13
Examination of witnesses
Richard Jones, David O’Keeffe and Charlotte Barbour.
Q1 The Chair: Good afternoon and welcome to the Economic Affairs Finance Bill Sub-Committee’s first oral evidence session. Today we will hear from the tax representative professional bodies on the draft Finance Bill’s research and development tax relief proposals. I invite the witnesses who have come today to kindly introduce themselves, please.
David O’Keeffe: I am here representing the Chartered Institute of Taxation. I am not an employee at CIOT; I am a member, a volunteer. I sit on the corporate tax technical committee covering R&D tax relief.
Charlotte Barbour: I am director of regulatory authorisations at ICAS, the Institute of Chartered Accountants of Scotland. I was previously director of tax, so this covers both patches. For the avoidance of doubt, I am a member of the CIOT. I sit on its council too, but I am here in the ICAS capacity.
Richard Jones: I am a member of the Institute of Chartered Accountants in England and Wales. I am in its tax faculty, specialising in business taxes.
The Chair: Thank you. Before I start the questions, I declare an interest. I am a member of the Institute of Chartered Accountants in England and Wales. I think I am a member of the tax faculty as well, if I have remembered to pay my subs. I am also a member of the Chartered Institute of Taxation.
Baroness Noakes: I do not think it is a declarable interest.
Q2 The Chair: Apparently, I am advised that it is best so to do. I am sadly not a member of the senior institute, but just of those two.
To kick off, how effective is R&D relief in encouraging investment in R&D?
David O’Keeffe: In a sense, that is a “How long is a piece of string?” question. There have been a lot of studies conducted to see if they can calculate a financial answer to that question. They all vary quite considerably, I think.
The most recent studies done for HMRC suggest that both reliefs are effective but that the larger relief—the R&D expenditure credit—is more effective than the SME one. I suspect that there are a lot of other reasons for that, down to the way the firms themselves, the companies themselves, record the relationship between the relief they get and the investment they make. Anecdotally, from companies and clients who are claiming, I do not know any company that says, “It doesn’t make any difference to us”. It always makes a difference to them in how they go on to reinvest in future projects.
Charlotte Barbour: It is fair to say that we do not get a great deal of feedback on the effectiveness of this. The main concern we hear is about who can provide advice on R&D.
Richard Jones: I generally agree. If you compare it to other regimes in terms of incentivising expenditure or investment, it is certainly one of the more effective, shall we say. There are things that could be better, but I am sure we will come on to talk about that.
Q3 Viscount Chandos: I declare my interest as a director and shareholder in two companies that have recently received R&D tax credits: Ambie Media and the Theseus Agency.
The review of R&D is continuing. What additional changes would you like to see, and why?
David O’Keeffe: From our perspective, the biggest issue is the compliance process. There has been a lot in the review over the years to tweak the relief itself. Potentially, changes and additional qualifying expenditure categories are being introduced this year. The biggest issue that we and our members see is in the compliance process itself, and the complexity sometimes of that process, which obviously impacts on the ease and the ability with which companies can successfully make claims.
Viscount Chandos: Before the other witnesses comment—not to steal the thunder of future questions—would you say that compliance was onerous but ineffective, given the reports of fraud?
David O’Keeffe: I am actually not sure that it is onerous. It is certainly not unduly onerous. I have a doubt as to its effectiveness, and that is borne out by the fact that there are large concerns.
Viscount Chandos: If it is not unduly onerous, why are you saying that that is the principal area where change is needed?
David O’Keeffe: I am saying that the problem with the compliance process, in my view, is that it is ineffective. That is a bold, brash statement, and I apologise to HMRC for making that statement, but it is ineffective in that there are too many claims getting through that, frankly, should not get through. That taints the whole system for all the companies that should be, and could be, making claims, and may be put off by the bad press. I think we have seen three articles over the weekend in the national media about this. It puts people off, because they think they are going to face aggressive challenges. Companies have said to me, “Is this tax avoidance?” No, it is not.
