causing a huge amount of stress on the system. For that reason, HMRC’s performance over the last year inevitably looks poor.

However, our concern is that after more than a decade of cuts, and with performance already dropping on previous years, the impact of the stress of the last year could cause long term damage to the UK’s tax administration if the government does not invest significantly more funds in tackling non-compliance and improving customer service.

The full report is available as a web page here, and as a PDF here.

The gift that keeps on giving

19th January 2022 by Alex Dunnagan

Rockstar Games UK Limited (previously Rockstar North) has finally published it’s 2020 accounts, more than one year late. In fact, the publication of Rockstar’s accounts are so late that the company’s 2021 accounts are already overdue. The recently filed 2020 accounts reveal that the video game developer was entitled to £56.6m in Video Game Tax Relief (VGTR) in the 12 months to 31 March 2020. This large sum was almost half of the total VGTR paid out that year. The total amount of claims for VGTR is going up ever year, as is the amount paid out, but despite this, Rockstar appear to be capturing more and more of this relief.

The Edinburgh based games studio, which is owned by American video game giant Take-Two Interactive Software, is responsible for the development of the multi billion dollar Grand Theft Auto (GTA) series. As we wrote in Gaming The Tax System, while the UK based company develops the games, they don’t publish them, with a structure set up to ensure that the UK company turns very little profit, and therefore has little to no corporation tax liability.

VGTR – What is it?

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses. The idea at the time being that only smaller publishers would be interested in producing games aimed solely at the British market.

The relief works by adding notional costs to the video games producer’s accounts, reducing the taxable profit or increasing losses. Developers can deduct an extra 25% of qualifying expenditure from their taxable profit. If the game’s production company is loss-making then the developer can claim a cash credit from HMRC.

Rockstar Returns

After filing their annual return nine months late with Companies House, Rockstar’s annual accounts are finally publicly available.

Before looking at the state of Rockstar’s 2020 finances, it’s worth noting that there is a large restatement for their 2019 accounts. It was previously reported that in the year end 31 March 2019, Rockstar’s turnover was £119m and the cost of sales was £56m. These numbers have now been adjusted to show that they were actually £231m and £167m. The reason given is that there was an error in the way that staff incentive payments were accounted for, and that “in the prior period these costs have been netted off in error against intercompany rechage income”, when in fact they should have been recorded. This is quite a significant accounting error. The impact it has on VGTR claims, if any, is not known.

Turning back to the 2020 figures, Rockstar turned a pre-tax profit of £9.63m over the reporting period, but once taxation is taken into account, that number increases by £65.16m to £74.78m. The vast majority of this increase is made up by the effect of VGTR, with the remainder coming from the effects of things such as deferred taxation and changes in valuation allowance. As a result of VGTR, Rockstar was able to pay out £40m in dividends over the year.

	2016	2017	2018	2019	2020	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£33,739,139
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£178,643,732
Of which VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£136,605,015
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£212,590,135
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£67,500,000

The last year for which Rockstar listed taxation as a liability was 2015, when the tax was listed as a cost of -£718k. In the first five years since the introduction of the relief, Rockstar’s accounts show the company accruing £136.61m in VGTR, with total taxation for the period actually showing £178.64m in credit.

Despite only having an operating profit of £33.74m over this five year period, Rockstar was able to pay out twice that (£67.5m) in dividends to shareholders due to the subsidy the company receives from the British Government.

By the end of March 2020, 1,000 games had received “Culturally British” accreditation, ^[1]This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this … Continue reading a pre-requisite for VGTR.^[2]For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the … Continue reading Of these, two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Studios are able to make interim claims before a game is completed, with the relief related to the production spend. The large claims from Rockstar for the 2019/2020 financial year are likely to be related at least in part to Red Dead Redemption 2, and possibly to the production costs of new games such as a future instalment of the GTA franchise, and potentially updates to GTA Online and Red Dead Online, although there may be other games in the works that we are unaware of. With Rockstar accounting for £136.6m of VGTR by March 2020, a company with fewer than 1% of the games qualifying for VGTR is set to capture over 30% of the total subsidy.

In 2018-19, 535 video games made 345 claims and received £103 million,^[3]A claim may cover several games. with Rockstar accounting for some 37% of this.^[4]We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph. Just as we thought the amount of VGTR hoovered up by a single multinational couldn’t increase, in 2019-20, 605 games made 350 claims and received £121m, with Rockstar accounting for some 47% of this. – despite having not released a game since October 2018.

Video Games Tax Relief was estimated to cost just £35m a year when it was introduced.^[5]“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM … Continue reading However, we are now seeing just one company claim alone claiming more than that.

