22
Examination of witnesses
Nigel Huddleston, Matthew Henty, Doug Stoneham and Zoë Nettlefield.
Q71 The Chair: Welcome, everyone, to the evidence session with the Financial Secretary to the Treasury and his colleagues from departments. We are dealing with four issues this morning: the measures dealing with promoters of tax avoidance; the measures increasing the maximum sentence for tax fraud; the measure merging the two existing R&D schemes and the introduction of a new R&D scheme for intensive SMEs; and the measure that requires taxpayers to provide additional data to HMRC. I invite the Minister and colleagues to introduce themselves and then we will start the questioning.
Nigel Huddleston: Good morning. It is a pleasure to be here. I am the relatively newly appointed Financial Secretary to the Treasury; I was appointed just two and a bit weeks ago in a somewhat busy period. Therefore, it is with great relief that I am at this committee with some excellent members of the team from the Treasury—I know how you go into the details—and I will invite them to introduce themselves.
Matthew Henty: I am the deputy director for enterprise and property tax, and within the team we have R&D tax credits.
Doug Stoneham: I am the deputy director for policy and technical in HMRC’s Counter Avoidance Directorate.
Zoë Nettlefield: I am deputy director for strategic data policy in HM Revenue and Customs.
Q72 The Chair: Thank you. Can we start off with promoters? Generally, there has been a warm welcome to the direction of travel and the proposals. Some witnesses felt that there was a strong case for letting the civil measures, which have been out for a while, bed down before moving to a criminal sanction. Would you agree? Would you not like to spend a bit more time finding out how the civil regime goes before you go on to other sanctions?
Nigel Huddleston: Civil can work in many cases, but the criminal element elevates it to show how important the issue is and how seriously we take it. Across this whole thing—we will probably talk a lot about this today—we want to make sure that, when we have incidents of avoidance in this area, particularly given its large scale, it very clear that it is not the taxman who is suffering here; it is the taxpayer. It is having a huge impact on public service provision and looking after the most needy in society. Therefore, the criminal side is very important. That does not mean that we are ignoring other processes, but it is important to elevate it to show how importantly we are taking this and why, therefore, we are bringing the new system in.
The Chair: You do not feel the need to see how the civil system goes before moving to criminal.
Nigel Huddleston: As always in these things, we will carefully monitor the situation and see how it goes. I do think it is important, because it elevates and signals the importance. The signalling is important as well as the process.
Q73 Baroness Valentine: Witnesses we heard from are concerned that the introduction of a criminal offence for promoters of avoidance schemes who do not comply with a stop notice gives HMRC more powers without additional safeguards. In particular, they feel that some independent oversight of HMRC’s decisions is necessary. Will you amend the legislation to provide for this?
Nigel Huddleston: I will ask Zoë to come in here in a minute. We will constantly monitor the situation. That will be a theme that you hear from me throughout today. However, we have decent systems and processes in place already that we are broadly comfortable with. HMRC takes its responsibilities very seriously and the people are incredibly professional. I am comfortable that if we do have incidents that are of concern, I will look at that in my ministerial responsibility as well as with HMRC.
Baroness Valentine: Could someone touch on the safeguards that you have in place within HMRC?
Doug Stoneham: We have a number of safeguards in place within HMRC in relation to the issuing of a stop notice in the first place. Technical experts and senior managers have to agree that it is appropriate to issue a stop notice. Once that process is complete, HMRC solicitors may need to be consulted, but the final decision on whether to issue a stop notice is taken by an independent senior civil servant in HMRC, so outside the Counter Avoidance Directorate where the work is being carried out.
Promoters can appeal to HMRC against a stop notice. If HMRC does not agree to withdraw the stop notice, the promoter can go to the tribunal to seek to have the stop notice withdrawn. It is also worth stressing that if we were to move into the criminal side of things on any of this work, that work would be taken forward in a different area of HMRC, its Fraud Investigation Service. Obviously, the decision to prosecute or not would be taken by the appropriate prosecuting authorities rather than in HMRC. Obviously, HMRC can seek to prosecute, but it would be for the Crown Prosecution Service in England and Wales or the appropriate authorities in Scotland and Northern Ireland to take the final decision to prosecute. There are a number of layers of governance in place.
We recognise that there are some concerns here and we are planning to publish a document setting out all the various safeguards that are in place. We can share that with the committee if that would be helpful.
Q74 Lord Roborough: My question is more for HMRC. Witnesses that we heard from were sceptical about the effectiveness of the criminal offence when so many promoters operate offshore. HMRC has said that international treaties can be used to bring them to book, but this seems to depend on extradition and the offence having a parallel in the other jurisdiction. Is the reality that the offence will not be effective against promoters based offshore?
Doug Stoneham: We feel that introducing the new powers in the stop notice measure and the director disqualification measure gives us greater scope in the offshore space to utilise the network of tax treaties that you referred to. It is also worth suggesting that the vast majority of avoidance cases, or avoidance schemes coming through, that we see are still related to disguised remuneration schemes, where there will almost always be a UK footprint in place so that the UK company is able to offer employment services as part of the process.
So we feel that there is a multistrand approach that we can take, where, going down the criminal route, we have the director disqualification measure that is being introduced, which would apply offshore and well as onshore, and there is the ability to go after the UK-based element of it. We have a range of different powers in place that enable us to tackle the offshore side of things, but we recognise that it is an area of concern.
Q75 Lord Stevenson of Balmacara: I hope you can hear me. I apologise for not being present. We have heard evidence that a number of promoters are appointing stooge directors who have no direct knowledge of the business but would be under risk of criminal prosecution and disqualification. Would you consider amending the legislation so that it focuses more on the controlling minds behind the avoidance activity, and provide a reasonable exemption for those who might be called stooge directors?