Charlotte Barbour: Our biggest concerns are about who can advise on R&D. Therefore, the one change that we would like to see is anything that helps to tighten up on who can give advice. On the way there, with the compliance process, some of these changes might be quite helpful if they give HMRC better tools to do risk analysis on who should and should not get R&D paid out. You sometimes get the sense that some people feel that it is a bit of a free-for-all.
Richard Jones: The main thing is that it is a very complex area—to some extent necessarily, because you need to have an understanding of the tax rules and the scientific area that the claim is being made for.
Having said that, there is a lot of room for simplification and, in particular, better guidance both in updating the BEIS guidance, which I think we will talk about later, and in HMRC’s guidance. The more HMRC could explain how the rules work, what qualifies and what does not, the more it might help to mitigate some of the erroneous claims that are coming through.
Lord Palmer of Childs Hill: Mr O’Keeffe, you can definitely state that it is not tax avoidance. I thought the unacceptable thing was tax evasion. Tax avoidance is generally pretty acceptable as long as it is within the law. Many a company would feel that it has a duty legally to pay as little tax as possible. I was a bit put off by your emphatic comment.
David O’Keeffe: I absolutely agree with what you are saying. We could have a very interesting debate, I am sure, about avoidance versus evasion and good avoidance versus bad avoidance. In the context of the current climate of the debate about tax avoidance, I am saying that claiming R&D tax relief, assuming that you are entitled to claim it, is not a bad thing to do. A lot of taxpayers would view tax avoidance as potentially a bad thing because it sounds bad. I agree with what you are saying. Maybe I should have phrased it slightly differently.
The Chair: I think I understand. Thank you.
Q4 Lord Monks: Mr Jones talked about the complexity of the procedures and the systems that have been developed. If they are so complicated, why do so many people sail quite successfully through them? The actual amount being paid out has rocketed. If it is so complicated, why are so many people doing rather well out of the scheme? Reference has been made to articles in the paper at the weekend. Is there not a major scandal lurking somewhere?
Richard Jones: One issue is that there are advisers who are not necessarily looking at all the rules in detail, or perhaps are looking at putting claims in that are, let us say, speculative at best. If you were doing a thorough job, it would take a lot of work to properly investigate whether a project qualifies and then what the qualifying expenditure is. That inevitably means that somebody who is doing the work thoroughly is going to cost the company quite a bit of money, potentially. I can see that there will be quite a temptation to go with an adviser who is perhaps significantly cheaper, but in the long run they may not make a claim that is accurate.
The problem is that a lot of these claims are smaller in volume, in the size of the claim. It is not in HMRC’s interests, or not efficient, for it necessarily to inquire into all of them, because it only has a limited amount of resource. I think that is one reason why a lot of these claims are getting through.
Lord Monks: The procedures are complicated, but firms employ experts—agents, accountants or whatever—who know the score, and they maximise the entitlements. Is that what you are saying?
Richard Jones: Those that use agents who go through the proper procedures and make sure that they have looked at all the expenditure, and have been clear that the project qualifies, spend the money on those fees. I think perhaps they are a little bit more self-assured that the claim will be allowed and is genuine. Equally, there are other companies that do not approach the agent. I am making lots of assumptions here, but I can imagine that a lot of agents go out and court companies in particular sectors, for example, where they feel perhaps that it is an area where, more traditionally, those claims have not been made and where they can push the boundary a little bit.
Lord Monks: Mr O’Keeffe hinted that it was the opposite—that the procedures are actually rather easy to navigate if you know what you are doing. Is that right?
David O’Keeffe: I do not want to completely disagree with what Richard is saying. From my perspective, I am saying that the process of identifying whether something is R&D, if you know what you are doing and if you have the experience and knowledge, is not unduly complicated.