In October last year we said:

“Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?”^[6]Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, https://www.taxwatchuk.org/video_games_tax_relief_2021/

Rockstar’s recent accounts show how it’s more necessary than ever for the UK Government to review the effectiveness of this relief. For this US owned company, VGTR is the gift that keeps on giving.

References[+]

References
↑1	This number has since increased, and statistics are available for the year up until end of March 2021. However, we are only looking at Creative Industries data up until the end of March 2020 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
↑2	For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/
↑3	A claim may cover several games.
↑4	We wrote about this at the time with our blog post Rockstar Takes The Pot, with TaxWatch analysis featuring in the Sunday Telegraph.
↑5	“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief
↑6	Video Games Tax Relief – 2021 Update, TaxWatch, 14 October 2021, https://www.taxwatchuk.org/video_games_tax_relief_2021/

HMRC reveals new estimate for Covid fraud recovery

17th January 2022 by Alex Dunnagan

Three-quarters of Covid support claimed in fraud and error won’t be collected

HMRC has revealed that they expect to recover just 25% of a total £5.8bn paid out due to fraud and error in relation to the coronavirus support schemes. ^[1]HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims

The latest figure has appeared in a document published on 12th January entitled “Myth Busters – HMRC’s responses to inaccurate claims” and sought to spin the figures as an achievement. Under a heading “HMRC has successfully tackled coronavirus help scheme fraud and error” HMRC explains “We recovered £500 million of overpayments in 2020 to 2021. The government then invested £100 million in a Taxpayer Protection Taskforce of 1,265 HMRC staff to combat fraud in the schemes. We expect the taskforce to recover £800 million to £1 billion between 2021 and 2023.”

This equates to a total of between £1.3bn and £1.5bn, or 22% and 26% of the amount lost to fraud and error.

The new figures appear to be a significant revision down from November last year, when Jim Harra, the head of HMRC, told the FT that the organisation will struggle to recover more than half of the losses. ^[2]HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

The published figures suggest that HMRC will be seeing up to a 10x return on investment when tackling fraud and error in the coronavirus support schemes. It is therefore difficult to understand why the department is not being given more cash to tackle the problem and instead is leaving ¾ of the money lost to fraud and error in the hands of people that wrongfully claimed it.

Recent research from TaxWatch showed that the DWP is receiving more than 2x the funding HMRC is getting to tackle fraud and error in the benefits system arising from the pandemic – demonstrating that when an issue is deemed to be important enough, the Treasury finds the money.

This research was featured in The Times, The Daily Mail, and Public Finance, among others. This then lead to Jim Harra being questioned by the Public Accounts Committee on the figures, and to an Urgent Question in the House of Commons on fraud.

References[+]

References
↑1	HMRC responses to inaccurate claims, HMRC, 12 January 2022, https://www.gov.uk/government/news/hmrc-responses-to-inaccurate-claims
↑2	HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

Funding to fight covid related tax and benefits fraud

29th December 2021 by Alex Dunnagan

UK Government has announced an extra £510m boost to DWP to fight benefits fraud following the pandemic. This is in addition to £103m already announced in the spending review

HMRC spending £155m to tackle covid related fraud

TaxWatch estimates the increase in benefits fraud due to covid was £3.39bn in 2020-21

Fraud and Error in HMRC administered Coronavirus Support Schemes is worth an additional £5.8bn

Intro & Summary

Analysis by TaxWatch has found that the DWP is spending more than twice the amount being spent by HMRC on recovering an increase in fraudulent payments arising from the pandemic. This is despite the increase in fraud seen in the benefits system in 2021 over the previous year being significantly lower than HMRC estimate of fraud and error in the Covid-relief programmes.

How much benefits fraud has there been during Covid?

During the pandemic, the amount of fraud in the benefits system more than doubled from 1.4% of total benefits payments to 3% according to the DWP. The reasons for this is the higher levels of Universal Credit payments, a benefit which has a disproportionately high level of fraud, and the fact that the department had to abandon face to face checks.^[1]Fraud and error in the benefit system for financial year ending 2021, Gov.uk, 13 May 2021, … Continue reading

If we just look at the increase in the total rate of fraud in the system, 1.6%, this equates to £3.39bn of fraud that is attributable to Covid related effects.

Overall, the total amount of fraud in the benefits system is estimated by DWP to be £6.35bn. However, this figure is before anything is recovered by DWP. DWP recovered £0.8bn in 2021. Although we don’t know how much of this was fraud recovery versus error recovery, we do know that overpayments on benefits caused by error were 0.9%, or £1.9bn, which equates to 23% of the total figure given for fraud and error (£8.4bn).

