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Holiday let tax rules allow owners to escape thousands of pounds in tax

9th August 2023 by Sarah Walton

The tax treatment of furnished holiday properties appears inappropriately generous and could encourage owners to lock away much needed housing stock to save thousands of pounds in income and capital gains taxes. The regime, dating back to the 1980s is in desperate need of review and reform in light of the recent platforms such as Airbnb making these investments much easier to manage passively.

Our research into this area shows how investors in holiday lets get the best of both worlds, with their earnings being treated as quasi businesses for income tax, but escaping national insurance contributions altogether, and also a lighter capital gains tax rate equivalent to a business that is taking on much more risk. Worked examples demonstrate that the tax savings are very considerable and represent a real incentive for tax driven behaviour beyond what was intended at the time when the rules were first designed.

We also explore an interpretation of the rules being promoted to the owners of second homes to convert these to holiday lets. This suggests owners can significantly reduce capital gains tax on any price escalation during the whole time of ownership including when the property was a private holiday home. HMRC debunked this interpretation when TaxWatch first highlighted the issue recently, but are now reviewing the technicalities. There is clearly current ambiguity which needs to be resolved. We call on HMRC and the Treasury to restrict the capital gains tax benefits to only the period where the Furnished Holiday Let (FHL) regime applies.

The full report can be found here.

The research shows, in just one corner of the tax system, how the complex rules, developed organically over many decades, incentivise and facilitate UK tax compliance and avoidance problems. The savings these rules permit are separate to the work of the Treasury Select Committee’s recent report on tax reliefs, which TaxWatch contributed to .

We also call on the Treasury to respond to the recommendations from the now abolished Office for Tax Simplification particularly in regard to personal use of properties within the FHL regime.

Post publication update

We have had a further response from HMRC confirming that BADR is available on the total capital gain on disposal of an FHL property, if it satisfies the BADR qualifying requirements on cessation of the business. This applies even in circumstances where the property has not been used as an FHL for the whole period of ownership. This further reinforces TaxWatch’s recommendation that this loophole in the legislation should be closed, as there can be no policy rationale for this beneficial treatment for property owners. We have submitted an FOI to HMRC with the aim of identifying the ongoing costs of this loophole.

‘Our tax system is too complicated’ concludes Treasury Committee report on tax reliefs

26th July 2023 by Sarah Walton

The Treasury Select Committee (TSC) today published a report¹ about the complicated world of tax reliefs. Last year TaxWatch provided written evidence to the Committee on this enquiry and in December last year, TaxWatch’s then acting director, Alex Dunnagan, gave oral evidence.

The report calls on the Government to regularly review tax reliefs and removal of those that no longer fit their policy objectives, cost significantly more than expected or are vulnerable to abuse.

It focuses on concerns about the number and complexity of tax reliefs, along with lack of scrutiny of their cost and effectiveness. They recognise that part of the problem arises due to governments introducing new reliefs, often following lobbying from interested parties, which then prove difficult to remove even if there are known problems with their operation. The scale of this issue is demonstrated by the fact that 105 of the 339 identified non-structural reliefs (i.e. those designed to promote certain behaviour) were estimated to cost £195bn in 2021-22. This equates to 72% of the health and social care budget (£272bn) in the same year.

Tax reliefs were also identified as creating opportunities for abuse, most clearly highlighted by evidence around R&D tax reliefs. Recent data (published since the TSC report was compiled) has suggested that levels of fraud and error in these reliefs are, in fact, much greater than previously estimated. Alex pointed out that, in addition to poor tax policy design issues, HMRC did not have sufficient resources to police the potential abuse of reliefs. In particular he referred to issues dealing with tens of thousands of R&D relief claims submitted every year.

The report refers to the closure of the Office for Tax Simplification (OTS) and the difference between their remit, which was to review the existing tax system, and a new focus by the Treasury and HMRC on tax policy design, which will only consider new tax policies.

The TSC call for a number of actions, including designating non-structural reliefs as public spending so they can be properly scrutinised as such. They also recommend five year reviews of each relief with a view to removing those that no longer serve policy requirements. While we support all of the recommendations, the volume and nature of the work involved would require significant resources and political commitment. Bearing in mind the closure of the OTS, it seems likely that this is not going to be top of anybody’s priority list.

TaxWatch have identified that it is not just in the area of reliefs where old tax policies linger without review of their purpose or effectiveness. We will shortly be publishing an analysis of issues around property taxation that we believe should be substantially reformed.

1Tax Reliefs, House of Commons Treasury Committee, 18 July 2023, https://committees.parliament.uk/publications/41067/documents/200054/default/

Around £1bn per year lost to fraud and error in R&D tax relief claims

20th July 2023 by Claire Ralph

£1.13bn – revised estimate of error and fraud in 2020-21 (previously £338m)
24.4% – revised rate of error and fraud in SME scheme (previously 5.5%)
£1.05bn – estimated error and fraud in 2022-23

HMRC have finally published initial data from their random enquiry programme (REP) into R&D tax relief claims which indicates significant underestimates in previous calculations of fraud and error in the schemes.