Nigel Huddleston: It is a good point, and I have discussed this with the team since I was appointed. We want to make sure that the right people are targeted here. We probably all share the concern that there are probably some naive, young individuals who are trapped or taken advantage of, and this can be pretty harsh treatment for them. But the reality is that anybody taking on these roles has a responsibility to know what they are letting themselves in for. There will probably be a mechanism for a bit of leniency in the processes and in any criminal sanctions at a later stage.
However, we need to take this seriously, and there are too many stooge directors. We have seen that across a range of sectors. Again, I think we have the balance right. The mechanism will allow us to go after the shadow directors and controlling minds as well, but stooge directors are a real problem, and it is not one or the other; we now have a mechanism to go after all.
Lord Palmer of Childs Hill: My question is a simple one. I can see a stooge director being taken on the first time. Might I suggest that you think about what happens when they do it more than once?
Nigel Huddleston: To be honest, that is the point here. We need to get tougher on the serial offenders of worst abuses, because there is a perception of too much leniency at the moment. I wanted to give some level of sympathy to the real edge case that we could all have on a human level when I made those comments a few minutes ago, but the reality is that the vast majority of people know exactly what they are doing in these cases and are trying it on, to call it sympathetically.
Q76 Lord Altrincham: I have a question for the Minister on the maximum sentence. HMRC does not seem to have any evidence about what deterrent value the maximum sentence for fraud may or may not have. In fact, it has only just begun research on this. Is this measure more of a statement about the Government’s attitude to tax fraud rather than an effective additional deterrent?
Nigel Huddleston: It was a manifesto commitment, which is important in terms of parliamentary process and the way the country is run. We endeavour to implement manifesto commitments wherever possible. However, similar to the answer I gave earlier, it is an important signal of how seriously we take these crimes and offences, because there is an impact. There is too lax an attitude that it is the taxman that is being impacted, and it is not. It has a serious impact on the way we fund and provide our public services. So making sure that the sentence is as clear as possible is an important signal.
You are right about the actual execution. That is a matter for the Sentencing Council guidelines, but it now has more flexibility. Therefore, if there are these extreme cases—we have seen some in the newspapers recently—it now has greater flexibility. I think it is good that the option is now there. It was not previously.
Lord Altrincham: To go back to the question, would you stop short of believing that it will be effective?
Nigel Huddleston: I think it will be effective, and the option is there. It will certainly have an effective impact on somebody who is sent to jail for 14 years, and it will send a signal to others. The signal itself is important, as is the maximum sentence option, in this case and for other serious crimes.
Q77 Lord Palmer of Childs Hill: This question is directed to HMRC. You operate a whistleblower scheme to obtain information about fraud, but our feeling is that it seems to be little known. Is there a plan to publicise it and use it more creatively? In the United States, there is a model whereby whistleblowers can benefit from a share in the tax recovered. Have HMRC or Ministers thought about that as an option, or are you prepared to look at that option?
Doug Stoneham: HMRC values the information that it receives from individuals and businesses in this space. We would urge anyone who has any evidence of tax fraud to report it to us. The details of how to do so are on GOV.UK. We have a system in place where we can make payments to individuals who provide us with information where it helps to tackle tax avoidance and evasion. That is very much based on discretion and on what results are achieved from the information.
Nigel Huddleston: I hope and believe that most people would call that out out of a sense of duty and citizenship rather than financial reward, but there are cases where there can be an element of financial reward. If we push the financial reward a bit too hard, it may have some negative, unintended consequences on the broader picture.
Lord Palmer of Childs Hill: You obviously think better of people than I.
Nigel Huddleston: I am an elected MP, so of my constituents of course I do, Lord Palmer.
Q78 Lord Rooker: I am full of admiration for the staff of public department number one. I will put that on the record. That is not because I am in any trouble with it at all. It is the public face I have any contact with, and I am full of admiration for it. However, the fact is that many of our witnesses are not full of admiration for HMRC. Performance is not good, and that is expressed elsewhere, so we need to be convinced and have confidence that HMRC has the resources to deal with more resource-intensive prosecutions and investigations. Can you convince us that you are up to the job?
Nigel Huddleston: Before I defend that, this is an area that I am paying close attention to, because I am relatively new in. As a constituency MP, I hear concerns expressed all the time about HMRC’s performance and so on. However, given the task it has to do, its 70,000 employees, which is a significant number, the incredible complexity and constant changes that it faces, particularly in the digital era, and how incredibly sophisticated and clever the fraudsters can be, it is a very difficult job. Talking to colleagues in different countries around the world who have my job, I know that the complexity in dealing with these issues is something that everyone is facing and tackling, hence some of the global moves.
We do, however, redeploy, enhance and increase resources, and we have done just that in the Autumn Statement on fraud; we have increased the number of people focusing on these activities. We constantly monitor where the resources can be. There will always be a call in any department or non-government department for more resources. It is my job to work with HMRC to make sure that it is adequately resourced to do its job correctly. However, it is incredibly effective in what it does.
The ROI for those who are working on compliance—what they bring in versus their salary—is compelling. It is very good. Often there is a case for increasing the number of people working on compliance and related issues, and that is what we have done. However, we will always be open to arguments and hearing the case that more should be deployed, balancing that out with the overall state of the public finances. You will hear me defend HMRC staff a lot, because they are incredibly hardworking, intelligent, bright, dedicated people. Some of the criticism and some of the customer service points are fair, because I have seen them in a constituency role, but we are working on it.
Q79 Baroness Valentine: You are introducing a set of measures here. Are you confident, therefore, that the resourcing that is applied specifically to these measures is at least good enough for what you are changing here? Does any benefit from tackling tax fraud come back into the resourcing of this activity?
Nigel Huddleston: I would say yes. We have a freeze on civil servants overall, for example. The Chancellor announced that, yet additional deployment was announced in the Autumn Statement, as were additional resources in HMRC to focus on compliance and fraud. Under the cap we have flexibility here, because if there is a cap and we are adding to it, that has an impact elsewhere. Therefore, in terms of the relative importance, yes.