Assuming that the DWP recover fraud and error overpayments in proportion to the amount of it that exists, we get a recovery of £616m (the remaining 77% of the compliance yield). With a total fraud of £6.35bn (3% of £211.7bn), if we subtract the £616m recovered, that leaves us with the net figure of losses to benefits fraud in 2021 of £5.73bn.

Covid related tax fraud

HMRC administered three Coronavirus support schemes throughout the pandemic, the Coronavirus Job Retention Scheme (CJRS, or Furlough as its commonly known), the Self Employment Income Support Scheme (SEISS), and Eat Out to Help Out (EOHO). These schemes were subject to widespread abuse, costing the UK government an estimated £5.8bn in fraudulent and erroneous claims.

On top of this, the 2019-20 tax gap revealed that “Criminal Attacks”, “Evasion”, “Hidden Economy” and “Avoidance” equated to £15.2bn in tax losses. These four behaviours are all clearly fraudulent and made up 43% of the entire 2019-20 tax gap.^[2]The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/ However, in addition to this, there are other behaviours identified by HMRC that may contain elements of fraudulent behaviour. HMRC’s TaxGap is presented net of compliance yield.

While we don’t have the figures for 2020-21 yet, there is nothing to indicate that the amount of fraud within the tax gap will have decreased.

How much are HMRC and DWP being given to combat covid related tax and benefit fraud?

An analysis of government announcements over the last year reveals that the amount of effort being put into tackling tax fraud and benefits fraud is wildly disproportionate to their relative tax losses.

In December 2021, the DWP announced that £510m of additional funding had been awarded to the department over the next three years to tackle the increase in benefits fraud seen as a result of Covid. This would allow the recruitment of 2000 new fraud investigators and was in addition to the £103m DWP secured for fraud and error at the Spending Review 2021.^[3]Autumn Budget and Spending Review 2021, Gov.uk, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029973/Budget_AB2021_Print.pdf ^[4]Counter-fraud Funding, Hansard, 13 December 2021, https://hansard.parliament.uk/commons/2021-12-13/debates/21121315000012/Counter-FraudFunding This takes the total amount allocated to the DWP to deal with the problem to £613m over a three year period, starting in April 2022, a little over £200m a year.

The contrast with the amount being spent by HMRC is stark. In the March 2021 Budget Chancellor Rishi Sunak confirmed the creation of a £100m “Taxpayer Protection Taskforce”, to be staffed by 1,265 “HMRC operatives”, seeking to recoup money wrongly claimed from pandemic support schemes.

With HMRC announcing on multiple occasions that it was not intending on hiring new staff to deal with fraud and error in Coronavirus support schemes,^[5]It was reported in City Wire in March of 2020 that HMRC wasn’t planning on increasing its recruitment despite the new workload that had arisen out of the pandemic. HMRC confirmed this again in … Continue reading it is thought that these 1,265 staff are likely to have been moved from other departments.

The PCS Union reported in June 2021 that the Fraud Investigation Service of HMRC had been asked to contribute 37 staff members, which begs the question of how many of the others are fraud investigators.^[6]FIS resourcing for the Covid taxpayer protection taskforce at HMRC, PCS, 23 June 2021, https://www.pcs.org.uk/news-events/news/fis-resourcing-covid-taxpayer-protection-taskforce-hmrc

The Autumn 2021 Budget revealed that the Taxpayer Protection Taskforce would see an additional £55m of funding next year. The Taskforce is a time limited operation believed to be currently funded until 2022-23. This puts the amount spent on recovering Covid related fraud at HMRC at £77.5 a year, less than 50% of the resource allocated to the DWP.

However, none of this appears to be new money. An Office for Budget Responsibility (OBR) analysis produced alongside the Autumn Budget showed is that the amount of tax HMRC is going to collect will fall in the next two years, in part because of the reallocation of staff away from their jobs to the new taxpayer protection task force ^[7]For more information see: Budget 2021 – Four tax takeaways, TaxWatch, 02 November 2021, https://www.taxwatchuk.org/budget-2021/.

This lack of funds is leaving money on the table. Jim Harra, the head of HMRC, stated in an interview with the FT in November 2021 that the organisation will struggle to recover more than half of the losses to fraud and error to Coronavirus support schemes, and plans to recoup the money lost may not go beyond 2022-23 ^[8]HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df.

TaxWatch has already reported the stark disparity of funding to tackle all forms of tax and benefit fraud, with the result that many fewer people that engage in tax fraud end up with a criminal record than those engaging in benefits fraud. The latest figures show this pattern repeating for covid related tax and benefit fraud.

This research was featured in the Daily Mail.