Data only enables them to restate 2020-21 figures at this stage (due to time lags in completing enquiries) but these suggest £1.13bn was lost to fraud and error in the schemes in that year, up from the £338m previously reported. The bulk of this problem arises within the scheme for small and medium sized enterprises (SMEs) which accounts for over £1bn of that loss. This equates to a staggering 24.4% rate of error and fraud in the SME scheme.

HMRC’s initial estimate of the most recent tax year (2022-23) is £1.05bn lost to error and fraud related to R&D tax schemes.

TaxWatch has been reporting on problems within the R&D claims industry for some time. In particular we have focused on the increasing number of largely unregulated advisers operating as ‘claims farms’. These have used hard sell sales techniques to persuade businesses to make claims for spending that at best pushes the boundaries of the rules and at worst clearly does not qualify. The advisers take a percentage cut of the benefit received so have an incentive to claim the largest amount possible. HMRC’s pay now, check later process means that money is paid out initially, resulting in firms claiming they have a 100% success rate. However, we are aware of cases where, when HMRC subsequently challenge a claim, the problem advisers leave their clients to deal with the enquiry, keeping the cut they have already taken.

Despite widespread discussion of these issues within the R&D claims industry, HMRC have been slow to tackle this problem. With almost 85,000 claims made in 2020-21and limited detail about each claim provided to HMRC then policing the schemes is a huge task. However, the failure to get a grip on this issue is likely to have fuelled abuse of the schemes as advisers’ confidence in their ability to get away with it increased.

Recent increases in compliance activity by HMRC have been widely reported. Unfortunately this is alongside recurring reports of lack of skilled and experienced staff to deal with what is complex legislation. TaxWatch has long identified concerns about resourcing of HMRC for compliance activity, particularly when skilled staff recover much more than they cost (HMRC report rates of return of around 18:1). An additional concern here is that poor handling of enquiries is discouraging genuine claimants from pursuing relief through these schemes. We are aware of one business that has actually moved its R&D facility outside the UK following frustrations at how their claim was being investigated. This could end up with the worst of both worlds whereby the businesses intended to be supported do not claim and those that don’t qualify walk away with the money.

HMRC has had its resources cut by large amounts over recent years while having to deal with significant extra responsibilities of Brexit and the Covid support schemes. The nature of the work means that new investigation resources cannot just be produced at short notice as it takes some years for people to be fully trained. The problem with R&D tax reliefs identified by this new data puts a spotlight on a more widespread problem of inadequate long term funding and planning of resources for HMRC. This requires attention before large amounts more money are lost.

HMRC’s 2023 Tax Gap report: Proportion of tax going unpaid unchanged from previous year

21st June 2023 by TaxWatch

Latest HMRC estimate of non-compliance unchanged from previous year, at 4.8% of all tax owed
Absolute Tax Gap figure is £35.8bn – up from £30.8bn the previous year
Changes to small business corporation tax methodology reveal a significant increase in this tax gap

The amount of tax lost in the 2021-22 financial year was 4.8% of the total tax owed, the same figure as the previous year, according to HMRC’s latest Tax Gap report.

In absolute figures, the amount of tax lost was £35.8bn – up from £30.8bn in the previous year.

HMRC has been collecting data and making estimates of the Tax Gap since the early 2000s, and has published them every year since 2008. It’s the only tax authority in the world that publishes an annual estimate of tax losses for all forms of taxation.

The Tax Gap is defined as “the difference between the amounts of tax that should, in theory, be collected by HMRC, against what is actually collected”. This is a broad measure of tax non-compliance, which covers tax losses arising for a variety of reasons – from innocent mistakes to complex frauds carried out by criminal gangs.

The Tax Gap takes into account the amount of tax collected through HMRC’s enforcement activity – known as the ‘compliance yield’.

Despite a long-term reduction in the reported percentage tax gap figures, there are a number of data points in HMRC’s report which deserve a closer look.

Points of interest

Small businesses are responsible for the largest proportion of the overall tax gap – 56%. Their share has been consistently increasing over the last few years, from a low of 38% in 2016-17. It’s clear that the main problem is with Corporation Tax, where small businesses have had a tax gap of almost 30% for the last three years – up from around 17% in the mid-2010s. No other major tax type has seen an increase in its tax gap figure of anything like these amounts. One possible explanation is that data collection has improved, as the report refers to a new random enquiry programme into small business corporation tax.

A recent House of Lords Finance Bill Subcommittee[1] in relation to R&D reliefs, hearing also heard evidence of a new random enquiry programme, which was expected to provide more accurate data around error and fraud in the small and medium enterprise (SME) scheme. It therefore seems likely that some of the increased corporation tax gap for small businesses is a result of R&D fraud and error, but this data is unlikely to be published before the HMRC annual return and accounts for 2022-23 are published in July. HMRC has already reported that 7.3% of claimed R&D by SMEs is thought to be incorrect, so it will be interesting to see if this increases by a significant amount.

Last year, HMRC committed to publishing figures for the “offshore” tax gap during 2023. HMRC receives data about assets owned by UK taxpayers in other countries via an automatic exchange of information programme. HMRC now says it will use this data in a random enquiry programme to calculate a standalone offshore tax gap for the Self-Assessment population. This will be published in the autumn[2]. The data included in the latest Tax Gap report uses a random enquiry programme to arrive at estimates for non-compliance, stratified to give more weight to wealthier taxpayers. However, with a total sample in 2019-20 of fewer than 2,000 enquiries, it seems unlikely that this will accurately reflect offshore compliance – which is, presumably, the reason for the new data.