I then commented about the compliance procedures themselves. That is the point about the fact that people put claims in, either through ignorance, and therefore error, or deliberate error, deliberate overstatement. They are claims that should not go through, and they are not being picked up. In my opinion, that has created, and is exacerbating, the problem. There are then people who think, “Well, my mate in his or her company has got this relief. Why are you telling me I can’t have it?” There are advisers saying, “Well, this is easy. All we’ve got to do is pull some numbers together and put a claim in, and it will sail through”.
Charlotte Barbour: I would add only that I think in a lot of smaller businesses, individuals are not relevant to R&D but nevertheless on this general point, they are broadly frightened of tax. They think it is complicated. Whether we fine-tune it so that this bit is complicated, that bit is complicated or the next bit is complicated, they are scared of it. If you are in a smaller business, presumably you have quite a bit to do just making the whole thing run. You are quite content to go to an adviser.
The issue that we have is not so much the complications or how you navigate them, but quite a lot of advisers are reported to us, in anecdotal evidence, where—much more than in other parts of the tax system—people complain that they are sales-oriented, cold-calling and commission-based. It is that which is causing the problems. Obviously, if you have a lot of claims going into the system and they are being processed, the money comes out and then is checked later, it is all too far down the line. That is what makes it feel complicated.
Lord Monks: There is a pretty lucrative business for agents and accountants in processing these claims, is there?
Charlotte Barbour: Certainly for the rogue agents who are working on a commission basis, there is money. Money is being paid out and, if they take a percentage, obviously there is money in it. It is just the same as any other kind of repayment claim.
Q5 Baroness Noakes: We have already strayed into this area, which is the abuse of the relief. I think, Ms Barbour, you mentioned that you had anecdotal evidence. What do you and your bodies know about what is happening in the abuse of the reliefs? Can you tell us how that is affecting your members and your members’ clients?
Charlotte Barbour: As a professional body, we work with members through committee systems, much like this. That is our formal mechanism for getting feedback, but we get quite a bit of feedback from members about the R&D issues. It is probably because it is close to home. If your client is being cold-called and then comes to you saying, “I’ve been told I can qualify for this R&D”, and you think, “No, you can’t”, it puts a strain on relationships. You then get told that somebody else—a business down the road—has been able to claim it, and they easily get it.
If the client goes ahead and claims it, quite often, especially on the smaller claims, as you mentioned, they are paid out and it may be a few years down the line before the claim gets bigger, as the company gets bigger, that it is checked. Then you come back to it. Of course, that puts our members in a really awkward position, because they say, “We don’t think this qualifies”, yet money is being paid out and other people are making claims. It puts our members on the back foot, and if you ever have to go and fix it, once it unravels, that also makes for trouble. Are your members the same, Richard?
Richard Jones: Yes. I would add a couple of things. First, a few months ago we saw HMRC essentially put a stop on certain repayments while it investigated the ones that it was more concerned about. That is perfectly understandable, but obviously it meant that more genuine claims were delayed. That potentially had cash-flow issues and made financial problems for those companies.
The other thing we know is that one of the ways HMRC is trying to address the claims is by sending out letters to companies in the same sectors as those that it has realised are making less than perfect claims, saying, “Can you please go away and check that you have actually made a genuine claim?” Again, I have sympathy for that methodology, but it creates tensions between agents and their clients. They say, “Oh, I would have thought that you would have checked this claim thoroughly”. The agent says, “Yes, of course”. Then they have to go through a process of unpicking it, probably unnecessarily because there has been an element of doubt cast into their minds by the letter that HMRC had sent them.
Baroness Noakes: Mr O’Keeffe, do you have anything to add?
David O’Keeffe: No, I do not think so. I agree with everything that has been said.
Baroness Noakes: The problem is the people who are doing cold calling. It is not fundamentally a problem of the agents not being members of your bodies. Presumably you accept that people can be confident in making claims whether or not they are members of your bodies. It is a subset of that. How can that be identified?
Charlotte Barbour: We feel strongly that all agents should belong to professional bodies. It is our sense that the rogue ones, as we would see them, are not members of the professional bodies.
Baroness Noakes: Do you have any evidence that there is a complete correlation between those rogue agents and those who are not qualified?