References[+]

References
↑1	Fraud and error in the benefit system for financial year ending 2021, Gov.uk, 13 May 2021, https://www.gov.uk/government/statistics/fraud-and-error-in-the-benefit-system-financial-year-2020-to-2021-estimates/fraud-and-error-in-the-benefit-system-for-financial-year-ending-2021
↑2	The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/
↑3	Autumn Budget and Spending Review 2021, Gov.uk, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1029973/Budget_AB2021_Print.pdf
↑4	Counter-fraud Funding, Hansard, 13 December 2021, https://hansard.parliament.uk/commons/2021-12-13/debates/21121315000012/Counter-FraudFunding
↑5	It was reported in City Wire in March of 2020 that HMRC wasn’t planning on increasing its recruitment despite the new workload that had arisen out of the pandemic. HMRC confirmed this again in October 2020, stating that it does not believe it can recruit additional staff to deal with furlough fraud and error due to the 18-month time-lag between starting recruitment and getting staff fully trained.
↑6	FIS resourcing for the Covid taxpayer protection taskforce at HMRC, PCS, 23 June 2021, https://www.pcs.org.uk/news-events/news/fis-resourcing-covid-taxpayer-protection-taskforce-hmrc
↑7	For more information see: Budget 2021 – Four tax takeaways, TaxWatch, 02 November 2021, https://www.taxwatchuk.org/budget-2021/
↑8	HMRC expects to recover less than half £5.8bn lost in Covid fraud and errors, Financial Times, 21 November 2021, https://www.ft.com/content/3991505c-8311-401e-aece-55342f2b07df

The Diverted Profits Tax and Tackling Offshore Promoters of Tax Avoidance

1st December 2021 by Alex Dunnagan

The Finance Bill 2021-22 was published earlier in November, legislating for tax changes announced at the Autumn Budget. This briefing focuses on two aspects of the bill, amendments to the Diverted Profits Tax and measures relating to the promotion of tax avoidance schemes.

The Diverted Profits Tax

The Diverted Profits Tax (DPT) was introduced in 2015 to target contrived and artificial arrangements implemented by multi-national companies to divert profits out of the United Kingdom. It is a tax on tax avoidance designed to reduce the incentives on companies to implement avoidance schemes.

It should be noted that the UK government did not need a DPT to recover tax lost to artificial arrangements designed to divert profits out of the UK. Under long-standing tax principles, HMRC is able to disregard the tax effect of contrived avoidance schemes and impose taxation and penalties on companies using such schemes.^[1]See TaxWatch: Is Tax Avoidance Legal? https://www.taxwatchuk.org/is_tax_avoidance_legal/

However, the DPT was designed to act as an additional disincentive on companies using artificial avoidance schemes due to the higher rate of tax charged.

At the time it was introduced, the government estimated that the tax would bring in up to £400m a year. However, the latest forecasts from the Office for Budget Responsibility (OBR) show that the tax brought in £100m last year, but that this will be reversed this year, and that there will be no income generated from the tax over the following five years.^[2]Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/

The Treasury response to the news that the DPT is no longer forecast to raise any revenue, as reported in the Observer, is to suggest that the tax had been successful in provoking multinationals to change their behaviour.^[3]Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 … Continue reading

However, according to the HMRC annual accounts, published this November, HMRC are currently carrying out 100 investigations into multinational companies under the DPT, with a total tax under consideration of £3.8bn.^[4]HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52

The low out-turn figures presented by the OBR may therefore be a function of HMRC settling disputes with multinationals without applying DPT.

In 2019, HMRC introduced a new “profit diversion compliance facility”. This was “aimed at arrangements targeted by the DPT”, and allowed multinationals to come forward and pay the taxes they should have paid, and any penalties, without suffering DPT.^[5]HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, … Continue reading

The resolution facility is open to companies even if they are currently under investigation by HMRC in relation to DPT, as such it represents an easy route for companies to avoid the application of DPT if they believe HMRC will apply the tax following investigation. The availability of the disclosure facility to companies currently under investigation calls into question how voluntary that disclosure really is.

The technical amendments in this year’s Finance Bill appear to facilitate the settlement of disputes without DPT being charged, by extending the time period when a company can amend previous tax returns in order to get out of the DPT charge.

If OBR figures are predicated on the expectation that most, if not all of the 100 companies currently under investigation will settle under the favourable terms, this raises serious concerns about tax compliance.

As is clear from the details published by HMRC at the time the disclosure facility was made available, a number of DPT investigations relate to fraudulent conduct.

In the Profit Diversion Compliance Facility Guidance, HMRC stated that it had found that companies had adopted cross border pricing arrangements based on “an incorrect fact pattern”. In some cases this arose out of arrangements not implemented “as originally intended or declared to HMRC”, leading to a divergence between “the fact pattern” presented to HMRC and “what is happening on the ground”. This included transfer pricing arrangements based on “misleading statements”. This description clearly covers tax fraud committed by multinational companies against the Treasury.