Individuals classed by HMRC as wealthy – which covers around 800,000 people – are responsible for around 5% of the tax gap, while all other individuals combined are only responsible for around 6% of the gap. While wealthy taxpayers are dealt with by specialist teams and have a much greater level of scrutiny, it seems apparent that more could be done with this group of taxpayers to increase compliance. It’s also assumed that this group will be more likely to feature in the offshore tax gap, which is to be measured separately (see above), so the 5% figure may actually be an underestimate of their share of the tax gap.

Error and carelessness account for around 45% of the tax gap, indicating that other, more serious, behaviours are involved for over 50% of the gap – a sum of nearly £20bn.

Last year’s Tax Gap report specifically excluded figures for fraud and error arising in the Covid schemes. The CJRS and SEIS ended on 30 Sept 2021[3], but it isn’t clear from the 2023 HMRC Tax Gap report whether the data includes the Covid schemes. However, the estimate for Covid scheme fraud and error in the HMRC Annual Report and Accounts for 2021-22 is £617m, which wouldn’t have a significant impact on the overall percentage.

[1] House of Lords Economic Affairs Committee Finance Bill Sub-Committee – corrected oral evidence: Draft Finance Bill 2022-23 https://committees.parliament.uk/oralevidence/11607/pdf/

[2] HMRC Tax gaps: Methodological annex https://www.gov.uk/government/statistics/measuring-tax-gaps/methodological-annex#chapter-a-introduction

[3] Gov.uk – Claim for wages through the Coronavirus Job Retention Scheme https://www.gov.uk/guidance/claim-for-wages-through-the-coronavirus-job-retention-scheme

Public Accounts Committee says HMRC not doing enough to deter tax cheats

2nd May 2023 by Alex Dunnagan

HMRC must do more to deter and punish tax cheats following disruption to its compliance programme caused by the pandemic, according to a new report by the Public Accounts Committee.

It shows HMRC opened 32% fewer cases in 2020-21 than the previous year, after 4,000 compliance staff were redeployed to work on Covid support schemes. This led to a £9 billion reduction in the amount of tax collected through its compliance work.

HMRC has said publicly that it isn’t planning to prosecute as many people as it did before the pandemic, and the Committee – which was given evidence for its report by TaxWatch – says it’s concerned this means there won’t be a credible deterrent effect.

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “HMRC’s ability and efforts to draw in the tax that is so desperately needed to pay for public services were seriously compromised by the pandemic. That alone is bad enough in the current economic crisis but we need to see more effort from HMRC get this back. It is simply not doing enough to deter and punish cheats, even at very high levels.”

The report also called on HMRC to do more to help those who want to pay their taxes correctly, by supporting those with tax debts and improving its customer service levels. The Committee says it wants to ensure “it is never easier for people to cheat the tax system than to comply with it.”

One of the report’s recommendations, that HMRC should build in more resilience to the tax system given the strong value for money case for increasing resources, mirrors one of TaxWatch’s own recommendations in its submission to the Committee. TaxWatch has consistently argued that HMRC needs to have long-term resource planning and funding because of the positive return on investment, with each pound spent bringing in as much as £18 of additional tax revenue.

Beyond the Loan Charge: Will the most recent proposals finally shut down disguised remuneration schemes?

24th April 2023 by Dr Pete Sproat

In 2016 Chancellor George Osborne declared the introduction of the loan charge would “shut down disguised remuneration schemes”.
Yet HMRC estimates 31,000 people used such schemes in 2020-21, resulting in a loss of £400m in tax.
The authorities have attempted to address the demand and supply of such schemes, using mainly administrative and civil penalties.
While tens of thousands face the loan charge, few enablers have faced hurtful sanctions.
Fewer than six financial penalties for enabling defeated tax avoidance schemes have been issued since 2017.
Fewer than five investigations into disguised remuneration tax avoidance schemes resulted in a criminal charge since 2017.
Recent proposals are unlikely to shut down the disguised remuneration schemes anytime soon.

In the recent Spring Budget the government proposed to consult on a new criminal offence for those who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme¹. This is welcome news, for the latest official estimates suggest that in 2020-2021, approximately 31,000 people were still using such schemes, and the UK lost £400m in tax as a result². A staggering 99% of the tax avoidance market³ involves disguised remuneration (DR) – contrived arrangements that use schemes which use loans, annuities, shares or other valuables to make allegedly non-taxable payments in lieu of wages. Hospital workers constitute the largest group who are involved in such schemes today⁴. Many do not know they are participants in such schemes – at least until later when HMRC demand the tax owed. Others are unaware of HMRC’s view these schemes do not work⁵.

However, in terms of penalties it has been the users, not those promoters and enablers of unsuccessful schemes, who have been the most heavily penalised, most notably in the form of the Loan Charge imposed upon 50,000-100,000 people⁶. Introduced in the Finance Act 2017, the controversial policy places an income tax charge on the value of outstanding ‘loans’ on 5th April 2019 held by people who used disguised remuneration schemes. As originally drafted, the charge applies to any ‘loan’ entered into since 1999. In the 2016 Spring Budget speech, then Chancellor of the Exchequer George Osborne declared the introduction of the loan charge would: “Shut down disguised remuneration schemes”⁷. It is clear that his prediction has yet to come true.