Over the next few months, we will focus on things like what the ROI will be and the business case for enhancing these activities if we add more resources. I am particularly keen to do this, because I understand how important it is. Are they sufficiently resourced? Yes. I have had conversations with the leadership of HMRC. That is one of the questions every time we do an Autumn Statement or a fiscal event: are we adequately resourced to do the things that we have just announced? We have to be confident that we are, and the OBR and others look at this.
Baroness Valentine: There is no hypothecation of money from tax fraud avoided going back into this resourcing.
Nigel Huddleston: There is constant analysis, which is why, even relatively early on, it was interesting for me to see from the day-one packs that I get as a new Minister, and from talking to the team and seeing where the activity is and what the ROI is, the compliance activities that I mentioned earlier. The ROI is very compelling in terms of what a compliance officer brings in—I am not sure I am allowed to say what a compliance officer brings in, so I will write to the committee—and that makes a strong case. The team may wish to add more here. I have probably given a high-level view, but there might be some specifics.
Doug Stoneham: It is worth touching on the criminal space in particular. We take forward a range of civil and criminal actions, but in the criminal space we are focusing on cases where there is particularly serious fraud and where criminal sanction is appropriate, where there is a need to send a strong deterrent message or where the civil powers are not sufficient to establish the truth. We are focusing on a core area of particular types of offence, and we have a successful rate of securing convictions. In 2022-23, we secured 218 convictions for tax fraud offences, which represented a 90% conviction rate. So we are focusing on what we see as the most serious offences and where we think there is the greatest chance of securing a conviction.
Lord Rooker: Is it the same lawyers from the City representing the crooks all the while? We have seen that in the City they are basically working for the crooks.
Doug Stoneham: I do not know on that one, I am afraid.
Lord Rooker: That was a cheap question.
The Chair: Which city had you in mind? I think Margaret Hodge got an answer in another place and another committee that there was an ROI of eight, so I would be interested to know where you think it might be now.
Nigel Huddleston: I would be keen to share what I can on this, because it makes a compelling case.
Q80 The Chair: Moving on to R&D and the intensive scheme—this is perhaps a question for the Treasury—it is clear that the intensive scheme was developed very quickly. Can you elaborate on it and explain the thought behind it? Why did you decide, after nine months, to move it from 40% to 30%, and why do you think that a cut-off is appropriate rather than a slope for something like this? Does it reflect on good policy-making that there was a sudden change and the whole thing has come about fairly quickly? It is an open question to HMT on your views on intensive relief.
Matthew Henty: On the intensive scheme, you will recall the changes to the rates and the rebalancing last autumn. The commitment was then to work with industry to see whether particularly intensive R&D SMEs needed further support. That was then announced in the subsequent Budget. The balance of the judgment there is about how to target that. As you noted, it was a 40% intensity limit that was determined to support roughly 20,000 SMEs on the basis that they were most reliant on the cash flow from the payable credit of the SME scheme in their business planning and their long runways—for example, in biotech—to profitability or to any sale. The intention was to target that as closely as possible.
The feedback that we have had and the commentary that you would have seen in the committee is that that is the right objective. The legislation that has now been published implements that. We also committed to keep working with everyone in the sector to understand whether that needed to develop further, and we will continue to do that, because obviously it is new. The changes in the Autumn Statement were to lower that to 30%, essentially to let a few more people, about 5,000 additional companies, into the scheme to make it easier to qualify for that higher level of support, and to implement a grace period so that, if you were in last year, you can continue to claim, so that we did not have one-off events dropping people out, in, out, in, and to make it a bit more certain for people that they can plan and rely on that cash flow. So the overall objective is, I think, reasonably well accepted.
On the mechanism, I definitely take your point that having a number means that effectively one side or the other is binary. It is potentially possible to implement something that is a bit more gradual, but that always brings its own bits of complexity. We will probably talk about this later, but there may be an opportunity to think about how that fits with the merged scheme, which is a new development from April next year, and whether there are opportunities to make further changes that would make it simpler.
We are changing some of the rules in the intensive scheme on things like subcontracting and aligning the merged scheme and the other scheme. The merged scheme is also a really important context here, because if you are not in the intensive scheme and you had gone to an RDEC-type scheme where you could not subcontract, it would have been a very dramatic change in the circumstances facing the business as to what qualified. Because we are aligning the schemes by aligning the subcontracting rules, although it would be a lower rate of support—that is the intention: to target the high rate of support at the intensives—the rules of the game would be very similar but the mechanism would still be different, so there is potentially an option to simplify in the future.
The Chair: You are open to graduating rather than a cut-off if you get responses back that the cut-off is a problem.
Matthew Henty: I am noting that there is a trade-off there between having a clear rule and having something more complicated that tries to fit all circumstances. The clear government position is that we have moved the line down so that more people are over the top of it, and we have tried to smooth any ins and outs through the grace period so that people have more certainty year to year. If they know that they are in it this year, they will know that they are in it next year.
Q81 Baroness Valentine: We have been told that SMEs will know that they are R&D intensive only at the end of an accounting period, after incurring spend. Absent that certainty at the outset of a project, are you concerned about how effective the incentive will be in practice for SMEs?
Matthew Henty: One of the advantages of the merged scheme and the above-the-line credit that we had in RDEC and which we will have in the merged scheme is that it is above the line, so you will have certainty. Obviously, it is then taxed, and your tax rate may play in. One of the disadvantages of the SME scheme—and it follows through to the intensive scheme—is that you need to know whether you are loss making or profit making to know what rate of support you would get.
With the lower rate of 30% and the intention to target it at the most intensive companies, many companies will very clearly know what their plans and financial flows are and what they are expecting. With an edge, there will always be people nearer that boundary who will need to plan quite carefully. That is also the intention of the grace period: to make year to year clearer. They will need to reassess every year for the next year, but they know that, if they are just under, they will still qualify, because they were in last year. We are trying to smooth those things through in the design.
