Alex Dunnagan

We are hiring!

20th March 2023 by Alex Dunnagan

We are looking for a new Director to lead TaxWatch!

We are an investigative think tank, and the UK’s only charity dedicated to compliance and sound administration of the law in the field of taxation. We’re a small organisation with a big reach. Since our inception a little over three years ago we have been featured in the media hundreds of times, from broadcast news to national and international newspapers. Our work has been cited in Parliament on numerous occasions, and is helping shape the debate on tax. We are independent of any political party.

If you think you’re right for TaxWatch, please get in touch!

Job Advert

Director – TaxWatch

TaxWatch is a charity dedicated to monitoring avoidance and evasion of tax across the economic spectrum, from individuals to multinational corporations, and to effective tax compliance and enforcement.

We are currently seeking a new Director to lead the charity’s work in forensic research and analysis and ensuring our work reaches a wide and influential audience.

The successful candidate will be an outstanding leader who can shape debates while working with a small team in which roles are flexible.

Your principal roles will be –

leading research from initial concept to finished product
representing TaxWatch publicly, for example in interviews and for press contributions
ensuring the operational effectiveness of the organisation
developing a network among media, parliamentarians, campaigners and others to promote TaxWatch’s message

Essential abilities for the role are: critical thinking; organisational skills; self-motivation; focus on delivery; strong writing skills.

Desirable skills include: an understanding of the tax system and policy surrounding it; familiarity with economic and financial reporting principles.

You will have a suitable track record of achievement to enable you to demonstrate these qualities.

SALARY: COMPETITIVE

HOURS: Full-time. A flexible working policy is offered, with core working hours of 1000hrs-1500hrs. Part time work of four days will be considered.

CONTRACT: 24 months fixed term contract. Subject to a three-month probationary period.

LOCATION: Remote, with occasional travel within UK.

BENEFITS: 23 days paid annual leave per year (rising to 25 following 12 months), plus Bank Holidays. A contribution of up to £175 towards a co-working desk

HOW TO APPLY: CV (no more than two pages), and cover letter (one page), are to be emailed to Alex Dunnagan at alex@taxwatchuk.org

CLOSING DATE: Midnight Wednesday 19 April 2023.

INTERVIEWS: Date and location TBC.

Spring Budget 2023

15th March 2023 by Alex Dunnagan

Nothing for HMRC compliance despite huge returns on investment
Increases in sentencing for tax fraud and potential new tax offence– only useful if HMRC successfully prosecutes
Tax to be simplified – we’re still not sure exactly how
R&D reformed yet again
Generous reforms to audio visual reliefs – still not dealing with the problems

On Wednesday 15 March, the Chancellor Jeremy Hunt unveiled his Spring Budget 2023. While numerous news outlets have covered the major stories of the budget, at TaxWatch we are casting a forensic eye over the lesser covered tax stories.

Nothing for HMRC compliance

While this budget talks of “tackling the tax gap” it does not actually provide the necessary resources to do so. There is an investment in HMRC’s debt management capability, £47.2m, but nothing for compliance work.

HMRC’s compliance work has a return on investment of 18:1, meaning for each pound spent, HMRC can expect to recover £18 in additional tax revenue.[1]

In a Treasury Select Committee session on 23 November 2022, Emma Hardy MP (Labour) put this figure to Jeremy Hunt, who responded saying: “That is why he [Jim Harra, head of HMRC] got an extra £79 million. I hope he maintains that 18:1 ratio. If he can do even better, I will consider giving him even more money because it is very, very important that we do that.”[2]

It would appear that since HMRC has not increased the ROI on compliance work in the past five months, the Chancellor has not considered it a good use of funds to invest more in tackling the tax gap through compliance work.

Tax simplification – but what does it mean?

In ‘The Growth Plan 2022’, the then Chancellor Kwasi Kwarteng announced the closure of the Office for Tax Simplification. At the same time the plan stated that the government was going to “set a mandate to the Treasury and HMRC to focus on simplifying the tax code.”[3]

It was not exactly clear then what this meant, and it still isn’t clear now.[4] Earlier this month the Treasury Committee called for the Chancellor to explain why he believes the Office of Tax Simplification (OTS) should be abolished. We are still waiting on a formal response.

The Spring Budget provides some clue as to what steps are to be taken by HMRC and the Treasury to achieve this simplification. Pensions have seen an increase in the Annual Allowance and the removal of the Lifetime Allowance, reducing the number of taxpayers that need to report. There will also be a consultation around how sole traders calculate their income tax, and a review of HMRC guidance forms for small businesses. The government is also set to publish a discussion document on modernising HMRC’s income tax services.

Tackling Promoters of tax avoidance and increasing sentences for tax fraud

It was announced that the maximum sentence for the most egregious cases of tax fraud would double from 7 to 14 years. While all well and good, this needs to be accompanied by an increase in the number of investigations and ultimately prosecutions. Put simply, in order for there to be a deterrence effect, these criminal powers have to be used.

The government is also set to consult on the introduction of a new criminal offence for promoters of tax avoidance. It’s important that if and when a new offence is introduced, the government conducts follow up work to ensure that its used. There have been multiple occasions in the past where legislation is introduced, only to never be used.[5] Despite the Corporate Criminal Offence coming into force in September 2017, we are still yet to see a single prosecution utilising this legal power.[6]

R&D reform (again)

It wouldn’t be a budget without some kind of reform to the R&D reliefs.

After the Autumn statement 2022 reductions in the SME (small and medium enterprises) scheme benefits, there were promises to look at the needs of ‘R&D intensive’ businesses. In this budget these are defined as those businesses where the expenditure on qualifying research and development (under the existing schemes) is 40% or more of their total profit and loss expenditure. On the face of it, this announcement increases the benefits under the SME scheme for those businesses falling under the definition. However, it only increases the payable tax credit rate from 10% to 14.5%, the rate it currently is, and retains the lower additional reduction at 86% announced in the Autumn statement (previously 130%). This is therefore at best retaining the same benefits for a proportion of businesses conducting R&D, but continuing with the reduction for many.