Action taken

Over the past two decades, the authorities have correctly attempted to address both sides of the tax avoidance problem. In terms of demand, legislative changes have required the earlier payment of tax in dispute, as well as the loan charge. HMRC has been gathering lots of information about the tax avoidance market and this has enabled it to try to nudge and prompt the public into compliance, using emails, blogs, webpages, dedicated agent services and a helpline⁸.

The collection of information has also facilitated HMRC’s attempts to deal with suppliers of schemes operating outside of the spirit of the laws on tax. Thus, tax advisers have been required to disclose details of their avoidance schemes promptly under the Disclosure of Tax Avoidance Schemes (DOTAS) regime since 2004. However, while this enabled HMRC to identify many potential problems more quickly, within a decade the government felt the need to introduce the Promoters of Tax Avoidance Schemes (POTAS). It empowered HMRC to impose conditions on the behaviour of: “a small number of promoters who operate in a culture of non-disclosure, non-co-operation and secrecy”⁹. It also enabled the issuing of notices to promoters to stop them from selling schemes that had been defeated.¹⁰ Since then, HMRC has been authorised to impose financial penalties upon any enablers involved in the managing, marketing, designing or financing of defeated, abusive tax arrangements that were entered into on or after 16 November 2017.

HMRC has introduced, or supported, new codes of behaviour including its own Standard for Agents (2016), and the tax and accountancy professions’ Professional Conduct in Relation to Taxation (2013), and it reports tax advisors to their professional bodies. In addition, it can suspend tax agents’ access to its systems, or refuse to deal with any who seriously abuse the tax system¹¹. HMRC frequently litigates civil action in tax tribunals, and occasionally it takes action against tax evaders and the promoters of tax avoidance schemes in criminal courts.

As a result of these changes and legal decisions, the nature and focus of disguised remuneration schemes have changed over the last decade or so. A HMRC policy paper states: “their creation and promotion have moved to the more disreputable and shadier end of the market”¹². These days, marketed avoidance schemes almost always involve employer businesses and “umbrella” companies engaging larger numbers of contractors or agency workers, operating arrangements which falsely claim to reduce Pay As You Earn and National Insurance Contributions. Umbrella companies can provide a legitimate business structure and services for contractors, but in some instances, they facilitate avoidance schemes.

Currently, HMRC estimate there are around 70 to 80 non-compliant umbrella companies in operation¹³. This is no improvement on its suggestion there were 60 to 80 of these operating¹⁴ in 2019-20. Similarly, each of its recent reports on the marketing of disguised remuneration schemes note about 20 to 30 promoter organisations: “are behind most of the tax avoidance schemes that are marketed to the UK public”¹⁵. The fact that as many new promoters and companies have entered the market in recent years as have left, suggests HMRC’s actions have failed to shut down disguised remuneration schemes. One result is the authorities have proposed or introduced, even more changes in the last few years.

Will the latest approaches defeat disguised remuneration schemes?

Recent ideas to reduce demand include; publishing a guide to help contractors engaged through umbrella companies, greater cooperation between HMRC and the Advertising Standards Authority (ASA), and listing promoters and enablers of tax avoidance schemes in the hope recipients of their advice will leave these schemes.

However, it is difficult to suggest these will have more than a marginal impact on the demand side. It is incredibly optimistic to expect most contractors to read official guides, or the newly employed to walk away if they find out they are paid in an unusual manner¹⁶.Similarly, even if the enablers are ‘named and shamed’ contemporaneously – presently it can take years to be listed, and names are removed from the list after 12 months – it is unrealistic to assume tens, if not hundreds of thousands of temporary workers will conduct regular checks on those who pay them A slight decrease in the number of deceptive adverts may mean some people do not fall for the schemes. The ‘naming and shaming’ list may also have a marginal impact on the supply side, in that some potential enablers may not risk the listing of reputation, or may fear being reported to their professional body as a result.

Interestingly, it was a listing on 18th August 2022 that triggered TaxWatch’s examination of Gateway Outsource Solutions and its complaint to the ICAEW about its director Paul George Ruocco¹⁷. However, while better contact with professional bodies may deter a few potential suppliers, these days promoters are almost never members of the professional bodies – as HMRC itself noted¹⁸. This then takes us on to consider other recent approaches to address the supply side.

To address the problems arising from the non-cooperation, delaying tactics by those promoting tax avoidance schemes and their dissipation of assets in order to avoid fines, the DOTAS and POTAS regime has been toughened to allow HMRC to obtain information from promoters earlier than in the past. The Finance Act 2022 authorised HMRC to apply for freezing orders when it has a good arguable case there may be a dissipation of assets to prevent the imposition of a tax penalty. It also enabled the organisation to petition a court to wind-up companies operating against the public interest. This can include persistent non-compliance with anti-avoidance rules, or a repeated failure to respond to HMRC’s requests for information¹⁹.