The government therefore needs to be careful that the operation of disclosure facilities and the DPT does not lead to multinationals being allowed to escape any accountability for tax fraud by retrospectively amending their tax returns and making an after the event disclosure. The DPT should not become an amnesty for tax fraud.

Promoters of tax avoidance schemes

Clauses of the bill relating targeting the promoters of tax avoidance scheme provide HMRC with additional powers to wind up companies involved in the facilitation of tax avoidance, freeze the assets of people subject to proceedings under DOTAS legislation, and to publish information relating to tax avoidance schemes.

It is vital that HMRC is able to take swift action against the promoters of tax avoidance schemes in order to protect the public. However, it is clear that many promoters are engaged in criminal activity. As the government accepted in its recent response to its call for evidence on tackling disguised remuneration tax avoidance: “The Government recognises that the design of arrangements that are sold as avoidance schemes may in fact enable fraud”.^[6]HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 … Continue reading HMRC needs to use the powers it has to enforce the law in this area.

At second reading the government was asked what it was doing to prosecute people involved in the promotion of loan schemes. The answer from the Financial Secretary to the Treasury was as follows:

“An issue I have raised directly with HMRC is how we can further prosecute and bring these people to justice. Unfortunately, I understand that many of them are located offshore, but we will be doing everything we can to ensure that those who are responsible for promoting this are brought to justice.”

It is important for HMRC to specific about what is meant by the term “offshore”. If offenses are committed by people resident, or that have escaped to, the Crown Dependencies, then there is no impediment to enforcing the criminal law of the UK.

For example, it is well known that many disguised remuneration schemes are run from the Isle of Man. The government published a series of anonymised disguised remuneration case studies which are available on gov.uk.^[7]Anonymised Disguised Remuneration Case Studies, available from: … Continue reading This detailed four case studies, of which three were identified as being schemes involving the Isle of Man. The remaining scheme did not identify any jurisdiction.

Section 13 of the Indictable Offences Act 1848 allows warrants issued in England and Wales for Indictable Offences to be executed in the Isle of Man (IoM) and the Channel Islands (i.e. Guernsey, Jersey, Alderney and Sark). Section 4 of the same act allows the enforcement of a warrant issued in Scotland to be enforced by the local IoM police.

The crime of Cheating the Revenue is an indictable offence. As such, if HMRC have reasonable grounds to suspect that the promoters of any Isle of Man or Channel Islands based schemes have committed the offence of Cheating (which constitutes any dishonest conduct that results in prejudice to the revenue), then all that is required is to issue a warrant for their arrest.

Section 5 of the Isle of Man Act 1979 enables someone in the IoM to be arrested for offences committed in the UK. While the act refers to specific “common duties” offences, such as customs, excise, and UK VAT, section 1 (2) allows for the treasury add “any duty or tax which is under the care and management of the Commissioners of Customs and Excise”.

These provisions have in the recent past allowed HMRC and other agencies to take action to arrest suspects located in the Isle of Man. In 2015, Operation Braid saw the confiscation of £500,000 from an Isle of Man businessman suspected of money laundering and a £21m VAT fraud in the UK. This action was part of a wider investigation into VAT fraud and money laundering, which saw seven arrests, 13 properties raided, and £1m in cash seized, in a joint HMRC-National Crime Agency investigation involving police forces across the UK, as well on the Isle of Man.

We have written to the Financial Secretary to the Treasury Lucy Frazer QC MP setting out the position.

Although there is no legal impediment to the enforcement of the criminal law in relation to tax on the promoters of tax avoidance schemes, there is a concern that HMRC are not adequately resourced to take on the job.

According to HMRC’s latest annual accounts, the number of criminal investigations declined steeply as a result of the pandemic, with HMRC concluding 437 criminal investigations in 2020-21, a 49% reduction on 2019-20 when the department concluded 864 investigations.

This reduction in activity is mirrored in the data from the Crown Prosecution Service (CPS) on how many offences they had charged relating to specific revenue offences related to tax fraud.

The figures TaxWatch received following an FOI to the CPS are reproduced below. They show a clear decline in prosecutions for almost all forms of tax fraud over the last five years, with the number of prosecutions being reduced substantially in 2021 as a result of the impact of the pandemic.