I recognise the point, but knowing only at the end where you sit in terms of the support you will get has been a feature of the new scheme throughout its history. The advantage of moving the vast majority of claims and SMEs to the new merged scheme is that it does not have that as a feature/problem.
The Chair: You recognise the problem that a company that has perhaps had zero and is about to embark on a project that may take it around 30% does not have that certainty. Clearly, the whole purpose is to encourage people to undertake R&D that they might not otherwise undertake. What comfort can you give those companies that 29.9% will not preclude them?
Matthew Henty: They will need to be at 30% to qualify for the intensive scheme. The intention, as set out originally last autumn and again in the spring, was to focus the support on the most R&D intensive. If you are a biotech company setting out on a drug-discovery programme, you know that you are very much higher than that because that is your entire purpose. You have very little other expenditure and no sales and so on. I recognise that there is a boundary issue, but I do not think that can be solved without introducing a lot more complexity, which has its own costs, given that the intention is to support those that are the most intensive.
Nigel Huddleston: That is an important point in this particular tax policy area and across the board. When we add more complexity—when we add tapers and so on—we start to move away from that other driving force and request from businesses all the time, which is simplicity. It is important to remember with this policy area that we had extensive consultation. We are largely implementing what industry has asked for. The R&D changes will obviously be beneficial overall. They are likely to cost another £280 million, so this is more money going into investing and encouraging investment in R&D. Even with the intensive scheme we estimate that another 5,000 companies will be eligible, so it is a good thing. We will keep an eye on how it gets processed.
Just in the last few weeks I have been lobbied dozens of times by colleagues and businesses for all sorts of changes, which on the face of it seem very sensible and straightforward, but every one of them would significantly add to the complexity of the tax system. That is something that we always have to balance out. We always want to do the right thing, but sometimes the requests can have knock-on consequences that are not always clear and could cause great challenges.
Q82 Lord Palmer of Childs Hill: The question that I did not hear an answer to is whether this is an incentive. It is nice for your constituents and the companies in your constituency to get a kickback, but the question is: what is the incentive at the beginning to enter into this R&D?
Nigel Huddleston: There are a lot of incentives. There genuinely is an incentive. Again, this is not only an ask of business; there are case studies here and around the world to show that these systems work. In our analysis of the various systems that we have had in the past, we have found that some work better than others, and some have a greater impact. The reality is that we have fallen behind in overall investment in business and R&D compared to many other countries around the world. That is very much a theme of the Chancellor for the Budget. We need to focus on growth and to enhance our productivity. We also need more investment in plant and machinery. R&D benefits the UK economy. There is a lot of economic analysis looking at the previous systems and seeing what worked and what did not work. We are very confident that this will lead to positive outcomes.
Q83 Lord Roborough: My question is to HMRC and touches on the Minister’s use of the word “simplification”. Can you explain why R&D intensive relief will continue as a separate relief even after the merger comes into effect? How can having two different models for R&D relief be described as simplification, particularly for SMEs that could move between them?
Nigel Huddleston: We have gone from three to two, which in itself is a simplification. This is very much based on the ask of industry, and on the ability to target. The SME loss-making R&D niche area is unique, which gives us the ability to target, and if in the future we need to make changes, it gives us the ability to target in a very specific way for an area where we see great things in the future for the UK economy and considerable growth. So it is quite good to have. The merger itself shows that there is simplification.
Matthew Henty: There are 20,000 in the intensive scheme in this respect. There are 50,000 or 60,000 now in the merged scheme—the vast majority are SMEs and large businesses—where it is clearly simpler than if you were not an intensive like biotech, or something like that, but you were growing and went from a scheme that had one set of rules to something that was entirely different in RDEC. That has now gone. The vast majority of businesses now have just one scheme to think about. We have merged the PAYE, the subcontracting and all that stuff into one set of rules that will apply to everyone in the same way. That is demonstrably simpler. I understand that having one additional scheme instead of two would be simpler in some ways, but where we have been able to do that we have aligned the rules. How this will fit together is very much clearer and it is definitively simpler than it was before.
Q84 Lord Stevenson of Balmacara: We are now clear that the merged scheme will come in on 1 April 2024. That decision was in the Autumn Statement. However, even if we take into account that a number of companies will not start that new scheme because their accounting periods are different and not on a fixed date, that still does not leave businesses much time to go ahead. Have you thought about postponing this? Witnesses have told us that they would like to see this whole thing put back to 1 April 2025.
Nigel Huddleston: In the context of the Chancellor’s Autumn Statement and the overall push for growth, this is an important element of that mix, so we want to implement it as soon as reasonably possible. The accounting period element is important, because it adds an extra layer of practical flexibility that we hope will be helpful. These are the measures that we have been hearing industries say they want, and on the government side we do not want to drag our feet in any way. We want to move at pace, but I hope that the accounting period element will provide some assurance to most businesses. Many of them will have an accounting period that will be late 2024 or 2025, so they have until then to work practically on this.
Matthew Henty: We think this is taking the best of both schemes into the merged design. That is a better system that will support more R&D through the subcontracting rules and clarify a lot of things. On the accounting period point, the feedback I have had since is that it has made a big difference to the big companies that are facing the most change through the merged scheme because of the subcontracting rules in particular. Given that it is better and putting more support in, there is a very strong case for going for 1 April or for accounting periods after 1 April as planned.
Q85 Lord Altrincham: I have questions for HMT and HMRC on who can claim relief. Supply chains and contracting arrangements are complex and varied, so why not, as some witnesses have suggested, allow the parties to choose who can claim relief? Would this not be simpler than trying to define types of contractual arrangement?
Matthew Henty: As we set out in the July draft publication, we put in the SME rules as they were and said that we would engage with industry. There has been a lot of discussion over the period since then. Broadly, yes, you can nominate someone to take the relief, but there is a strong economic case for giving R&D relief to the decision-making body, the company that has the project to resolve a scientific or technological uncertainty. The risk of determining who would do it through things like nominations is that you end up with bargaining power contracts, and things like that, that are not following the substance, and with companies perhaps saying that they will claim anything that is R&D, and it goes up, even when it is not the top-level contractor doing a project to resolve a scientific uncertainty.