This new announcement also brings in additional complexity to a relief which is already the target of abuse by advisers persuading businesses to claim amounts that are not due highlighted in TaxWatch’s recent report[7]. The reduction in scheme benefits at least partly arose out of concerns about this abuse. It seems likely that many of these firms are currently studying the new definition of R&D intensive businesses to try to find a way to present information such that their claimants qualify for the higher rates.

Additionally, for those businesses who are genuinely involved in advances in science and technology, the additional definition will likely lead to more complexity in an already complex claims process. This is hardly keeping in spirit with the direction to simplify the tax code. These changes will also result in more aspects of claims for HMRC to enquire into, at a time when HMRC appear to be incapable of handling current enquiries consistently and effectively.

The lack of any further investment in HMRC compliance (see above), despite calls for this from many different directions, suggests there will be little in the way of reduction of abuse of these reliefs and a greater compliance burden on legitimate R&D businesses for some time to come.

Reforms to audio visual reliefs

Film, TV and video games tax reliefs will be reformed, becoming expenditure credits instead of additional deductions from 1 April 2024.[8] There are large increases to the rates at which these reliefs will be paid, with relief increasing to 34% (from the current 25% on 80% of costs, meaning maximum of 20%). There are also further tweaks around qualifying expenditure.

What these reforms don’t do, is address the issues already present within these reliefs. The first issue is affordability. TaxWatch research found these reliefs are costing far more than anticipated, with the vast majority of these reliefs going to large multinational corporations. Video Games Tax Relief was estimated to cost just £35m a year when it was introduced, yet in 2021-2022 cost a record £197m – more than five times as much as anticipated.[9] The vast majority of this relief is going to large multinational companies.

The reforms don’t create new opportunities for avoidance, but they don’t deal with the current profit shifting that we see with the reliefs. There are examples with both Film Tax Relief and Video Games Tax Relief where companies are claiming hundreds of millions in relief, only to offshore the intellectual property. With this IP sitting outside the UK, foreign companies then distribute the product, with the revenues – and ultimately taxable profits – sitting offshore. The UK will continue to spend hundreds of millions of pounds subsidising entertainment products, with the corporation tax receipts these products generate ending up in foreign jurisdictions.

[1] Different areas of compliance have different returns, though this is thought to average out at 18:1. A Public Accounts Committee report on HMRC performance published in January 2023 used this return on investment ratio, https://committees.parliament.uk/publications/33390/documents/182713/default/

[2] Treasury Committee Oral Evidence Session, House of Commons, 23 November 2022, https://committees.parliament.uk/oralevidence/11933/pdf/

[3] The Growth Plan, HM Treasury, September 2022,

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1105989/CCS207_C

[4] In an evidential submission to the Public Accounts Committee, we recommended that the government should provide clarity about what it means when it talks of “simplifying the tax code”- Managing tax compliance following the pandemic, Written evidence submitted by TaxWatch, Public Accounts Committee, 26 January 2023, https://committees.parliament.uk/writtenevidence/115783/pdf/

[5] In 2016 the government introduced a measure to name and shame aggressive tax avoiders. In 2019, we revealed that not a single company had been listed https://www.taxwatchuk.org/hmrc_special_measures/. The Government also introduced a Procurement policy note in 2013 which sought to exclude companies engaged in tax avoidance from bidding for government contracts. In 2022 after sending FOIs to over 40 government departments, we found that this mechanism had never once been used.

[6] As at 01 January 2023, HMRC currently has 9 live CCO investigations. No charging decisions have yet been made. https://www.gov.uk/government/publications/number-of-live-corporate-criminal-offences-investigations/number-of-live-corporate-criminal-offences-investigations

[7] R&D – still changing after all these years, TaxWatch 14 March 2023, https://www.taxwatchuk.org/r_and_d_press_release

[8] TaxWatch recently submitted evidence to a HM Treasury Consultation looking at audio visual reliefs, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142803/M5082_Government_response_to_consultation_on_audio_visual_tax_reliefs_.pdf

[9] “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

R&D – still changing after all these years

14th March 2023 by Alex Dunnagan

R&D reliefs predicted to cost over £9bn by 2026-27 – by far the largest corporation tax relief
Fraud and error in schemes total over £1.1bn in last three years
R&D ‘claims farms’ continue to hard sell opportunities to claim refunds on expenditure that often does not qualify
Impact of changes to help tackle problem R&D claims firms not felt for another two years
HMRC not resourced to tackle historical incorrect claims

A new report by TaxWatch shows that R&D tax reliefs, by far the largest corporate tax relief, are not working as intended, while being subject to hundreds of millions of pounds a year in fraud and error. The last three years alone saw £1.1bn in fraud and error (21-22 £469m, 20-21 £336m, 19-20 £311m).

New measures introduced in the Autumn budget won’t be felt for nearly another two years, and do nothing to claw back the billions already lost. The lack of resourcing at HMRC means that historic fraud will effectively be forgotten about.

Boundary pushing is rife with unregulated advisers encouraging borderline fraudulent behaviour, while skimming off the top. Multiple R&D claims advisers are still advertising jobs for sales advisers to cold call businesses persuading them to make claims, while industry insiders believe that it is a saturated market and that most new claims are unlikely to be eligible.

Our research suggests that the reliefs aren’t always acting as intended. Many companies are only applying for the relief after being contacted by tax advisers, suggesting the work would have been carried out regardless of the relief.

It’s unclear if this money is going to “innovative projects in science and technology”. The ‘Financial and Insurance’ sector made 1,445 claims in 2021 on a spend of £2.59bn, averaging £1.8m per claim – likely a result of the huge salaries paid in finance. ‘Admin and Support Services’ made 5,015 claims that year, on a spend of £1.33bn – that’s a whole lot of innovation in admin.

