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chancellor

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, http://13.40.187.124/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

Supermarkets to receive billions from government coronavirus package

27th March 2020 by George Turner

The coronavirus outbreak will not be easy for anyone – but there is no doubt that some industries and businesses are set to do well from the widespread social changes that the crisis demands.

One of those industries is our supermarkets. No one can deny that supermarkets are doing an exceptional, difficult and vital job keeping the country supplied during the crisis.

However, the empty shelves seen across the country are not a sign that people have stopped buying food. Quite the opposite. UK supermarkets are currently seeing levels of demand usually experienced around Christmas as households face the prospect of two weeks’ isolation if anyone in the home gets a cough. This is not just a case of Christmas come early. Christmas is coming again and again and again. High volumes have been paired with higher prices as companies remove multi-buy deals to discourage panic-buying.

This is unlikely to be just a coronavirus blip. Social distancing measures may need to be maintained for some time after the outbreak is tamed, meaning that people are likely to be spending more time at home. The shift to home working for millions of people is also likely to persist for some time, as many companies that have been forced to build an infrastructure to allow home working will be more relaxed about their employees doing so in the future.

All of this will mean that in the long term, supermarkets are likely to make significant gains from the coronavirus outbreak. This is probably the last industry right now that needs a bailout – however, they are about to receive a cash bonanza from the government.

One of the big items of spending the government has announced in response to the pandemic been the business rates holiday for all retailers. The holiday applies to all retailers, whether or not they have been forced to close during the outbreak.

According to The Grocer, superstores and hypermarkets pay a total of £2.68bn in business rates a year. Add to this an extra few hundred million paid by smaller stores and the total bill hits £3bn.

The industry is concentrated, with a few companies making up a large percentage of shop space. The largest, Tesco, claims to pay around £700m in business rates a year. A week ago, Sainsbury’s put out a stock market announcement welcoming the Chancellor’s announcement on business rates, pointing out that the company paid £500m in business rates on its shops. Shares in the company were up over 10% on the news. The stock-market announcement said that the company was awaiting details of the scheme, however, it seems certain that they will qualify with the Chancellor stating in his first coronavirus update:

“We’re abolishing business rates altogether this year if you are in hospitality, retail and leisure.”

The amount of money this represents is mind boggling. To put it into context, Tesco made pre-tax profits of £1.6bn last year. A business rates holiday of £700m represents 50% of their total profit. For Sainsbury’s their business rates bill is more than double last year’s pre-tax profit of £239m.

Until now, the response of the government to the immediate crisis has been to throw money at entire sectors of the economy. Given the speed at which the government has to react to events, that is to some extent understandable.

However, there are risks to this approach and some significant questions which will need to be worked through. Does such broad intervention by the government, by rewarding both winners and losers, lead to economic inequalities being exacerbated?

Providing such broad interventions is easier and quicker to administer, but it is expensive. As the bill for the coronavirus continues to mount, will the public continue to support the government if they feel that their tax money is being spent on companies that are set to do very well out of this?

Should the government be asking for more in return for businesses that receive support? In the supermarket sector, should there be an obligation to use at least some of the support they receive to help stock foodbanks for example?

The business rates holiday was announced at a time when the government probably thought that the limit of their intervention on social distancing would be to tell people to wash their hands and avoid the crowds.

Now that the entire county has been put in lockdown, with all but “essential” retailers being told to close their doors, it may be a better idea for the government to take a more targeted approach, with support being directed towards businesses forced to close, whilst those that remain open and thrive continue to pay business rates in the normal way.

This research featured in The Times. Our Director has had an op-ed on the issue published in The Guardian.

Photo by John Cameron on Unsplash


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