	2016-2017	2017-2018	2018-2019	2019-2020	2020-2021
Common Law (Cheating the Public Revenue)	144	113	127	79	19
Criminal Law Act 1977 { 1(1) } (Conspiracy to Cheat the Public Revenue)	9	13	49	27	1
Taxes Management Act 1970 { 106A }	173	127	62	69	21
Value Added Tax Act 1994 { 72(1) }	228	184	161	129	48
Value Added Tax Act 1994 { 72(3)(a) }	100	65	69	33	18
Value Added Tax Act 1994 { 72(3)(b) }	17	1	0	1	0
Value Added Tax Act 1994 { 72(8) }	1	3	2	1	0
Value Added Tax Act 1994 { 72(11) of and paragraph 4(2) of Schedule 11 }	119	196	96	137	23

As we move beyond the pandemic, HMRC will have to deal with the backlog of cases built up during the last 18 months, together with the substantial amount of furlough fraud. In order to adequately take on tax crime, HMRC will need significant extra resources to ensure that those responsible for cheating the revenue are brought to justice.

Read the full briefing in PDF format here.

References[+]

References
↑1	See TaxWatch: Is Tax Avoidance Legal? https://www.taxwatchuk.org/is_tax_avoidance_legal/
↑2	Figures available from: https://obr.uk/download/october-2021-economic-and-fiscal-outlook-supplementary-fiscal-tables-receipts-and-other/
↑3	Jon Ungoed-Thomas and Toby Helm, Osborne’s ‘Google tax’ on overseas profits now raises zero revenue, Treasury reveals, The Observer, 31 October 2021 https://www.theguardian.com/politics/2021/oct/31/osbornes-google-tax-on-overseas-profits-now-raises-zero-revenue-treasury-reveals
↑4	HM Revenue and Customs, Annual Report and Accounts 2020 to 2021, p.52
↑5	HM Revenue and Customs, Guidance: Profit Diversion Compliance Facility, 10 January 2019, https://www.gov.uk/government/publications/hmrc-profit-diversion-compliance-facility/profit-diversion-compliance-facility
↑6	HM Revenue and Customs, Call for evidence: tackling disguised remuneration tax avoidance summary of responses, 23 March 2021, para 2.34 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972080/Call_for_evidence_tackling_disguised_remuneration_tax_avoidance_-_summary_of_responses.pdf
↑7	Anonymised Disguised Remuneration Case Studies, available from: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/784201/Appendix_2___Anonymised_Disguised_Remuneration_Case_Studies.pdf

Budget 2021 – Four tax takeaways

2nd November 2021 by Alex Dunnagan

On Wednesday 27 October, the Chancellor Rishi Sunak unveiled his Autumn Budget 2021.

This budget was billed as one looking ahead to the “post-Covid” era, with a lot of focus on growth and the economic outlet. Numerous news outlets have covered the major stories coming out of the budget. At TaxWatch, what we have scrutinised is the perhaps lesser covered tax stories.

1 – Additional Compliance Work

An additional £292m across three years was announced for HMRC, with the goal of ‘bearing down on tax avoidance and evasion’.

The Taxpayer Protection Taskforce, announced in the Spring 2021 budget, is to see an additional £55m of funding next year. This is in addition to the previously announced £100m investment. It is not clear whether this £55m is part of the aforementioned £292m.

This taskforce will seek to recoup money wrongly claimed from pandemic support schemes, such as furlough.¹ The spring announcement on the Taxpayer Protection Taskforce stated that it will be staffed by “HMRC operatives” suggesting that staff are to be moved from elsewhere within HMRC.

The March 2021 Budget revealed that the extra spending on compliance would actually lead to less in tax being collected year on year until 2023-24, with one reason given being “impacts on compliance yield reflecting reprioritisation (including to respond to COVID19).”²

Budget 2021 policy decisions (£ million)

HMRC is set to see a “£0.9 billion cash increase over the Parliament to £5.2 billion in 2024-25”. Spending Review 2020 revealed that £1bn would be going to HMRC “to reform and enhance the UK customs system after the end of the transition period, including investment in vital physical and IT infrastructure and additional support for UK traders”.³ So while the £0.9bn cash increase sounds impressive, it’s worth bearing in mind that the vast majority of this will not go towards tackling tax fraud, but rather to deal with the additional complexities surrounding the UK’s departure from the European Union.

2 – Clamping down on promoters of tax avoidance

The budget also revealed that the forthcoming Finance Bill 2021-22 will feature legislation for further measures to clamp down on promoters of tax avoidance.

Section 5.74 of the budget announced that the measures will:

allow HMRC to freeze a promoter’s assets so that the penalties they are liable for are paid
deter offshore promoters by introducing a new penalty on the UK entities that support them
provide for the closing down of companies and partnerships that promote tax avoidance schemes, and
support taxpayers to steer clear of avoidance schemes or exit avoidance quickly, by sharing more information on promoters and their schemes.