The historically low level of HMRC compliance activity in R&D is a good example of how failing to take timely action results in increasing abuse as people become more confident in their ability to get away with it.

Issues around R&D tax relief seem likely to appear again in the Spring Statement but will the Chancellor fully tackle this ongoing problem?

Alex Dunnagan, Director at TaxWatch, said:

The changes we saw in the Autumn Statement should help clamp down on future abuse, but the fact is that these amendments do nothing to tackle the billions previously lost to fraud and error.

With such great returns on investment for HMRC compliance activity, it’s a no brainer that they should be properly resourced to pursue historical abuse

Given the huge sums of money available for R&D reliefs, it’s no surprise that an entire industry of advisers has appeared, with many encouraging companies to submit boundary pushing claims.

The Government needs to decide whether the relatively untargetted nature of these reliefs is actually increasing innovation.

The full report is available here.

This research featured in The Times.

HMRC tax defaulting tax advisor reported to two professional bodies

6th March 2023 by Alex Dunnagan

TaxWatch have submitted a formal complaint to both the Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) about one of their members, namely David Warren Hannah from Leicester. This is as a result of his inclusion on HMRC’s ‘Current list of deliberate defaulters’. This is the fifth complaint lodged by TaxWatch to professional bodies.

The reasons for reporting

HMRC has published details of deliberate tax defaulters over the last decade. Today, each of those listed has avoided paying at least £25,000 in tax and has received a penalty, either for deliberate errors in their tax returns, or, deliberately failing to comply with their tax obligations. HMRC also identifies the date of default and notes: ‘the published person may have changed their behaviour’ since the time of the default. Despite the value and deliberate nature of the defaults, individuals and businesses are only ‘named and shamed’ on HMRC’s list for 12 months.[1]

David Warren Hannah was first included in HMRC’s ‘Current list of deliberate tax defaulters’ on 24 March 2022. It describes him as a “property tax advisor” and declares he was charged a penalty of £17,136 for having deliberately defaulted on £30,600 tax between 6 April 2011 and 5 April 2012.

CIOT lists a David Hannah as a personal and property tax advisor for Cornerstone – a firm based in Leicester. The ICAEW website identifies a David Warren Hannah of Leicester as a member. Both organisations state their members are governed by the Professional Conduct in Relation to Taxation (PCRT) amongst other things. The PCRT was developed by the ICAEW and others including the Chartered Institute of Taxation as a means by which the professional bodies could take a greater lead in setting and enforcing clear professional standards.

It is suggested Mr. Hannah’s actions clearly breached the ‘Integrity’ rule of the Professional Conduct in Relation to Taxation in place at the time, for rule 2.2 of the PCRT (published on 4th January 2011) stated:

“A member must act honestly in all his dealings with his clients, all tax authorities and other interested parties, and do nothing knowingly or carelessly that might mislead.”

It is also argued his actions breached PCRT 2.16 which demanded:

“A member’s own tax affairs should be kept up to date. Neglect of the member’s own affairs could raise doubts within HMRC as to the standard of the member’s professional work and could bring his professional body into disrepute.”

It is posited Mr. Hannah’s activities reveal a breach of sections within the ICAEW’s Code of Ethics (1 January 2011 – 31 December 2019) including Section 150.1 which stated:

“The principle of professional behaviour imposes an obligation on all professional accountants to comply with relevant laws and regulations and avoid any action that the professional accountant* knows or should know may discredit the profession. This includes actions that a reasonable and informed third party, weighing all the specific facts and circumstances available to the professional accountant* at that time, would be likely to conclude adversely affects the good reputation of the profession.”

Interestingly, Mr. Hannah is the director of over a thousand companies[2]. While Cornerstone Tax Limited went into Liquidation in 2021, it appears that Cornerstone Tax 2020 Limited took its place[3]. Mr. Hannah recently resigned as a director of Cornerstone Tax 2020, however, this company lists Cornerstone Group International Limited as the ‘person with significant control’ on Companies House[4]. Mr. Hannah remains as a director of Cornerstone Group International and holds 75% of more of its shares[5].

Following our submissions, the Taxation Disciplinary Board, an independent body that deals with complaints to CIOT, has informed TaxWatch it is unable to proceed with any complaints against Mr. Hannah pending the outcome of proposed judicial review proceedings brought against CIOT by Mr. Hannah. In contrast, the ICAEW has explained its Professional Conduct Department was already aware of the matter and is considering the case.

Unfortunately, despite several efforts, TaxWatch has been unable to contact Mr. Hannah to obtain his point of view.

[1] ‘Details of deliberate tax defaulters’, HMRC, https://www.gov.uk/government/publications/publishing-details-of-deliberate-tax-defaulters-pddd

[2] Companies House search result for ‘David Warren Hannah’, https://find-and-update.company-information.service.gov.uk/officers/J7GT9-bNfyEdm9MZs-llx5UHY_A/appointments

[3] Section 2.4 of Cornerstone Tax Limited Liquidator’s Annual Report to Members and Creditors For the Year Ending 7 February 2022 noted: “On 09 February 2021, a sale of the assets of the Company was completed to Cornerstone Tax 2020 Limited who is a Connected Company. Mr. David Hannah is the common director of both companies”. Section 2.6 stated: “On 19 February 2021, a sale of the Company book debts was completed to Cornerstone Tax 2020 Limited who is a Connected Company”.

https://find-and-update.company-information.service.gov.uk/company/10154301/filing-history/MzMzMjA0NTA3OGFkaXF6a2N4/document?format=pdf&download=0

[4] Companies House, search ‘Cornerstone Tax 2020 Ltd.’, ‘People’. ‘Persons of Significant Control’.

https://find-and-update.company-information.service.gov.uk/company/12164380/persons-with-significant-control#

[5] Companies House, search ‘Cornerstone Group International Limited’. ‘People’. ‘Persons with Significant Control’.

https://find-and-update.company-information.service.gov.uk/company/03874730/persons-with-significant-control

Director of suspected HMRC tax avoidance scheme continues to be member of professional body

2nd February 2023 by Alex Dunnagan

Despite his company being ‘named and shamed’ by HMRC for alleged involvement in disguised remuneration schemes, Paul Ruocco continues to be a member of the Institute of Chartered Accountants of England and Wales.

