MPs are scheduled to start debating Finance Bill 2023-24 on 10 January. ICAEW has produced briefings on R&D, pensions, provision of additional data and promoters of tax avoidance.
ICAEW’s Tax Faculty has prepared briefings for MPs on Finance Bill 2023-24 clauses covering:
- the new R&D regime (cl2 and Sch 1 – see ICAEW REP 03/24);
- the abolition of the lifetime allowance charge (cl14 and Sch 9 – see ICAEW REP 06/24);
- additional information to be contained in returns (cl35 – see ICAEW REP 05/24); and
- measures related to promoters of tax avoidance (cls32 and 33 and Sch 13 – see ICAEW REP 04/24).
In ICAEW’s view, the merger of the two existing R&D tax relief schemes is being implemented far too quickly. The new rules will apply to accounting periods commencing on or after 1 April 2024. Members are concerned that this does not provide enough time to consult and prepare robust legislation alongside adequate guidance. This is made worse by the lack of transitional provisions present in the draft legislation. It is disappointing that ICAEW’s recommendations in ICAEW REP 17/23 around the start date and transition were largely ignored.
ICAEW believes that rushing the changes will result in increased complexity and a potential drop in compliance as businesses struggle to get to grips with the new rules. This will be particularly challenging for smaller entities with limited professional tax resource. The inclusion of special rules for R&D-intensive companies appears to retain a separate scheme similar to the rules around the ‘old’ SME scheme. This is at odds with the policy aims of reducing complexity through the merger.
Without exception, members were most concerned about the changes to subcontracted R&D. The new provisions do not appear to adequately consider the practicalities of likely commercial relationships. For example, many contracts for subcontracted R&D can span several years.
The proposed legislation is overly complex and difficult to navigate. It appears that eligibility is largely dependent on the terms of the contract and surrounding circumstances at the time of entering into those arrangements. Members felt that the legislation should be much clearer as to who is able to claim the relief. ICAEW is aware of problems that it would not expect at this stage of legislative drafting. For example, if the principal and contractor have non-coterminous year ends, they could be subject to different rules (one under the ‘old’ and the other under the ‘new’).
ICAEW repeats its recommendation to defer the scheme’s start, or at least provide transitional provisions to help businesses to adjust and prepare for the new R&D tax relief regime.
ICAEW has voiced concerns that the legislation is overly long and increases complexity. The government could have achieved its objectives using more straightforward legislation, reducing the risk of misunderstanding by taxpayers, agents and advisers.
The government has stated its commitment to embedding simplification in all stages of the tax policy making process. However, here it has squandered an opportunity to promote its simplification agenda through legislation.
ICAEW’s primary concern is the proposed additional reporting obligation for employers. It is intended that regulations will oblige employers to report employee hours.
However, it has not been explained:
- what data concerning employee hours will need to be reported (eg, will it be hours worked or hours paid?);
- how the hours to be reported will be calculated (how should employers deal with bank holidays, annual leave and varying lengths of months?); and
- how employee hours are relevant for the purposes of the collection or management of the taxes listed in s1, Taxes Management Act 1970.
While details of hours worked are needed to calculate gross amounts of pay for workers paid by the hour, they are not relevant for the collection and management of tax. This is a separate calculation based on total pay. If hours are reported to check national minimum wage compliance, it would not relate to tax.
ICAEW believes the Finance Bill legislation will not work to oblige employers to report hours worked or hours paid. The clause confines the power to collect information to data needed for the collection and management of tax.
ICAEW suggests that the legislation needs redrafting to allow non-tax information to be collected from employers, with safeguards so that it cannot be used to replace existing data sources available to government (eg, a census).
Two measures in the Finance Bill tackle promoters of tax avoidance.
The first measure intends to ensure that directors and individuals involved in the operation of companies promoting tax avoidance are disqualified from becoming directors in the future.
ICAEW believes that a safeguard should be included to allow directors to demonstrate they had no knowledge of the promoter activities of the company concerned. These provisions could be used to disqualify individuals who were directors of shell companies used subsequently for tax avoidance promotion.
The second measure is a criminal offence for a failure to comply with a ‘stop notice’ requiring tax avoidance promoters to stop carrying on their activities.
ICAEW has suggested safeguards to ensure that compliant advisers do not fall foul of the proposed criminal offence. These include expanding the ‘reasonable excuse’ provisions to include circumstances such as taking steps to wind down the promotion activity or making a successful appeal against the stop notice. ICAEW also believes that decisions around stop notices should be taken at a higher level of seniority within HMRC if the new criminal offence is to be introduced.
The schedule for debating Finance Bill 2023-24 is extremely tight. The committee of the whole house will debate the following clauses on 10 January:
- permanent full expensing etc for expenditure on plant or machinery (cl1);
- new regime for research and development (R&D) carried out by companies (cl2 and Sch 1);
- amendments to multinational top-up tax and domestic top-up tax (cl21 and Sch 12);
- rebate on heavy oil and certain bioblends used for heating (cl25);
- interpretation of VAT and excise law (cl27);
- increase in maximum terms of imprisonment for tax offences (cl31);
- disqualification of directors etc promoting tax avoidance schemes (cl32 and Sch 13);
- promoters of tax avoidance: failure to comply with stop notice etc (cl33); and
- construction industry scheme: gross payment status (cl34).
The Public Bill committee will then consider the remainder of the Bill on 11, 16 and 18 January.