In principle, and from the economics, it is better to have the rules that we are proposing. Clearly, it will require a lot of guidance and clarity from HMRC so that people know exactly what needs to be done. A focus over the next few months will be to make sure that that is right. However, there is strong evidence that it is better to go in that direction than the other.
The Chair: Other countries around the world allow choice and it seems to work. You can see from contractual negotiations that if a contract specifies, “We will claim it and you will not”, there will be clarity, but did you look at other countries and think about that?
Matthew Henty: Yes, but some of the concerns about that process are exactly that: “I will claim it. You can’t”. However, if a subcontractor is building something and says that it will take any R&D claim but does not know anything about R&D, and it is the next layer down that is actually doing a project that is R&D to resolve a scientific uncertainty or something, the rules that we are setting out are intended to show that a company that is one step down that is actually doing the project can claim for its R&D activity. That is important and follows the substance rather than the form of a contract or anything like that.
Lord Altrincham: Just for clarification, does it rest on the economic understanding that the substance exists only in one part of the value chain?
Matthew Henty: Obviously, there is lots of complexity. I am just using that as an example; there may be others. It is not only the economics; it is also the point that what you can claim for is doing an R&D project that is to resolve uncertainty. If you are contracting to build a stadium, you are not doing an R&D project to resolve an uncertainty. It is the next layer down, a construction company, that might be doing that. If it is a pharmaceutical company doing a trial, the R&D project is at the pharmaceutical company level and it can claim for the work that it has subcontracted to do a trial somewhere. That also picks up a previous problem about fragmented R&D, stuff that could never be claimed anywhere. The rules as designed are to ensure that we pick up all the R&D and do it at the level of the decision-making body that is trying to resolve a scientific uncertainty.
The Chair: Or indeed sub-sub-subcontractors in the real world.
Baroness Valentine: I want to check that I have understood the response. If you are responsible for building the Olympic Stadium and you contract a construction company that contracts someone to do some R&D in order to build a sexy new stadium or whatever it is, where is the R&D claim in that instance?
Matthew Henty: It would depend on the circumstances. There will need to be HMRC guidance, but the intention is that it will sit with the decision-making body attempting to resolve the scientific uncertainty. In the way that I think you have described that, that would be the middle one.
Baroness Valentine: One tier down. That is what I had understood. Thank you.
Q86 Lord Palmer of Childs Hill: My question follows on very much from that. The Minister clearly said earlier that the aim of the whole policy is economic growth. That must be behind all this, not the complexities of the tax system. The SME scheme, where it deals with subcontractors, has worried some of the people who have spoken to us. Will the changes announced affect innovation if the subcontractors, as in the stadium example, are excluded from this?
Nigel Huddleston: As a point of principle, the R&D credit being at the point of the decision-maker for the R&D makes logical sense. The contractual arrangements for businesses are how the work is distributed. I understand that, for some businesses where there is a lot of subcontracting, this change may require some renegotiation of some of those contracts. However, that is not beyond the wit of man. Where the R&D credit will now go can be, or should be, fairly easily worked out. Then there might be some renegotiation of those contracts.
I accept that there is some inconvenience from this change. However, the point of principle of simplifying it to the extent that it is very clear now where the credit goes at the point of decision-making overall should be more helpful, and certainly will be in the long term. There might be some transitional complications with some subcontractors, but I hope that point in the process will be easier in the medium to long term.
Lord Palmer of Childs Hill: Will the legislation, which is what we are talking about, allow renegotiation, or will they say, “I’m sorry, this is the law and we’ve got the benefit, not you”? How practical is it that there will be renegotiation along the line?
Matthew Henty: One of the key things in the current system is that there are bits of R&D that cannot be picked up by the system, because the subcontractor cannot claim for it and it is not R&D when it gets to the next layer down. So the intention is to ensure that we pick up more of the R&D through the relief. That may, over time, require changes to things like pricing, but there is nothing in the legislation specifically to allow for that. It will be a process of change over time as contracts are entered into.
Q87 Lord Rooker: How do you know what the costs will be for businesses from the merger of the R&D relief?
Matthew Henty: Do you mean from changing the systems?
Lord Rooker: No. Your estimate is a one-off cost of £7 million. How will you know?
Matthew Henty: The costings from the tax impact note used a set of modelling for how long it takes people to familiarise themselves with a change. Here, we are expecting it not to be about the change of system but about familiarising yourself with new rules as a one-off cost. The estimate is based on established methodology for business-customer costs, which is the process for all the changes in the tax system that go through the process that delivers the numbers in the tins. It is a forecast based on a set of assumptions about the time taken to look at the rules of the new scheme.
Overall, the package of stuff that was announced in the autumn was an additional £28 million of support every year. So there is a one-off transition to get to the rules and to make sure that everyone understands what they need to do. The judgment there is that that is very worth while, given the increase in support.
Lord Rooker: Does anybody ever go back after two or three years and check whether that judgment about the cost to businesses was correct?
Matthew Henty: I believe that on occasion those things are kept up to date, but I do not have information on the exact one here or previous ones. We can find out.
Lord Rooker: Could you write to us with one example of a change you have made, a one-off cost to business, where estimates or forecast judgments have been made which someone has subsequently checked to see whether they were accurate or not?
Nigel Huddleston: You make a valid and fair point. I have just come to the Treasury from the Department for Business and Trade, and my background, before I came into Parliament, is business. The engagement that I had in my old department, and the engagement that I want to have in my new role dealing extensively with businesses, is the way I want to conduct my time as a Minister, and I am working very closely with other government departments—in particular, the Department for Business and Trade, and the Minister, Kevin Hollinrake, over there—particularly on the impact on small businesses. These are things that I am very live to and very concerned about.