TaxWatch have submitted a formal complaint to the ICAEW about one of its members, Paul Ruocco, the director of Gateway Outsource Solutions Limited which HMRC suspects may be promoting disguised remuneration tax avoidance schemes. This is the fourth complaint lodged by TaxWatch to professional bodies.

The scheme

Last year HMRC began ‘naming and shaming’ companies with its ‘Current list of named tax avoidance schemes, promoters, enablers and suppliers’.¹ One company that features on this list is Gateway Outsource Solutions Limited, whose director is Paul George Ruocco. It appears from information published by HMRC, that users of Gateway’s scheme entered into an employment agreement with a Maltese company, Gateway Outsource Solutions Limited (Malta), before receiving two salary payments – one paid at minimum wage, and a second which is described as a loan or an advance, which is not taxed. HMRC suspects this to be a disguised remuneration scheme, a scheme that HMRC has been stating for years does not work, and the so-called loans to individual workers, are subject to income tax and National Insurance contributions.

The company’s financial statements for 2018, 2019, 2020, and 2021 all state that there is only one employee of the company – with Companies House listing Mr. Ruocco as the sole director during these years.

Mr. Ruocco is also a member of the Institute of Chartered Accountants of England and Wales (ICAEW), an organisation which is supposedly governed by the Professional Conduct in Relation to Taxation (PCRT). The PCRT was developed by the ICAEW and others including the Chartered Institute of Taxation in response to the government’s challenge to the professional bodies to take a greater lead in setting and enforcing clear professional standards around the facilitation and promotion of tax avoidance.

According to the Purpose of the Principles and Standards section of the Code:

“PCRT applies to all members providing advice on UK tax matters regardless of, contracts of employment, membership of other professional organisations or where in the world they work and reside”.

Moreover, in relation to: “Advising on tax planning arrangements”, section 3.2 of the PCRT notes:

“Members must not create, encourage or promote tax planning arrangements or structures that: i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation; and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”

In sum, if members of professional bodies are involved with what is effectively tax avoidance, then action should be taken in accordance with PCRT. TaxWatch has submitted evidence to ICAEW about Gateway Outsource Solutions Limited and Mr Ruocco for review and possible investigation following HRMC’s decision to list the company. We hope that ICAEW will review the evidence provided to them and take the necessary action. We look forward to seeing evidence of the PCRT working in practice.

The Isle of Man connection

Our research also reveals that Mr. Ruocco was previously appointed as a director or designated member of the same company or Limited Liability Partnership on the same day as Mr. Douglas Alan Barrowman, Chairman of the Knox Group of companies on at least nineteen occasions. Mr. Barrowman is husband of Conservative Peer Baroness Mone who recently requested a leave of absence from the Lords “to clear her name”, amid allegations she benefited from a company she recommended for a PPE contract.² Recently, Mr. Barrowman was charged with corporate tax evasion by prosecutors in Spain.³ He denies the charges. Although it is not suggested Mr. Barrowman has been involved in the company that lies at the heart of this complaint, it is noted that Companies House records Panda Holdings Limited of Knox House, 16-18 Finch Road, Douglas, Isle Of Man, IM1 2PT as the ‘active person with significant control’ over Gateway Outsource Solutions Limited.

Incidentally, a Knox House of Finch Road, Douglas, is the headquarters of Mr Barrowman’s Knox Group of Companies, as well as the correspondence address for Braaid Limited – which Companies House records as the ‘active person of significant control’ for AML Tax (UK). Readers may recall TaxWatch’s complaint about Arthur Lancaster, the director of AML Tax (UK), to the ICAEW in March of last year. In the judgment of the Upper Tier Tax Tribunal, in the matter of Revenue and Customs v AML Tax (UK) Limited, the Court described his evidence as “seriously misleading”, “evasive” and “lacking in candor”.⁴AML Tax (UK) was added to HMRC’s name and shame list last in January 2023, with HMRC describing a disguised remuneration scheme purportedly operated by the company. Mr. Lancaster is a director of the Knox House Trustees (UK) Limited for which the ‘active person with significant control’ is one Douglas Alan Barrowman.

Mr. Ruocco was contacted for comment by TaxWatch and confirmed he is a Chartered Accountant but was now “all but retired”. He denies that he created, encouraged or promoted any tax planning arrangements and said that Gateway Outsource Solutions Ltd does not provide any tax related services or participate in any tax schemes itself.

The HMRC website states it is possible that when HMRC learns more about such schemes it may find that information which it has published is incorrect or misleading, therefore we expect ICAEW to work with HMRC when reviewing this complaint.

1HMRC. ‘Current list of named tax avoidance schemes, promoters, enablers and suppliers’ https://www.gov.uk/government/publications/named-tax-avoidance-schemes-promoters-enablers-and-suppliers/current-list-of-named-tax-avoidance-schemes-promoters-enablers-and-suppliers

It is possible that when HMRC learns more about the scheme it will find that information which has been published is incorrect or misleading.