Charlotte Barbour: We do not have a complete study of that, but it is my understanding, from looking at the websites of those that do cold calling—the rogue ones—that they are not members of any of the professional bodies that you would expect to do tax.
Baroness Noakes: Do you not accept that you can be competent at putting a claim in even if you are not a member of one of your bodies?
Charlotte Barbour: Absolutely, you can be. It is one of the difficulties that HMRC has in looking at the wider issue of raising standards. There is no reason why you cannot be competent without belonging to a PB.
Q6 Lord Palmer of Childs Hill: All the questions relate to each other, as Baroness Noakes said. We read in the papers only today about the amount of abuse there has been; there were two articles today. If there has been that abuse, how effective will the Government’s proposals be in tackling it? How could it be tackled? There are two sides to it. One is that there are people claiming who should not claim, and who perhaps are being encouraged to do so. On the other side, there are people being discouraged from claiming because they think it is too complicated.
Perhaps I could relate that to the advice you give as professional bodies, of which I am a member. When you decide on the advice to give the clients of your professional body—the SMEs or whatever—and some of them think the forms are too complicated or the process is too complicated, despite what Mr O’Keeffe said earlier, do you do any sounding among SMEs as to whether they feel the forms they have to fill out are too complicated? What is putting them off? There is abuse on both sides—those not claiming and those claiming. Do you think the government proposals are helping?
David O'Keeffe: In terms of the proposals that are on the table at the moment in the draft legislation for the Finance Bill, I honestly do not think they will be of huge help in tackling abuse. It is important—you alluded to the point—that there is a distinction between abuse and error, but they often get lumped together. I do not think these measures will have a significant impact. Some of them do not even attempt to address it; they are addressing other issues. The big one that is ostensibly attempting to address it is about providing advance notification. I do not think it will work in the sort of abuse we are hearing about and seeing.
Charlotte Barbour: Some of the measures ought to give HMRC more information, which ought to help it be able to decide who it is going to check. If HMRC has the staff and the capacity to do that, that ought to help. Some of the measures should in theory help. I am not sure that they completely resolve the problem. Pre-notification may help, but equally it may hinder. It may hinder genuine claims if they have not come in within the six months’ notice of the pre-claim. It is a bit of both.
Richard Jones: I tend to agree. The measures would affect both genuine claimants and non-genuine claimants equally. The notification requirement in particular is aimed at companies that either have not made a claim or have not made a claim in the last three years. Those are probably the most likely companies that less genuine agents might approach, but equally they are the ones that are most likely to miss the deadline, which is very short and only six months from the end of the accounting period. If you miss that deadline, you cannot make a claim. I can imagine a lot of genuine claimants missing out as they do not have the processes in place already because they are not used to making R&D claims.
The Chair: The second part of Lord Monks’s question may not have been fully addressed. Other than saying that every agent has to be a member of a professional body, how do you think abuse can be best tackled?
Charlotte Barbour: As things currently stand, you have a mixture of how the claims are policed and how much resourcing goes into that. Abuse is also tackled by having agents you can rely on. We would like to think that the agents who subscribe to all the professional body requirements, have monitoring visits and abide by the professional conduct in relation to taxation guidance, operate at a certain standard, and that ought to help.
The Chair: I was asking about other than that.
David O'Keeffe: I come back to the point I made before about a compliance process. We are where we are with a process that has encouraged companies and advisers to make claims that should not be made, and encouraged them with apparent success. It is the process. I do not want to encourage a draconian clampdown, because that will defeat the object of the relief in itself. I recognise that this is not an easy fix. Measures such as advanced notification and telling HMRC who the adviser is may or may not do something, but they will not go all the way. The process has to be tightened up so that claimants and advisers have a genuine anticipation—you can call it fear—that their claim will be looked into.
Richard Jones: HMRC could divert more of its resources, maybe not 100%, to investigating agents it has identified as issuing non-genuine claims, rather than bringing in blanket measures that affect everybody equally.