In September 2020 we submitted evidence to HMRC as part of their consultation “Tackling Disguised Remuneration Tax Avoidance”,⁴ calling for those who sell disguised remuneration tax avoidance schemes to be investigated for tax fraud.

These proposed measures stop short of HMRC applying the full criminal law to prosecute those who design, operate, and promote dishonest tax avoidance schemes. TaxWatch’s view remains that the best deterrence is to put those who promote fraudulent schemes before a jury.

3 – R&D reliefs need to be made ‘fit for purpose’

Plans to increase R&D investment to £22bn per year, as outlined in the March 2020 budget, have been pushed back from a targeted May 2024 to 2026-27, with the government acknowledging that current R&D reliefs are not fully “fit for purpose.”

It has long been known that the cost of the R&D expenditure credits is far greater than what was originally anticipated, with a February 2020 NAO report highlighting that the actual costs were more than double those forecast.⁵

Costs compared with forecast for the research and development (R&D) expenditure credit

Sunak stated in his speech that:

“Companies claimed UK tax relief on £48bn of R&D spending. Yet UK business investment was around half of that, at just £26bn. We’re subsidising billions of pounds of R&D that isn’t even happening here in the United Kingdom. That’s unfair on British taxpayers.”

While it’s correct that there are issues with R&D reliefs, the cause of the problem isn’t necessarily research conducted abroad, but whether or not the research is conducted at all.

The total number of claims for R&D tax credits for 2019-20 was 85,900, with £7.4bn in relief claimed on £47.5bn of expenditure. The ONS estimates that businesses only carried out £25.9 billion of privately-financed R&D in the UK in 2019.⁶ Overseas expenditure can qualify for tax credits, and HMRC previously produced an initial estimate of £4 billion to £7 billion for overseas expenditure in the year ending March 2018. It is highly unlikely that the amount of overseas expenditure in 2019-20 was £21.6bn, the difference between UK R&D and total R&D claimed. Rather, the data points to large scale abuse.

The government said it would set out separate plans to combat abuse of R&D tax reliefs “later in the autumn”.

4 – Climate change given short shrift

With the UK hosting the 2021 United Nations Climate Change Conference, known as COP26, it seemed a little odd that there was so little on climate in the budget. A week prior to the budget, the UK Government had published its Net-Zero Strategy,⁷ with talk of “Removing dirty fossil fuels from the global economy.”

The chancellor failed to use the word “climate” even once during his budget speech. He did, however, reveal there would be a cut to the rate of air passenger duty on domestic flights, along with the cancellation of the planned rise in fuel duty.

Image by mohamed Hassan from Pixabay

1 Fraud and the Coronavirus Job Retention Scheme, Taxwatch, 12 May 2021, https://www.taxwatchuk.org/furlough_fraud/

2 Budget 2021, HM Treasury, March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

3 Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020

4 TaxWatch to HMRC: Prosecute sellers of disguised remuneration schemes, TaxWatch, 02 October 2020, https://www.taxwatchuk.org/hmrc_loan_charge_fraud/

5 The management of tax expenditures, National Audit Office, 14 February 2020, https://www.nao.org.uk/wp-content/uploads/2020/02/The-management-of-tax-expenditure.pdf

6 Research and Development Tax Credits Statistics, HMRC, September 2021, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit/research-and-development-tax-credits-statistics-september-2021

7 Net Zero Strategy: Build Back Greener, Department for Business, Energy & Industrial Strategy, 19 October 2021, https://www.gov.uk/government/publications/net-zero-strategy

Video Games Tax Relief – 2021 Update

14th October 2021 by Alex Dunnagan

Key facts and figures:

£180m paid out in VGTR last year

48% increase in VGTR on the previous year

55 claims for over £500,000 represent 87% of the total value of payments

Video Games Tax Relief (VGTR), a form of subsidy to the UK videogames industry, has seen a 48% increase in the past year. Originally forecast to cost £35m a year, VGTR cost £180m in the 12 months to March 2021.

The reason given for the increase is “large payments for a small number of very high-budget games and underlying growth in the value of claims1”. The intent of the scheme is to promote British culture, and to foster innovation amongst small independent games developers through subsidies. The reality however is that this scheme is increasingly being captured by large, successful, multinationals.

In 2020-2021, 55 claims of more than £500,000 equated to 16% of all claims made. These claims were worth £156m, or 87% of the total amount paid out – again an increase from last year, where claims over half a million were worth 80% of the total.

While almost half of these claims were for under £50,000, these claims are only responsible for around 2% of the total amount paid out.

It would be unfair to say that the claims paid to multinationals has a negative effect on independent, British SMEs, as it appears that the pot of money available is effectively limitless, with costs increasing year on year.