2Conservative peer Michelle Mone to take leave of absence from Lords, BBC News, 07 December 2022, https://www.bbc.co.uk/news/uk-politics-63871448

3Michelle Mone’s businessman husband faces jail if found guilty of Spanish tax charge, The Mirror, 16 December 2022. https://www.mirror.co.uk/news/politics/michelle-mones-businessman-husband-faces-28752717

4Revenue and Customs v AML Tax (UK) Limited [2022] UKUT 81 (TCC), United Kingdom Upper Tribunal (Tax and Chancery Chamber), 14 March 2022, https://www.bailii.org/uk/cases/UKUT/TCC/2022/81.html

Video Games Tax Relief costs five times as much as forecast

27th January 2023 by Alex Dunnagan

Video Games Tax Relief (VGTR) cost a record £197m last year, more than five times as much as it was anticipated to cost when it was introduced.¹ A total of £830m in subsidy to the video games industry has been paid since the relief was introduced, with numbers increasing every year as the following chart reveals:²

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2021-22

Despite being billed as a relief set up to help independent developers produce culturally British games, it is large firms that benefit, as revealed by HMRC’s commentary on statistics for VGTR in the creative industry:

“In the year ending March 2022, the majority of claims tend to be for smaller amounts, with 49% of all claims being for £50,000 or less; however, these claims are only responsible for 1% of the total amount paid out. Claims over £500,000 account for 88% of the total amount paid out.”⁴

Worse still, is the fact much of the tax relief has been taken by large multi-national companies, for here there is a huge risk they will game the system and ‘offshore’ the subsidised intellectual property, resulting in the profits, and tax on them, being collected elsewhere. This point was made by TaxWatch’s Acting Director when he gave evidence about Video Games Tax Relief in front of the Treasury Select Committee on Monday 19th December 2022.

Rockstar Games illustrates this risk. The Edinburgh-based company developed Grand Theft Auto V which is thought to have generated revenues of over $5bn, only to then sell the intellectual property to their US-based parent company Take-Two Interactive at more or less cost price.⁵ Take-Two Interactive distributed, and continues to distribute, the game globally, and ultimately makes the (taxable) profits.

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 2022, 1,500 games received this certification.³ 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.

Rockstar’s latest accounts reveal it obtained £79.8m in VGTR in 2021-2022, a sum that is more than twice the value of the original costing of this tax relief to the whole industry and 41% of all of the VGTR paid out last year. The amount obtained by Rockstar has risen each year, taking the total the US-owned company has claimed to a staggering £285m – or 31% of this tax relief over the years.

	2016	2017	2018	2019	2020	2021	2022	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£9,399,572	£11,789,662	£54,928,373
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£64,359,515	£81,036,506	£324,039,753
VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£68,376,369	£79,837,384	£284,818,768
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£73,831,443	£93,170,605	£379,592,183
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£0	£0	£67,500,000

Together these show it is time for the UK Government to review the effectiveness of this corporate subsidy, and it is not just TaxWatch who is asking pertinent questions for during the Treasury Select Committee session Danny Kruger MP (Conservative) asked the CEO of UK Interactive Entertainment, the trade body for the games industry:

“…wouldn’t it be nice if some of the profits, which are the ultimate purpose of a commercial enterprise, were taxed in the UK? Do you not think that there would be some value in that?”⁶

We agree.

1Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022
“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

2Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

3This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2022 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
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/

4Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

5The 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/

6Oral Evidence: Tax Reliefs, HC 723, House of Commons Treasury Committee, 19 December 2022, https://committees.parliament.uk/oralevidence/12468/pdf/

Public Account Committee questions resourcing of HMRC

18th January 2023 by Alex Dunnagan

A new PAC report argues that the government is “missing the opportunity to recover billions”

Tax Debt stands at £41.6bn, over £20bn more than pre-pandemic levels, with HMRC estimating it will take “some years” for this debt to be reduced.
New PAC report argues that the government is missing the opportunity to recover billions by not resourcing HMRC compliance effectively.
Chancellor Jeremy Hunt to consider giving HMRC more funding if the department can improve upon the 18:1 return on investment currently seen with compliance activity.

A new report by the Public Accounts Committee (PAC) has argued that “The government is missing the opportunity to recover billions in lost revenue by not resourcing compliance.”¹ The report also highlights disappointment in the amount of money lost to fraud and error in the Covid-19 support schemes, stating that there is a “moral duty to pursue fraud to ensure fairness and maintain a level playing field for individuals and businesses that did not abuse the schemes, rather than HMRC being seen to reward those that were dishonest.”

The committee also recommended that HMRC publish a three-year plan to monitor and improve customer service, saying that taxpayers are “still not receiving an acceptable level of customer service”

Tax Debt

Much has been made of the tax debt owed to HMRC,² with Dame Meg Hillier, the PAC Chair, saying “the eye-watering £42 billion now owed to HMRC in unpaid taxes would have filled a lot of this year’s infamous public spending black hole.”

HMRC’s Annual Report and Accounts for 2021-2022 state that “The debt balance hit its lowest point since the start of the pandemic in January 2022 at £38.8 billion. Since then, it has steadily increased to £41.6 billion at the end of March 2022.” The main reason for the tax debt increasing is that as people struggled to pay taxes throughout the pandemic, HMRC allowed taxpayers more time, rather than aggressively pursuing debts.

However, while the debt balance has actually reduced from £57.5bn in 2020-2021, it is nowhere near the pre-pandemic levels. HMRC state that the balance is likely to remain above the pre-pandemic average of 2.4% of tax revenues for “some years”. The debt balance in 2017-2018 stood at £18.2bn, and in 2018-2019 was £19.1bn. HMRC was due to publish a plan to tackle the “mountain of tax debt” in September 2022, however, this has since been postponed to January 2023.³ It’s important that HMRC make clear what they mean by “some years”, in order for a greater understanding to be gained as to when this debt will be paid and the overall debt reduced to similar pre-pandemic levels.

HMRC debt balance 2017-2018 through 2021-2022

While this £41.6bn figure is staggering, it is important not to conflate this with the Tax Gap. The debt balance is what HMRC are intending to recover, and is therefore expected to be available to the exchequer at some point.