Overall, I go back to the point I made at the beginning. Remember that these are changes that we have made in response to a consultation, and that many of them are at the request of businesses that recognise that there may be some execution implementation changes, but, net, we are adding hundreds of millions more into the R&D system, and there is a recognition that there will be some inconvenience.
Your point about forensic analysis—when we come out with a number and see it on a sheet of paper, is that actually how it is?—is a fair one, and I am more than happy to come back to you on that. It is in my mind all the time too.
Q88 The Chair: Given that this will start in April 2024, are you satisfied that you have done enough to publicise the changes, particularly to SMEs, or are you planning a big programme to make sure that SMEs are aware of what is going on?
Nigel Huddleston: Given that it was just announced, there was a fair bit of publicity, and many of the industry bodies and groups have done a very good job of publicising it themselves, and we will continue to work with them and with other communications channels. There is a plan to communicate, as there is every time we make announcements. Whether we do enough on these things I am not sure. We will constantly take feedback here, but we will be promoting and pushing this. It is all very well to make announcements of this type, but it is the adoption, the take-up rate, that is key. We want to make sure that the money is used for the purpose that it was intended for. We will be working in particular with industry bodies.
The Chair: I am aware that you have a large number of PR officials in both your departments. Is there a budget allocated to promoting this scheme, or is it just in the general pot? How does it work?
Nigel Huddleston: There might be a specific budget allocated, but I am not aware of it. I am happy to come back to you on that. We have communications, but it is not all PR; it is not all spin. There is genuinely active communication, advertising, promotion, and a lot more going online through apps and so on, which I constantly encourage people to use. They are effective, they aid communication and they reduce cost. There are a variety of channels that we will use.
Matthew Henty: In the last couple of years, there has been consultation throughout the review through various means. Industry bodies, business representation groups, agents, accountants, accountancy bodies, and many businesses have been actively engaged throughout the process and, again, on the draft legislation in the autumn. All want to make sure that the information gets out so that people know what they are doing. A large number of people are involved in making that happen rather than it just being an exercise from the agency or the Treasury.
Q89 Baroness Valentine: Moving on to data collection, we are unclear how you are intending to use the data on employee hours. We seem to receive mixed messages about whether this is for policy or specifics, and whether it will be shared with other government departments. I want clarity on why you are collecting the data on employee hours. Is it needed for tax purposes, and can you explain how you propose to use it? The sub-question is: are you intending eventually to share it with other government departments or agencies? If so, are you going to make that explicit, and are you going to consult before doing so?
Nigel Huddleston: I will ask Zoë to come in here in a second. Those are all perfectly fair and reasonable questions that were also raised by industry. We are only sharing information where necessary and appropriate with other government departments. I can give assurances there, because I am aware of concerns over data sharing.
On the broader point of principle, we all know of the criticisms of the interventions during the pandemic, which are currently being investigated, and of the Public Accounts Committee report. We were not always able to distribute the money in the way we would have liked, because we did not have some quite obvious things that everybody assumed we had on what businesses do, where they are, what their operations are, and so on. The whole point of looking to improve data has a purpose for the here and now, as well as should we face a pandemic-type situation in the future.
In each of these areas, we are not collecting it just for the sake of collecting it. There are purposes in each of the areas. On the hours, and in the other areas, it should improve things. I will let Zoë come in on the detail. If we do not give you sufficient answers now, we will write to you, but I hope that we can give reassurances.
Baroness Valentine: If you are collecting data for policy purposes, the headline information must be of use to other departments, so there are positives and negatives about passing data across. On the more general statistical use of it, it would seem to me to be useful to other departments, provided that you are not giving the detail across, so I am confused about that point as well.
Nigel Huddleston: There is the intent to gather this for sharing purposes, but not to have lots of information on databases stored willy-nilly all over the place. We take data incredibly seriously, because we know how sensitive they are. I was not underplaying the importance of the potential use of data. I am saying that it will be used when necessary, not just collected for random purposes.
Zoë Nettlefield: As set out, this work was prompted by the use of HMRC’s data to deliver some of the Covid schemes and the data gaps that we identified in using tax administration data for non-tax purposes. We learned a lot about our data—its utility, where we collect data, where it is not mandatory. We have patchy data, and we learned a lot about how we can use the data that we hold.
In looking to improve that data, which is a helpful futureproofing exercise, we wanted to focus specifically on areas that would strengthen our ability to administer the tax system flexibly. The tax administration strategy, which was set out in 2020, set out how HMRC is looking to have more timely and accurate data that will help us to help customers get their tax right the first time, as well as allow us to intervene where they get it wrong.
The particular use of this data is in the nudges and prompts territory, upstreaming that compliance activity, encouraging customers. Where we can see particular characteristics of particular activity we can give them a prompt earlier to encourage them to declare income appropriately so that we get that intervention earlier, which reduces downstream costs and more intensive compliance activity. It also helps customers to reduce their costs by getting it right first time and not having to engage with a more intensive compliance check later on.
We will be looking to use the data in the new RTI data space. There is a large tax risk with undeclared earnings, tax and NICs, so that is an area where we can add this to other data that we have in order to give employers the nudges and prompts to encourage them, where we see that there is potentially a gap, to declare the earnings earlier in the process rather than having to intervene further down the line. We do a lot of nudges and prompts activity. The compliance solutions programme that we deliver brought in £394 million additional tax revenue last year, and there is a productivity gain of pushing that compliance activity upstream. That is the space where we think this data will be useful. It gives us that flexibility.
There are other purposes for which it will be helpful to make sure that we collect data in the right way and that the data collection is most useful. We have that in mind when designing, but the core purpose of collecting is to help us with tax administration.
Baroness Valentine: To be honest, I am still a tiny bit confused. To get employee hours you are going for contractual hours, presumably.
Zoë Nettlefield: Contractual hours or the number of hours paid, if it is an hourly paid individual.