To address the problem of ‘phoenixism’ – the re-birth of a company by people involved in one that has been dissolved in order to avoid tax obligations – the government amended legislation to allow POTAS obligations to be transferred to other scheme-promoting entities controlled by the same individuals. To facilitate this, HMRC proposes better cooperation with the Insolvency Service. It has also suggested giving relevant cases to the Financial Conduct Authority. Finally in this regard, the government introduced legislation which allows HMRC to impose a new penalty on UK-based entities that assist the activities of offshore promoters. In general, these people are more difficult to deal with because of the complex nature of schemes and the UK’s reliance on the authorities elsewhere. The value of the new penalty on the UK promoter can be as high as the total fees earned by all those involved in the development and sale of that tax avoidance scheme – potentially including fees paid directly to the offshore promoter, and any other entities or persons who formed part of the ‘promotion structure’ for the scheme.²⁰

These moves are a step in the right direction, in particular the stiff financial penalties facing UK-based entities in league with overseas promoters contained in the Finance Act 2022. However, to produce a sudden step-change HMRC needs to implement all of these approaches – especially the tougher ones – at speed and at scale. Unfortunately, this seems unlikely.

For example, HMRC has had the ability to charge an enablers penalty since 2017. However, it requires the scheme use to be defeated and an opinion from the General Anti Abuse Rule (GAAR) panel. The first opinion of the panel in respect of an enablers’ penalty was published in October 2022. In addition, while it has been possible to obtain freezing orders and winding-up orders for almost a year, not one of either²¹ had been obtained by the time we spoke to HMRC in March 2023. This suggests each process either takes a long time or HMRC did not have targets in mind when the legislation was introduced.

The speed at which various sanctions and financial penalties can be imposed by HMRC is unlikely to increase anytime soon. This is because the number of cases outstanding at the First-tier Tax Chamber has increased by 52% to 45,000 in the last year – primarily, as a result of it receiving a high number of cases and the time it takes to decide each²².

The scale of implementation is important for if enablers are to be deterred, they need to believe there is a good chance they will face a strong sanction. This seems unlikely, given HMRC has not implemented the tougher sanctions at scale in the recent past.

It did make 75 professional interest disclosures for any breach of its Standards for Agents to professional bodies²³ between 2018-19 and 2021-22, but this is will have little impact given most promoters are not members. HMRC has ‘named and shamed’ 27 promoters of tax avoidance schemes²⁴ as of 23rd March 2023. While we will not find out the impact of this until next year, it is unlikely to put a stop to the problem of mass-marketed avoidance schemes given HMRC’s belief new companies continue to join this illicit market as others leave.

As for the use of sanctions that have a greater chance of deterring, HMRC has issued fewer than six financial penalties for enablers of defeated tax avoidance schemes²⁵ since 2017. Similarly, it opened only 15 criminal investigations in relation to arrangements that it categorised as disguised remuneration tax avoidance schemes between 1st April 2017 to 8th March 2023. Of these, fewer than five progressed to a charging decision or resulted in a criminal conviction²⁶. Surely, this is a major reason the number of promoters has remained the same in recent years?

As for the ideas in the recent budget, the idea of expediting the disqualification of directors of companies involved in promoting tax avoidance is unlikely to be a game-changer for disqualified directors can simply find others to front their companies. The proposal to prosecute those who refuse to stop promoting schemes is more promising – especially if it contains strong sanctions including imprisonment. However, even if it is proposed the new law will cover schemes in operation now, it is unlikely to be applied at the appropriate scale anytime soon. The consultative and legislative processes take a while, and not everything gets through it – as advocates of compulsory professional indemnity insurance for tax advisers will remember. Similarly, the proposal could be shelved afterwards – as happened recently to the plan to create a single enforcement body to monitor the treatment of employees by umbrella companies and others.

Unless HMRC decides to change its criminal investigation efforts from focusing on “very serious evasion and organised crime”²⁷, the number of enablers prosecuted is unlikely to change dramatically. In sum, he main reasons the number of promoters is not declining is because enforcement action takes too long, many of the actions are weak and stronger sanctions are rarely applied. What needs to happen is for HMRC to use its wide-ranging set of powers – including criminal investigations – at speed and at scale. Perhaps then the government will be able to do what George Osborne’s loan charge failed to do, shut down disguised remuneration schemes. Hundreds of millions of pounds a year in lost tax revenue are at stake.

This story was featured in The Times

1 Spring Budget 2023, HM Government, 15 March 2023, https://www.gov.uk/government/publications/spring-budget-2023/spring-budget-2023-html

2 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

3 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

4 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

5 Tax avoidance loan schemes and the loan charge, HMRC, updated 9 February 2022, https://www.gov.uk/government/publications/loan-schemes-and-the-loan-charge-an-overview/tax-avoidance-loan-schemes-and-the-loan-charge . For a more detailed discussion of the law with regards to tax avoidance see TaxWatch’s briefing: Is Tax Avoidance Legal? Available from: http://13.40.187.124/is_tax_avoidance_legal/

6 Ray McCann, President of the Chartered Institute of Taxation in answer to Q.105. Oral Evidence: The conduct of tax enquiries and resolution of tax disputes, House of Common Treasury Sub-committee, HC 733, 10 December 2021, https://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-subcommittee/the-conduct-of-tax-enquiries-and-resolution-of-tax-disputes/oral/93722.html

7 Budget 2016: George Osborne’s speech, Gov.uk, 16 March 2016, https://www.gov.uk/government/speeches/budget-2016-george-osbornes-speech