The Tax Gap on the other hand is the difference between the amount of tax that should be collected, and the amount of tax actually collected. It is the sum total of all of the evasion, avoidance and non-payment that leads to the loss of tax revenue to the government. Almost half of the tax gap, which stood at £32bn in 2020-2021, is resultant from fraud. ⁴

Returns on investment

On 15 January, the Treasury Minister Victoria Atkins acknowledged that 1,043 HMRC tax compliance staff had been reallocated to work on cases relating to Brexit in 2021-2022.⁵ This is in addition to the 1,250 staff that had been reallocated to tackling Covid Relief related fraud and error. HMRC’s 2020-2021 Annual Report and Accounts lists 1,237 staff working on ‘COVID-19 response’. This is presumably the administering of the relief schemes, rather than in Covid compliance work.

In order to combat the fraud in the Coronavirus Relief Schemes, a Taxpayer Protection Taskforce was set up. This team is set to wrap up in March, despite collecting less than 25% of the amount lost to fraud and error in these schemes, with HMRC estimating that at least £3.3bn in fraud and error will be outstanding at the end of the financial year. The PAC said they were “disappointed” at the amount set to be recovered. TaxWatch research revealed that staff redeployed to the Taskforce could have produced significantly higher compliance returns in their original teams.⁶

The lack of returns ultimately stem from HMRC being under resourced, a fact highlighted by the difficulties the department is having in dealing with the sheer amount of fraud that occurred throughout the pandemic, and simultaneously having to deal with the impacts of Brexit.

That said, HMRC compliance work still delivers a very healthy return on investment. The PAC report notes that “for every £1 that HMRC spends on compliance activities, it recovers £18 in additional tax revenue”. Despite this, the Autumn 2022 budget saw an increase of only £15m per year to HMRC for compliance work, a paltry sum compared with the extra £112m per year the Department for Work and Pensions (DWP) is set to receive to tackle fraud.⁷

In a letter to the Chair of the Treasury Select Committee, the head of HMRC, Jim Harra, stated that the increase seen at the Autumn Budget is “expected to deliver a return of over 9:1 over the period from 2023-24 to 2027-28 with a return comparable to the 18:1 in 2027-28 when staff taking up these roles are fully trained and experienced in post.⁸” While still a healthy return on investment at 9:1, this highlights the time lag between investment and results. The sooner HMRC is given adequate resourcing, the sooner it can hire and train staff, which ultimately results in greater returns.

In a Treasury Select Committee session on 23 November 2022, Emma Hardy MP (Labour) put some of these figures to the Chancellor Jeremy Hunt, highlighting the 18:1 return on investment, as well as the discrepancy in DWP and HMRC funding models. Hunt responded: “That is why he [Jim Harra, head of HMRC] got an extra £79 million. I hope he maintains that 18:1 ratio. If he can do even better, I will consider giving him even more money because it is very, very important that we do that.”⁹ The idea that a return of £18 for each £1 spent on compliance is not enough to warrant more investment is baffling. Tackling the tax gap should be a high priority of the government.

TaxWatch has submitted written evidence to a recent PAC inquiry entitled ‘Managing tax compliance following the pandemic’, with our submission touching on many of the themes present in this recent publication. In our submission we argue that HMRC’s long term under-resourcing has been highlighted by the timings of Brexit coupled with the pandemic, with tax administration in the UK facing a difficult task without equal in modern times. We argue that the impact of the stress of the past few years could cause long term damage to the tax administration if government does not invest significantly more funds in tackling non-compliance.

Parliamentary copyright images are reproduced with the permission of Parliament.

1HMRC performance in 2021-22, Public Accounts Committee, 11 January 2023, https://publications.parliament.uk/pa/cm5803/cmselect/cmpubacc/686/report.html

2The Times and The Financial Times both ran articles centred on the £42bn debt referenced in the PAC report.

3Treasury Minutes Progress Report, HM Treasury, December 2022 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1121672/E02829734_CP_765_Treasury_Minutes_Progress_Report_Web_Accessible.pdf

4HMRC’s Tax Gap 2022 Edition – TaxWatch Briefing, TaxWatch, 27 June 2022, https://www.taxwatchuk.org/tax_gap_2022/

5UK tax billions go uncollected as staff tackle Covid fraud and Brexit, Financial Times, https://www.ft.com/content/63ce3722-56bd-46d2-9aad-0ae666e69b3c

6Funding of Taxpayer Protection Taskforce raises serious issues, TaxWatch, 14 November 2022, https://www.taxwatchuk.org/taxpayer_protection

7Opportunities Missed – Autumn Statement 2022, TaxWatch, 17 November 2022, https://www.taxwatchuk.org/autumn_statement_2022/

8Email from Jim Harra to Harriet Baldwin MP, 06 January 2023, https://committees.parliament.uk/publications/33540/documents/182481/default/

9Treasury Committee Oral Evidence Session, House of Commons, 23 November 2022, https://committees.parliament.uk/oralevidence/11933/pdf/

TaxWatch give evidence at Treasury Select Committee

28th December 2022 by Alex Dunnagan

TaxWatch Acting Director Alex Dunnagan gave evidence to the Treasury Select Committee (TSC) on Monday 19th December highlighting the abuse of tax reliefs.

Written evidence

In November we submitted written evidence to the TSC for their inquiry on tax reliefs, focussing on both Creative Sector reliefs and the R&D reliefs.

TaxWatch’s evidence pointed out that Creative Sector reliefs are costing far more than anticipated, with the vast majority of these reliefs going to large multinational corporations. These multinationals are developing entertainment products that would likely have been produced regardless of whether or not the relief was available.

We also highlighted that companies claiming hundreds of millions of pounds in reliefs are engaging in profit shifting. These multinationals are producing games and films in the UK while claiming relief, then selling the taxpayer subsidised intellectual product at effectively cost price to overseas parent companies. It is these overseas companies, usually US based, which then distribute the product, generating significant profits, and with that, significant Corporation Tax bills outside the UK.