Figure 1: Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2020-21

In order to access VGTR games must pass a test and be certified as ‘Culturally British’ by the British Film Institute (BFI). Previous TaxWatch research has demonstrated how the ‘cultural test’ administered by the BFI is meaningless, as games are able to gain subsidies regardless of the subject matter, and even if they are produced overseas.2

The Guardian revealed in 2019 how four large multinationals – WarnerMedia, Sony, Sega, and Rockstar – had claimed close to half of all VGTR.3 In the past we have analysed the accounts of videogame multinationals, finding that regardless of whether or not they turn a pre-tax profit, the companies paid no corporation tax.4 VGTR is set up in a way whereby the scheme is almost bound to ensure that the UK games industry will not pay corporation tax.

Rockstar North, a UK based and American owned videogames developer responsible for the Grand Theft Auto Series, has in previous years been the largest beneficiary of VGTR. Their latest accounts, dated January 2020, revealed that the company claimed £37.6m in Video Games Tax Relief that year, taking its total to £80m since the scheme was introduced. Of the 1,110 VGTR claims made up until that point, Rockstar accounted for a quarter of all the relief, despite only making two games that qualify as ‘culturally British’.5

Companies House shows that Rockstar North’s accounts are over six months overdue, so we are unable to comment on how much money the American owned company has received in the most recent financial year.

Figure 2: Rockstar North accounts showing as overdue on Companies House. Image taken 13 October 2021.

So what?

The cost of this tax relief is increasing year on year, with just shy of 90% of the money going to games claiming over half a million. We have seen in the past how games such as Grand Theft Auto have claimed tens of millions.

In establishing the relief, the UK argued to the European Commission that British games were in decline, and that “culturally significant games may have production costs equal to global games but a significantly smaller market”.6 Seven years from the introduction of VGTR, questions need to be asked as to whether this is achieving its initial aim, creating culturally significant games and helping British developers, or is it a scheme gone awry, with hundreds of millions in taxpayer cash subsidising successful multinational enterprises?

1 The “growth in the value of claims” is likely regarding the fact that a company has two years to make or rectify a claim once a project is finished.

2Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 18 November 2019, https://www.taxwatchuk.org/cultural_test_tax_relief/

3Revealed: global video games giants avoiding millions in UK tax, The Guardian, 02 October 2019, https://www.theguardian.com/games/2019/oct/02/revealed-global-video-games-giants-avoiding-millions-in-uk-tax-sony-sega

4Global Video Games Giants: Playing the system or paying their fair share?, TaxWatch, 20 November 2019, https://www.taxwatchuk.org/video_games_giants_tax_report/

5Rockstar takes the pot, TaxWatch, 19 January 2020, https://www.taxwatchuk.org/rockstar_2019_tax_relief/

6Commission Decision of 27.03.2015 on the state aid scheme SA.3619 (2013/C) (ex 2013/N) which the United Kingdom is planning to implement for video games, European Commission, 27 March 2014, https://ec.europa.eu/competition/state_aid/cases/248371/248371_1557990_171_2.pdf

Photo by Sigmund on Unsplash

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Another record year for Rockstar Games Tax Relief (RGTR)

HMRC Investment Announced

HMRC Compliance

New R&D team to tackle abuse of reliefs

Organised Crime in the Department of Health and Social Care supply chain

TaxWatch launches annual report on state of tax administration

Summary of our report

The gift that keeps on giving

VGTR – What is it?

Rockstar Returns

HMRC reveals new estimate for Covid fraud recovery

Three-quarters of Covid support claimed in fraud and error won’t be collected

Funding to fight covid related tax and benefits fraud

UK Government has announced an extra £510m boost to DWP to fight benefits fraud following the pandemic. This is in addition to £103m already announced in the spending review

HMRC spending £155m to tackle covid related fraud

TaxWatch estimates the increase in benefits fraud due to covid was £3.39bn in 2020-21

Fraud and Error in HMRC administered Coronavirus Support Schemes is worth an additional £5.8bn

Intro & Summary

How much benefits fraud has there been during Covid?

Covid related tax fraud

How much are HMRC and DWP being given to combat covid related tax and benefit fraud?

The Diverted Profits Tax and Tackling Offshore Promoters of Tax Avoidance

The Diverted Profits Tax

Promoters of tax avoidance schemes

Budget 2021 – Four tax takeaways

1 – Additional Compliance Work

2 – Clamping down on promoters of tax avoidance

3 – R&D reliefs need to be made ‘fit for purpose’

4 – Climate change given short shrift

Video Games Tax Relief – 2021 Update

Key facts and figures:

£180m paid out in VGTR last year

48% increase in VGTR on the previous year

55 claims for over £500,000 represent 87% of the total value of payments

So what?