8 Managing tax compliance following the pandemic: HM Revenue & Customs. SESSION 2022-23. National Audit Office. 16 December 2022. HC 957. https://www.nao.org.uk/wp-content/uploads/2022/12/managing-tax-compliance-following-the-pandemic-report.pdf

9 HMRC Investigations Handbook 2016/17 (Bloomsbury, 2017), M. McLaughlin, (ed). p147

10 New powers for HMRC: fair and proportionate? House Of Lords, Economic Affairs Committee, 19 December 2020, p11.

11 Raising standards in the tax advice market, HMRC, 10 March 2022, https://www.gov.uk/government/publications/raising-standards-in-the-tax-advice-market-hmrcs-review-of-powers-to-uphold-its-standard-for-agents

12 The Rt Hon Jesse Norman MP, the then Financial Secretary to the Treasury in: Tackling promoters of mass-marketed tax avoidance schemes, HMRC, updated 23 March 2020, https://www.gov.uk/government/publications/tackling-promoters-of-mass-marketed-tax-avoidance-schemes

13 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

14 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

15 Use of marketed tax avoidance schemes in the UK (2020 to 2021), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk-2020-to-2021

16 In addition, Meredith McCammond of the Low Incomes Tax Reform Group suggested: “The list will also do nothing for those who may have little choice to be paid by a non-compliant umbrella company if they want the work.” ‘HMRC adds three AML schemes to its tax avoidance blacklist’, Contractor, Simon Moore, 31st January, 2023, https://www.contractoruk.com/news/0015769hmrc_adds_three_aml_schemes_its_tax_avoidance_blacklist.html

17 Director of suspected HMRC tax avoidance scheme continues to be member of professional body, TaxWatch, 02 Februart 2023, http://13.40.187.124/hmrc_name_shame_complaint/

18 Use of marketed tax avoidance schemes in the |UK (2018 to 19), HMRC, updated 30 November 2022, https://www.gov.uk/government/publications/use-of-marketed-tax-avoidance-schemes-in-the-uk/use-of-marketed-tax-avoidance-schemes-in-the-uk

19 Clamping down on promoters of tax avoidance: summary of responses, HMRC, updated July 2021, https://www.gov.uk/government/consultations/clamping-down-on-promoters-of-tax-avoidance/outcome/clamping-down-on-promoters-of-tax-avoidance-summary-of-responses

20 Clamping down on promoters of tax avoidance: summary of responses, HMRC, updated July 2021, https://www.gov.uk/government/consultations/clamping-down-on-promoters-of-tax-avoidance/outcome/clamping-down-on-promoters-of-tax-avoidance-summary-of-responses

21 According to a spokesperson from HMRC, 13 March 2023.

22 Tribunal Statistics Quarterly: July to September 2022, Ministry of Justice. 8 December 2022, Section 8. www.gov.uk/government/statistics/tribunal-statistics-quarterly-july-to-september-2022/

23 During the period 2018-19 to 2021-22. HMRC FOI2022/72035, 05 December 2022.

24 According to a spokesperson from HMRC, 14 March 2023.

25 FOI2023/12152, HMRC, 23 March 2023. HMRC used a legal exemption in the Freedom of Information legislation to avoid providing a more precise answer.

26 FOI2023/08373, HMRC. 08 March 2023. HMRC used a legal exemption in the Freedom of Information legislation to avoid providing a more precise answer.

27 Jim Harra, Chief Executive and First Permanent Secretary, HMRC, in answer to Q 176. The Work of HMRC, Oral Evidence. House of Commons Treasury, 30 November 2022, https://committees.parliament.uk/oralevidence/11972/html/

Can a posse of professional bodies clean up tax dodge city?

17th April 2023 by Dr Pete Sproat

Following an era of austerity and a series of tax scandals, there has been a sea change in the public attitude towards tax evasion and those who create elaborate tax avoidance schemes that go against the spirit of the law.

One aspect of this change is the increased frequency of demands that ‘something must be done’. These include suggestions tax advisers should be subjected to additional rules and better enforcement by HMRC, while ideas such as mandatory membership of a professional body or regulation by an external body have been proposed in recent articles in AccountancyWeb by Ray McCann – former President of the Chartered Institute of Taxation – and Mark Lee – founder of the Tax Advice Network – respectively. TaxWatch’s Dr. Pete Sproat contributed to the journal’s debate by considering the broad requirements of an effective system of mandatory self-regulation by professional bodies in an article entitled: How can we regulate the tax profession better? The main ideas of his article on AccountancyWeb are reproduced here:

Held to account

The public’s desire to hold to account those who commit or facilitate tax evasion increases after each tax scandal. Accountability is also a major reason people choose members of professional bodies to provide tax advice. Customers believe professionals are unlikely to provide dubious advice because professional bodies insist on standards, and deal with those who breach them. Unfortunately, in practice promoters of tax avoidance schemes are “almost never members of the professional accountancy bodies” according to HMRC, while we at TaxWatch have found professional bodies to appear slow or reluctant to undertake disciplinary procedures against those who are suspected of breaching their rules.

If the solution is to be ‘self-regulation’ by mandated membership of a professional body, as implied recently in AccountancyWeb by Ray McCann, it would be better for the bodies to collectively propose a comprehensive plan for a system of mandatory self-regulation, than wait for a government minister to propose an externally regulated regime and then criticise it. It is suggested that to be effective, a system based upon professional bodies would consider the following aspects.