As for R&D reliefs, we pointed out that HMRC’s estimate of fraud and error with R&D relief (£469m in 2021-22) is likely a significant underestimate. While the true scale of abuse with R&D reliefs is not known, it could well costs billions of pounds every year. Without adequate compliance checks, we will simply never know the true scale of fraud and error.

Our evidence also pointed out that there are tax advisers boasting of 100% success rates in applying for R&D relief. There are companies that offer software which auto-generates relief claims, and accountants stating that it is the government intent to provide R&D relief for things such as cocktails and menu updates. This clearly is not the intent of Parliament.

Treasury Select Committee session

In addition to the facts presented in the written evidence, during the oral evidence session, Alex was able to highlight the lack of scrutiny these reliefs receive. There are close to 1,200 reliefs, the majority of which receive little to no government scrutiny. Even the smaller reliefs can have expenditures larger than government departments. Video Games Tax Relief, originally forecast to cost £35m a year, cost £197m in the year ending March 2022. The Serious Fraud Office by comparison had a budget of £74m last year.

The session was attended by Harriett Baldwin (Chair); Rushanara Ali; Anthony Browne; Dame Angela Eagle; Danny Kruger and Siobhain McDonagh. The panel consisted of Alex Dunnagan, Acting Director, TaxWatch; Dr Hosam Al Kaddour, Head of Teaching and Learning, Accounting Department, University of Southampton; Anita Monteith, Head of Taxation Policy, Institute of Chartered Accountants in England and Wales; and Dr Jo Twist OBE, CEO at UK Interactive Entertainment.

TaxWatch welcomes any opportunity to present further evidence on tax reliefs.

The full transcript for the evidence session is available here.

ITR Global Tax 50 2022: Alex Dunnagan

23rd December 2022 by Alex Dunnagan

At TaxWatch we are hugely proud to announce that our Acting Director has been listed in ITR’s Global Tax 50 2022 (paywall).

International Tax Review’s Global Tax 50 is an annual list which highlights “the most influential individuals in the world of tax policy and business, from public officials to industry leaders.”

In their article about TaxWatch ITR noted our work with the All-Party Parliamentary Group for Anti-Corruption & Responsible Tax, where we jointly published a report arguing that aggressive tax avoidance can and should be treated as criminal fraud.

ITR also noted our growing body of regulatory complaints to professional bodies about advisers and accountants engaging in tax avoidance. We’re happy to say that there will be plenty more of this in 2023.

ITR’s list previously also included organisations, which saw TaxWatch make the 2020-2021 list.

A huge thank you to all our staff, trustees, editorial committee and supporters who made this possible through their passion and dedication to raising the important issues TaxWatch covers in its work.

Opportunities Missed – Autumn Statement 2022

17th November 2022 by Alex Dunnagan

Minimal efforts to close the tax gap, despite HMRC producing a return on investment of up to 18:1 with compliance work.
DWP to receive an extra £112m a year to tackle fraud, but HMRC only to receive £15m. Once again, the government is prioritising going after benefits fraud while failing to take tax fraud seriously.
R&D tax relief schemes changed, but attempt to make relief less attractive to those claiming fraudulently will reduce benefits to small and medium businesses conducting genuine R&D, and will do nothing to recover previously overpaid amounts.
Changes in the threshold for the 45% tax rate aren’t as progressive as they seem. While someone on £150k will pay what is worth an extra 1% of their income, the change to someone on £1.5m is less than 0.1%.

On Thursday 17 November the Chancellor Jeremy Hunt unveiled his Autumn Statement 2022.

Hunt, the fourth UK chancellor of 2022, delivered this budget against a backdrop of financial uncertainty. The chancellor has called this a plan to tackle the cost of living crisis and to rebuild the UK economy.

While numerous news outlets have covered the major stories of the budget, at TaxWatch we are casting a forensic eye over the lesser covered tax stories.

Minimal efforts to close the tax gap

In an attempt to balance the governments books this budget features both cuts to public services and increases in taxes. There is a third option for the government to increase funds however, though it seems to have been overlooked – and that is reducing the tax gap.

HMRC estimates that in 2020-21, £32bn of tax went uncollected. Of this, 45% – or £14.4bn – is a result of fraud. These numbers are almost certainly an underestimate, as they don’t include profit shifting, which academic studies have found to be in the region of £20bn, nor do they include the amounts lost to fraud and error in the coronavirus support schemes, which is estimated to be around £4.5bn.

The solution to recovering significant amounts of this lost tax is through investment in compliance. Just last month during a Public Accounts Committee oral evidence session Jim Harra, the head of HMRC, said “On average, for every pound that we spend in our customer compliance group, we recover about £18 worth of additional tax revenues.” Dame Meg Hillier MP responded “that’s a helpful pitch to the treasury.” At TaxWatch, we agree.

Justin Holliday, HMRC’s Chief Finance Officer and Tax Assurance Commissioner, also stated during this session that “to get £1 billion off the tax gap, you would need between a twentieth and a tenth of £1 billion”.¹ This is a ridiculously good return on investment.

Despite this, there was little in the way of investment in HMRC announced. There is to be “a further £79 million over the next 5 years” in order to tackle tax fraud. While any investment in HMRC is good news, £15.8m a year is small change. The Department of Work and Pensions is to receive an extra £280m between now and 2024-25 to tackle fraud, error, and debt in the benefits system – working out at £112m per year.

Last year TaxWatch revealed that the UK Government had given the DWP £613m to tackle pandemic related benefits fraud, while only giving HMRC £155m to tackle Covid related tax fraud. This is despite the fact that fraud and error in HMRC administered Coronavirus Support Schemes is thought to be worth billions more than the increase in Covid related benefits fraud.²

The Government have calculated that over the course of five years this £79m investment should see a return of £725m. That’s an investment gain of £646m, with a total return on investment of 818%. With such healthy returns for so little invested, it is unclear why the government is again choosing not to put more money into HMRC.

