A step in the right direction, but more to be done
- £161m investment in HMRC compliance work – set to bring in an additional £3bn over next five years
- New 50 strong HMRC team tackling R&D fraud to be in place by 2023
Fraud within the tax system costs the UK tens of billions of pounds a year,The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/ with HMRC recently put under intense scrutiny on their record of tackling the problem. HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/ Arguments can be made about the strategy HMRC pursues in tackling tax fraud, but ultimately, everything the department does comes down to resources available as a result of government decisions on investment.
While most media coverage of the Chancellor’s Spring Statement last month focussed on the cost of living crisis, one announcement that appears to have flown under the radar is an extra investment in HMRC’s compliance work and a new team tackling the abuse of R&D. Though these actions won’t see the eradication of tax fraud in this country, they are certainly a positive move.
HMRC is set to see an additional £161m of funding for its compliance work, which is expected to generate more than £3bn in additional revenues over the next five years. With such a healthy return on investment, why isn’t more being spent on compliance?
The March 2021 Spring Statement revealed that refocusing attention on covid fraud would lead to less tax being collected until 2023-24 as staff were moved from other areas of compliance work. Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020.
The 2022 Spring Statement sets out additional compliance resources for HMRC and suggests that the £161m investment will bring in an additional £3bn. HMRC is expecting an additional £18 in tax revenues for every £1 spent.
It was announced in December last year that the DWP is set to receive £510m for additional compliance work to tackle fraud and error, with the expectation that this will “deliver savings” of £3.15bn by 2026-27.See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/ The amount of fraud in the benefits system is far smaller than that in the tax system, and the predicted return on investment is £6 for every £1 spent – 1/3 of the ROI for tax compliance. The question the government needs to answer is: why is more being spent on benefits compliance, which results in a lower return on investment?
New R&D team to tackle abuse of reliefs
In the run-up to the Spring Statement there were a number of rumours that the Chancellor was about to overhaul the way in which R&D reliefs worked.Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014 In his Mais lecture of February 2022, Sunak stated that that “in spite of spending huge and rapidly growing sums, clearly it [R&D] is not working as well as it should.”
However, when it came to the statement, very little new was actually announced. There was talk of legislation on overseas R&D expenditure and the inclusion of cloud computing costs, but for the most part the message was that we should wait until Autumn for further developments. The Chancellor said, “the government will consider what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.” This is not the first time we have been told to wait and see. The Autumn Budget 2021 referred to combating the abuse of R&D tax reliefs “later in the Autumn”. It appears the can has been kicked further down the road.
In November 2021, a treasury report on R&D Tax Reliefs referred to “the creation of a new cross-cutting team focussed on abuse.” R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf The Spring Statement also mentioned this “new cross-cutting HMRC team”, but failed to give any further detail. TaxWatch approached HMRC for more information, and we were told that the aim was for the team to be set up by 2023. An HMRC spokesperson said:
“We are committed to tackling error and fraud within R&D Tax reliefs. We are creating a 50-strong team, working right across HMRC, to further support the ongoing work in this area.
“This new team and the other measures announced in the Autumn are designed to tackle abuse and boundary pushing while limiting the impact on compliant businesses.”
It’s likely that these 50 will be moved from elsewhere within HMRC, rather than being new staff altogether. Details should become clearer throughout the year, and there is a realistic possibility that this new team will somehow involve the fraud investigation team.
The creation of this new team is a step in the right direction. If the team functions well and is able to target the right cases for inquiry, we may start to see HMRC begin to make serious progress against the egregious abuse within the R&D system. Watch this space.
|↑1||The tax fraud gap – 2021 edition, TaxWatch, 16 September 2021, https://www.taxwatchuk.org/tax_fraud_gap_2021/|
|↑2||HMRC’s record on covid support and tax fraud under the microscope, TaxWatch, 14 February 2022, https://www.taxwatchuk.org/hmrc_record_covid_support_fraud/|
|↑3||Spending Review 2020, HM Treasury, 15 December 2020, https://www.gov.uk/government/publications/spending-review-2020-documents/spending-review-2020|
|↑4||See Funding to fight Covid related tax and benefits fraud, TaxWatch, 29 December 2021, https://www.taxwatchuk.org/covid_fraud_spending_dwp_vs_hmrc/|
|↑5||Sunak plans overhaul of ‘generous’ R&D tax credits, Financial Times, 02 March 2022, https://www.ft.com/content/c948c5c5-06cb-4770-a789-e8146df49014|
|↑6||R&D Tax Reliefs, HM Treasury, 30 November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037348/RD_Tax_Reliefs.pdf|