Membership coverage

Given HMRC suggests more than one in three tax advisors do not belong to a professional body, and almost all promoters of tax avoidance schemes belong to this group, any system of self-regulation that did not require compulsory membership of one of a number of specified professional bodies would be fatally flawed. Making membership compulsory would require government legislation.

Control authorisation

Those authorised to provide tax advice would need to be capable of following both tax laws and professional rules of conduct. Presently, professional bodies tend to assure this by use of entry qualifications and /or a period of experience working in the area. They also insist members hold professional indemnity insurance. Therefore, obtaining agreement on a credible set of minimum standards in these two areas should not be a problem in practice.

Professional bodies might also wish to propose directors of companies providing tax advice are authorised so that it is easier to make firms accountable for the actions of their employees. They might also like to consider whether tax advisors should complete continuing professional development.

Conduct rules and sanctions

Professional bodies would have to agree a minimum set of conduct rules and sanctions, if not ethics, to avoid regulatory arbitrage. This too seems a realistic possibility given the existence of the Professional Conduct in Relation to Taxation.

Monitoring the rules

A major advantage to professional bodies of mandatory self-regulation would be their ability to decide on their approach to monitoring the rules. It has been suggested that the regulatory and oversight arrangements provided by the ICAEW “already meets, and in some areas exceeds, the statutory regulatory requirement found elsewhere in the world”. Evidencing such claims in relation to countries with an external regulator such as Australia, could help persuade outsiders that this form of regulation would be the best option.

Thoroughness of investigations

Similarly, a joint approach to issues such as a statute of limitations, as well as the thoroughness and speed of investigations would be necessary. A proposal that included enhanced monitoring after an initial assessment of any complaint could help persuade sceptics that charlatans would have difficulty continuing to make money while a PB undertook a thorough investigation.

Adjudication panel

The sharing of an independent adjudication panel for judging breaches of the shared conduct rules would help avoid the criticism that the application of sanctions differed in practice. The fact the Chartered Institute of Taxation and the Association of Tax Technicians share the Tax Disciplinary Board shows this is not beyond the realm of possibilities.

Cost to advisers

When resisting calls for external regulation, advocates of self-regulation often cite cost – albeit without any real evidence. Indeed, it is impossible to evidence the claim self-regulation would be cheaper without a detail proposal as to what it, and an externally regulated regime, would look like. Presently, advocates of the latter are likely to suggest the annual cost to each tax advisors of their system would be in the region of $731 (£407.61) before tax, for this is the cost to each tax advisor of regulation by the Tax Practitioners Board in Australia. Professional bodies are advised to keep this in mind when designing a system that looks like it would work as well, or better, in practice.

Conclusion

The system as it currently stands is not working. Hopefully, this and the piece in AccountancyWeb, encourages the relevant professional bodies to take a more pro-active approach to problems in the tax advice market, and a more co-operative approach to reducing them. Alternatively, they could do nothing and hope the problems go away. Without evolution, the professional bodies may see an external regulator imposed on the profession.

Image by Limoredin from Pixabay.

R&D relief – still not working?

6th April 2023 by Alex Dunnagan

This piece on research and development tax relief was originally published in the R&D Tax Credit Insider newsletter on LinkedIn.

What does the money achieve?

R&D tax relief is an important government policy intended to incentivise businesses to incur expenditure on R&D that is ultimately expected to bring economic benefits. Efficient operation of the system behind it is vital to achieve this. One issue around tax reliefs more generally is that, once introduced, their costs and benefits generally get much less scrutiny than other direct government spending, even if they end up costing significantly more than forecast. It is critical that what is essentially government spending is producing beneficial results for the taxpayer alongside the claimant businesses.

There has long been debate about whether and how much R&D tax relief benefits the economy. Most advisers have stories of businesses that would not have been able to fund their innovations without the reliefs, and the generally held view is that businesses bring forward their R&D investment due to a greater appetite for risk resulting from the existence of the support. However, it also seems clear that at least a proportion of claims are made in relation to expenditure that was incurred without the businesses being aware of the relief so they could not have been incentivised to carry out that R&D.

The complexity of the schemes means many businesses and their ordinary advisers do not feel able to make claims themselves. This has resulted in the large market for R&D claims specialists in the same way that the increasing complexity of tax generally has increased the tax advice market. Of concern for R&D relief is the clear growth of firms of advisers using inappropriate marketing and promotion to persuade businesses to make unreasonable claims, taking a percentage cut in the process. It seems to be well accepted (and confirmed by HMRC estimates of fraud and error) that a proportion of the relief has been going to businesses who do not qualify, along with the fees to their advisers, in some cases a significant percentage of the claim. Recent years have seen little in the way of scrutiny from HMRC which has presumably encouraged more of this approach.

A further cut of the pot also goes in interest and fees to finance companies offering upfront loans against future receipt of claim repayments. It is understandable that businesses wish to improve their cashflow when waiting for repayments. However, the reliefs were not intended to support businesses changing their croissant recipe along with their associated advisers and finance companies.

These concerns have led to the legislative changes coming in this year, including the reduction in benefits in the SME scheme, which will ultimately impact genuine R&D claimants and their advisers alongside the less reputable end of the market.