R&D reform (again)

Its no surprise that reforms to the R&D relief schemes were featured in the Autumn Statement. Looking at the past few years of budgets, reference is made to reforming R&D reliefs in the Spring Statement 2022,³ Autumn Budget 2021,⁴ Spring Budget 2021,⁵ Spring Budget 2020,⁶ and Spring Statement 2019⁷ demonstrating the concerns around these tax reliefs. It’s likely that there will be further reform at the next budget/statement/fiscal event. Limited changes to the schemes were made in Finance Act 2022 (coming into existence in April 2023) to extend claimable expenditure to cloud computing costs and data and requiring more detailed information to be submitted with claims. These latest reforms however have been fairly substantial, and will affect claims from 2022-23.

Today’s announcement fundamentally changes the benefits in the two schemes, known as the SME scheme (Small and Medium-Sized Enterprise scheme) and the RDEC scheme (Research and Development Expenditure Credit) scheme which is mainly for large businesses but can be claimed by SMEs in some cases.

There have long been concerns about the increasing costs of R&D tax relief (from £1.1bn in 2010-11 to £6.6bn in 2020-21⁸) and levels of error and fraud in the schemes⁹ . HMRC estimated fraud and error in R&D reliefs in 2021-22 was £469m but calculated that 7.3% of SME scheme claims were incorrect while only 1.1% of RDEC scheme were incorrect. t. The Chancellor referred to the high level of fraud and error in announcing a reduction in the additional corporation tax deduction for R&D expenditure in the SME scheme from 130% to 86% and the SME credit rate reducing from 14.5% to 10%. In contrast the RDEC scheme has been made more generous with the credit available increased from 13% to 20%. These adjustments have been described as a rebalancing of rates but in fact are predicted to result in a net reduction in the costs of both schemes across the next few years.

The statement describes the changes as a move towards a ‘single RDEC-like scheme for all’ with the intention of consulting on the design of a single scheme for the future alongside consideration of further support for ‘R&D intensive’ SMEs without significantly increasing the cost of the overall scheme.

The reduction in the SME scheme benefits appears to be a blunt instrument to deal with well-discussed problems with boutique R&D claims firms said to be using no win no fee arrangements to push the boundaries of R&D definitions and claimable costs¹⁰. This will likely make the scheme less attractive to those entities, as there will be a smaller amount to take their cut from, but will obviously have an immediate impact on the support given to SMEs carrying out genuine innovation in the field of science and technology. While anything intended to reduce the amount of error and fraud in the tax system is good news, this should not overshadow the significant sums already believed to have been erroneously claimed in earlier years. As mentioned above, investment in compliance work by HMRC is depressingly low compared with the potential return on that investment, and while there are suggestions that around 100 staff have now been deployed to pursue enquiries into more past R&D claims, there is a risk that significant amounts of overclaimed amounts will never be recovered.

Top rate of tax – not as progressive as it sounds

The 45% top rate of income tax was scrapped under Truss and Kwarteng, only for a U-turn to see it reinstated. Hunt announced today that the government will decrease the additional rate threshold from £150,000 to £125,140 in April 2023, saying “those in the highest income households will contribute more.”

Arun Advani, an Associate Professor at the Department of Economics at the University of Warwick, has conducted some analysis as to what this means in practice.¹¹ Lowering the threshold will raise around £850m in year one, rising to just over £1bn by 2026-27, with the increase affecting the top 2% of earners. That’s not an insubstantial amount of money, but, its important to note that what it raises is not particularly progressive. A person earning £150k a year is going to pay another £1,250 in tax, almost 1% more of their income. A person earning £1.5m is also going to be paying another £1,250 in tax, less than 0.1% of their income. While it may make headlines, in reality, the very rich won’t really be affected.

1Public Accounts Committee, 20 October 2022, https://parliamentlive.tv/event/index/4b5df068-66e0-4d62-a65b-8a073cd65253

2Funding to fight covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/

3Spring Statement 2022, Chancellor of the Exchequer, March 2022, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062708/Spring_Statement_2022_Print.pdf

4Autumn Budget and Spending Review 2021, HM Treasury, 27 October 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1043688/Budget_AB2021_Print.pdf

5Budget 2021, HM Treasury, 3 March 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/966868/BUDGET_2021_-_web.pdf

6Budget 2020, HM Treasury, 12 March 2020, https://www.gov.uk/government/publications/budget-2020-documents/budget-2020

7Spring Statement 2019, Chancellor of the Exchequer, Spring 2019, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785618/WMS_final_Commons.pdf

8Corporate tax: Research and development tax credits, Gov.uk, 29 September 2022, https://www.gov.uk/government/statistics/corporate-tax-research-and-development-tax-credit

9Huge cost to taxpayers of HMRC research & development initiative comes out in the wash, The Times, 31 October 2022, https://www.thetimes.co.uk/article/huge-cost-to-taxpayers-of-hmrc-research-development-initiative-comes-out-in-the-wash-czn9mxnhs

10Formal meeting (oral evidence session): Draft finance bill 2022-23, UK Parliament Committees, 14 November 2022, https://committees.parliament.uk/event/15744/formal-meeting-oral-evidence-session/

11Arun Advani, Twitter, 16 November 2022, https://twitter.com/arunadvaniecon/status/1592993284712173568

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Spring Budget 2023

Nothing for HMRC compliance despite huge returns on investment

Increases in sentencing for tax fraud and potential new tax offence– only useful if HMRC successfully prosecutes

Tax to be simplified – we’re still not sure exactly how

R&D reformed yet again

Generous reforms to audio visual reliefs – still not dealing with the problems