Baroness Valentine: Somehow that will translate into prodding employers to be up front about how much they are paying their staff before the end of the tax year. Is that what you are saying?
Zoë Nettlefield: It is the information, the intelligence, that we can use to understand whether there is underdeclared tax and NICs, and similarly with regard to the national minimum wage, which HMRC has operational responsibility for the enforcement of. Similarly, there is NICs relief in freeports and investment zones. It enhances the data that we can use to target activity and put nudges and prompts in those compliance areas.
Baroness Valentine: Would it be possible to write to us with some examples? That would be helpful.
Q90 Lord Roborough: The one-off cost for businesses of implementing the new requirement on employee hours is estimated at £35 million. Most of our witnesses thought that this was a significant underestimate, perhaps by an order of magnitude, and challenged HMRC’s suggestion that ongoing costs would be negligible. Will you publish the assumptions on which costing was based and work with representative bodies to refine the costings more realistically?
Nigel Huddleston: We are asking for information that most companies ought to hold already. Some already have a legal requirement. If you are paying minimum wages, you have to know how many hours people are being paid, as well as the contractual terms; most contracts have hours in them. We recognise that it will be a cost, because not everything is existing information on an existing database. Some additional effort is likely to be required to put that in in the right format, but the information itself should be readily and easily available to any reasonably well-run business, because how else are they paying their employees at the moment? We will keep an eye on the cost and the feedback.
I know that concerns might have been expressed by industry, but some of that might be based on the assumption that what we are asking is more onerous than it is. Originally, there were a lot more elements of additional data collection to be considered, but we have honed it down to these three areas. I hope these three areas will be easier and less burdensome on business, but we will always keep an eye on the cost to businesses. As a point of principle, I want to run my portfolio area by being very sensitive to the costs to business of any policy changes that I bring in.
Zoë Nettlefield: Matthew described earlier the standard costing model that we use for assessing what the impact will be on businesses to implement, including getting their heads around the changes and making any systems changes. We have been talking to stakeholders throughout this. We launched the consultation in 2022. We have been consulting on the draft Finance Bill clauses. We will shortly publish the secondary legislation. The clauses are enabling legislation. The detail will be in the regulations.
We have had constant dialogue with a wide range of stakeholders—large employers, payroll software providers, public and private sector agents and business representation bodies—and we are getting into the detail of what it looks like to be able to connect the information they already hold on the hours their employees are contracted for or paid hourly for and the impact of putting that into an RTI return.
So we are refining the costings, and we will publish an updated version of them when we publish the draft regulations in the new year, but the feedback that we are getting is that there is a bit of an up-front cost but it is not enormous. They hold the information already. It is not a large new requirement to collect anything new, and the ongoing cost will be minimal, because once that connection is made and the data are being fed through to the RTI software, there is not a large, ongoing maintenance cost to continue submitting that information.
Lord Stevenson of Balmacara: I think you may have covered this in some of the answers just given, but it would be helpful for the committee to see the draft regulations, if possible, before we finalise our report. Would your timing accommodate that? Normally, these things are promised but often do not appear on the timetable. If there was a chance to see them in advance, we would find that very helpful.
The Chair: Is it your intention, from what you are saying, just to find out the contracted time that an employee has? What happens if someone is contracted for 35 hours but, in reality, works 50 or 70 hours, which happens a lot?
Zoë Nettlefield: We are only asking for the contracted hours. If overtime is paid, there are additional hours counted and paid for, and that would be counted as the amount of hours paid for. However, if it is just that somebody is very dedicated to their job and works 100 hours a week but is paid for 37, that is the data that will be submitted.
The Chair: That leads on to Lord Altrincham’s question, which he might amplify.
Q91 Lord Altrincham: Our question is for HMRC and is the final wrap-up on this topic, but maybe the Minister could comment as well. We have heard in this committee that the costs would be quite high, a lot higher than HMRC believes, and that it could be quite complicated. We have also heard about a wide range of purposes for this information. You mentioned enforcement on the minimum wage. Clearly, PAYE will be affected. We also heard about how it had nothing to do with HMRC at all and that it is all about general data gathering by the Government and other ministries. We have heard about wide costs and a wide purpose. Therefore, the question that the committee must ask you is: is it really necessary to burden employers and taxpayers with providing this data? Could some of it be obtained from other sources within government?
Zoë Nettlefield: The burden is pretty minimal. For all three data items that we are legislating for, they are to a large extent collected already. We collect hours worked already, but it is in bands, and there is an “other” band. We get very poor data out of that, and it is more burdensome for businesses to change the hours recorded into bands to submit to us. It is not a great experience for the business or for HMRC’s use of that data. We are increasing the utility of that data by improving how we want to collect it and the format in which we want to collect it.
On dividends, we collect information. If you receive dividends, you have to put that on your self-assessment return anyway. We are just adding the additional requirement for those who are owner-managers of businesses and receive dividends from those companies, and the proportion of the ownership of that business.
On start and end dates of trade, that information is already on the self-assessment return. It is a non-mandatory field, which means that the data we get from it is very poor. It is making those mandatory. They are familiar mechanisms, information that organisations should hold already. We are just asking for an adjustment in the way that data is being collected so that it is more useful for the context of administration purpose, for the nudges and prompts, and for understanding our populations better in order to target information about appropriate reliefs, for example, as well as upstream or downstream compliance interventions.
The data that we collect is not particularly useful at the minute. We want to make it useful, and we think there are some strong uses in HMRC for it. However, we always have in mind that if we are collecting data and putting that burden on customers to provide it, we want to make that data as useful as possible for a multitude of purposes. The Government’s national data strategy sets out that public data—HMRC has a national asset of data on citizens and businesses—should be shared more across government to provide more joined-up services to citizens and to businesses. Overall, it reduces the cost and the burden on individuals if we are better at sharing data among government. That, rather than the primary purpose, is in the back of our minds.