‘Problem’ advisers

This piece will not rehearse the extreme examples of R&D projects claimed to be eligible for relief by a variety of less reputable advisers but it is clear that these are the source of significant numbers of problem claims.

The changes to legislation requiring pre-notification of claims six months after the end of the accounting period will go some way to preventing speculative backdated claims that appear to be part of the ‘overmarketing’ problem.

The requirement to identify advisers compiling the claims alongside a responsible officer within the claimant business is also expected to improve compliance. However, the first pre-notifications won’t happen until around September 2024 and it will be getting on for two years before HMRC are receiving information in a digital format to enable proper targeting of risk assessment. This is plenty of time for many more spurious claims, which could lead to further losses in the region of £1bn based on most recent estimates of fraud and error, which would further discredit the system.

Many people within the industry have been advocating for compulsory professional regulation for R&D advisers (and more widely in the tax adviser industry)¹. Research has shown that 80% of advisers that are not members of professional bodies have no professional qualification², which is surely unusual in the financial services industry and gives rise to significant risks to both clients and HMRC. However, consultation last year on improving the tax advice market resulted in no changes and intentions for a further consultation that has not yet appeared. In the meantime, problem advisers, who are generally unregulated, are continuing to abuse the system and potentially cause financial damage to those unwittingly accepting their advice if boundary-pushing claims are eventually refused.

The issue of regulating tax advice is obviously a complex one and there is no straightforward answer but the fact that HMRC are still failing to deal properly with problem agents results in poor outcomes for everyone involved in R&D reliefs. It is therefore critical that targeted compliance efforts against problem advisers are stepped up prior to the new legislation kicking in.

HMRC approach and resources

TaxWatch recently submitted evidence to the Public Accounts Committee enquiry into managing tax compliance following the pandemic and many of the issues raised are relevant to how R&D policy is formed, how it works in practice and how HMRC handle compliance³.

The report highlights issues with increasing complexity of tax legislation alongside the closure of the Office for Tax Simplification, reductions in the numbers of tax professional staff in HMRC and inexperienced staff working in compliance, lack of long term funding and resourcing for compliance, and lack of evaluation of new legislation and different compliance approaches.

Recommendations included:

urgently explaining the new mandate to be given to HMRC and the Treasury to simplify the tax code
committing greater funding to compliance given its positive return on investment
putting in place long term resource planning to ensure a consistent and robust compliance response
putting in place a programme of evaluation in relation to all new legislation and compliance projects
considering what other action can be taken against problem advisers.

As Malcolm Henderson said in a previous piece, the majority of staff at HMRC want to provide good customer service, and the experience held within the previous specialist R&D units encouraged claims where they were due as well as ensuring compliance with the rules⁴. Obviously that level of support has been overwhelmed by the huge increase in the numbers of claims, and the current rush to tackle compliance concerns has resulted in the reported scattergun approach to identifying risks and inconsistent treatment between different officers.

Of particular concern is recent evidence from the Institute for Government that between March 2016 and March 2022 there has been a reduction of 8,160 Full Time Equivalent (FTE) staff working within the tax profession in the civil service.⁵ A reduction of that level of highly qualified staff within HMRC obviously impacts on their performance across all sectors and will almost certainly affect the department’s approach to R&D compliance.

There is clearly a concern in the R&D industry that HMRC’s approach to compliance is not working. It has been suggested that compliance staff are not properly trained for the role and do not have enough experienced support to advise on the R&D definition. There appears to be a general feeling that they are often challenging the wrong cases, costing businesses time and money, creating a disincentive to make future claims

The definition of R&D belonged to the Department for Business, Energy, and Industrial Strategy (BEIS) (possibly now Science, Innovation and Technology?). That definition is a specific difficulty as it is vital for establishing eligibility but is not a tax concept. The original R&D teams had sector specialist who were available to assist with applying the definition. It is not clear whether those roles still exist, except for software cases where staff from the Chief Digital and Information Office (CDIO) are providing guidance. However, this raises the question whether there are non-tax professionals within government who would be better able to test claims against the eligibility definition, alongside the tax compliance staff dealing with other aspects.

It seems clear that without a significant improvement in HMRC’s compliance performance on R&D cases, the schemes are likely to suffer further damage impacting on the overall benefits to the economy.

1Raising standards in the tax advice market: Summary of responses and next steps, HMRC, November 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934614/Raising_standards_in_the_tax_advice_market_-_summary_of_responses_and_next_steps.pdf

2Understanding the characteristics of unaffiliated tax agents, HMRC, November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037031/Understanding_the_characteristics_of_unaffiliated_tax_agents.pdf

3Written evidence submitted by TaxWatch, Public Accounts Committee, January 2023, https://committees.parliament.uk/writtenevidence/115783/pdf/

4R & D tax credits: Customer service examined, R & D tax credit insider, 2 February 2023, https://www.linkedin.com/pulse/rd-tax-credits-hmrc-customer-service-examined-rufus-meakin?trk=news-guest_share-article

5Civil Service Staff Numbers, Institute for Government, 15 December 2017, https://www.instituteforgovernment.org.uk/explainers/civil-service-staff-numbers

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 http://13.40.187.124/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, http://13.40.187.124/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