Lord Altrincham: To go back to the question, the low cost of collection cannot be a justification for the action. We are asking whether it is necessary and whether it can be provided in any other way.
Zoë Nettlefield: There is no other place where government collects the specific information from businesses that we are asking for here. Companies House collects similar data. To be able to match the data that Companies House is collecting with the data that HMRC holds, you would probably end up having to ask for greater data collection at Companies House level and bring it across to HMRC. That would probably be as burdensome on customers, if not more so, and you would have to build that infrastructure in order to provide the information moving between organisations. It is much more efficient to be able to do it at HMRC level.
Q92 Lord Palmer of Childs Hill: The Minister said that he was in business before he took up his political career. How would you feel in your business if you had to provide this additional information, or would you have to outsource it?
Nigel Huddleston: I do not think that anything we are asking for here is anything that a decently run business should not already have at hand, so I do not think I would be too fearful. I would ask, as others have, why you want it, what you want to use it for, and who you will share it with. I believe that we have decent answers to that.
Also in that context, having gone through the pandemic with constituents and businesses in my constituency, I know the frustration that many of them went through in trying to claim for things when we did not know what was and was not a business, whether you were self-employed, whether you were not self-employed, whether you were paid, whether you were not paid, whether you were remunerated by X, Y and Z. There were some startling gaps in information and knowledge in government that we had to fill. Some of it is not tax related. What we are talking about here today is related specifically to the tax elements. I would raise the very questions that you have raised, and, I hope, be reassured, by the answers you have been given, that we are asking for a reason.
A lot of this data and information is genuinely—I know there is a lot of scepticism here—to help to correct errors. When we have data on how many hours people are working, it is very easy to genuinely make a mistake and an error in returns, as opposed to deliberate fraud. That is one thing that I want to make sure we get across. We have had a lot of debate today on fraud and those who are intentionally deceiving and tax avoiding. The vast majority of businesses and people in this country are law abiding and do the right thing. However, because of the complexity and all the paperwork, it is very easy to make errors.
Some of this additional data can help to identify systematically where those errors have been made and be genuinely helpful to the companies concerned and of use to the taxpayer, because it means that we can more accurately bring in the money. That is the overall message that we want to send. Also, and I am sorry to belabour this point, there are legal restrictions on how we can use data. We can share information within government, but, even there, there are legal restrictions, and we are very sensitive to that.
Q93 The Chair: Can I ask two further points on that issue? The first is on the dividends that you mentioned. We spent a lot of time during the Economic Crime and Corporate Transparency Bill on the Companies House requirements, on tagging the information and on making sure that it was much more advanced than it currently is. However, you are still asking companies to tell you what dividends they have paid. It does not seem to be joined-up government that those two systems cannot talk.
The second question, with some nervousness, is that if you are only taking contracted hours worked but in reality employees are working extremely different hours from those contracted, that information is not correct and might be used in a way that does not reflect the actual hours that are being worked. If you are going to pass that information to different departments, not for tax, they are assuming that people are working 35 hours a week and they are not.
Zoë Nettlefield: Taking the second point first, there will always be limitations on data and a balance to be struck between the purity of the data that you can get and putting an additional burden on customers if that data is not easily recorded. That is exactly the feedback that we were getting from stakeholders—that that is not data that they would necessarily hold and that it would not be that easy for them to provide it.
We think that, on balance, it is right to have good data, not perfect data. We understand the limitations of it, and whenever we share data with other bits of government—as has been set out already, there are very strict controls over how we can do that—we do that with the full knowledge of what our data shows us. We in HMRC are the experts on what our data shows us, and we work very carefully with other departments before we share data so that they understand the limitations of it, how it can be used, and any caveats that they should hold around it. Ultimately, it is a balance between not making this overly burdensome and having something that is good and useful.
On the point about Companies House, we have looked at whether we could bring across the data. As I said before, to be able to match that data appropriately we would probably need Companies House to collect more data so that we had the right identifiers to be able to bring that across and match it to HMRC’s systems. Given that people are already submitting dividend data in their ITSA tax return, it is just a small addition, and the additional burden is minimal. We thought that, overall, that was the smaller burden than enhancing the Companies House collection and sharing it across to HMRC.
The Chair: However, you are, one assumes, interacting with Companies House to verify taxpayers’ information and to check that proper disclosure is being made.
Zoë Nettlefield: Yes, there is close join-up between Companies House and HMRC on a range of issues.
Nigel Huddleston: On the point you raised about employee hours, I know exactly what you are getting at there, but, from a tax perspective, what we are trying to do is collect information relevant for tax purposes. Whether I work 80 hours or 40 hours does not matter from a tax perspective. It does matter for employee morale and all the other things, but if we went in that direction—gathering that data and information could be very useful for all sorts of other purposes—I think we would fairly get criticism from businesses about asking questions for interest rather than direct relevance and purpose, and the burden on business would be immense. You are making a broader point about the way we conduct business and the treatment of employees, but we will probably not resolve that here today.
Baroness Valentine: I am sorry to keep picking at the minimum wage use of this information. You are just collecting it for tax purposes. Are you saying, “Contractually, you say that you’re doing 20 hours, but in fact you’re doing 30 hours, so you’re not paying a proper minimum wage”? How do the two things link up?
Zoë Nettlefield: We can add a bit more when we write to you on the specific uses. I am not an expert in national minimum wage enforcement, but I understand from colleagues and experts in the department that this will be incredibly useful data for understanding the ways in which employers are paying. The enforcement of the national minimum wage compliance is a responsibility that we take very seriously in HMRC. This is the information that would be helpful for enriching that picture of employers and how they are paying. Where we get different sources of information it is easier to spot mismatches and, therefore, to prioritise where we focus our efforts.
The Chair: If there are no further questions, thank you, Minister and colleagues, for coming to address us today. I know you have a busy day, so thank you very much indeed. We look forward to receiving the further information that you have offered.