Lord Palmer of Childs Hill: I want to touch on what Mr O’Keeffe said—that it is not unduly onerous. In the institutes and associations that you represent, when you give guidance, does that come from within your professional body, or are you going out to SMEs and saying, “Do you understand this?”
Charlotte Barbour: When we offer guidance in the main on R&D as a professional body, there is some topical guidance that sits in the suite of professional standards, professional conduct in relation to taxation, which is one of our key documents about how one should or should not work with tax planning, claiming relief and such things. There is a separate suite of topical guidance on R&D, and it has two sets of audiences: one is our members, and we like to say, “That is what we expect of you”; although if our members are abiding by the rules anyway you would think it is not necessary.
The second is that we get reported back to us that members find it really helpful to show their clients that that is what is expected of them as a member of a professional body, so sometimes I think it is quite helpful to wave it about and say, “This is why we won’t accept your claim or support it”.
Q7 Lord Turnbull: I am not getting, from the HMRC people we interviewed last week or from you, the enormity of what is going on. In my view, this is a major, major financial scandal. It seems to me that, in 2014-15, £1.4 billion was paid out for R&D. In the last year, it was £4.6 billion. That is three times as much. This is at a time when over those six years the economy has basically been stagnant, so it is completely implausible that R&D being conducted by small companies has gone up by that amount against that economic background.
We have a system that is not onerous; it is basically “Help yourself”. You put in an application, and what makes it genuine is that Inland Revenue ticks it through because that means you go around and someone else will say, “Well, they approved that”. There has been great complacency in letting through claims with a rigour that is completely missing. If I were them, I would say, “You have to start again and look at this”, and not the idea that you put in a claim, we say, “Okay”, and then all claims that are similar can go on. That is just for the SME part of it. There are similar figures for the larger companies.
As safeguards, there has to be something that looks rigorously at what really is R&D, whether it is worth supporting and how that R&D is growing over time—not measuring it by the people claiming it as R&D, but looking at what is actually happening so that the quality of the claims is consistent over time. There is no way, in my mind, that R&D in the small firm sector has grown by 50% compound for six years. That is completely implausible. I would say that a very large part of that £4.6 billion is bogus, and something needs to be done about it.
David O'Keeffe: I do not know whether it is bogus. You would have to go back and look at it to say whether it is. I suspect you are right. Whether it is a large part of it or a very large part of it, I do not know. There are two points. As you will be aware, the ONS has just revised its methodology for measuring business expenditure on R&D—BERD—which, having been revised, reduces significantly the gap between its measure of R&D spend in the economy and HMRC’s measure of the expenditure claimed on R&D relief.
Lord Turnbull: The HMRC measure is how much it has paid out.
David O'Keeffe: Yes, it is the expenditure on which it has paid out. Absolutely. There was a big gap—I do not have the figures in my head—but there is now a much smaller gap, with the R&D tax relief figure still higher. There is that side of it, but, without wishing to sound like a worn record, it comes back to the process that you have alluded to: the fact that claims are being allowed through that should not be, and then people look at that and say, “Well, that must be right then”, because HMRC has “approved” it.
It is one of the things that certainly I hear a lot of the time, and I am sure we all hear it. Businesses or even advisers say, “But HMRC has approved that”. That does not mean it has actually looked at it and approved it; it just means that it has not challenged it.
Lord Turnbull: Mr Jones said that it is not effective for HMRC to look at it, but when the sums are this large it must be effective. There are plenty of other areas where, for £1 billion or £2 billion, HMRC thinks that it is very much in its interest to pursue them.
Charlotte Barbour: I suppose it is partly whether you are looking at a lot of small claims in the SME market. One of the things that we warn members about is that quite often a small start-up business claims R&D, but it is not an awful lot. It gets paid out, so it has been approved. That is a licence to put the next claim in. The next one maybe goes in and you are third year or fourth year down the line before it has become bigger, because the start-up has become bigger. You start to police it, and then it might start to unravel, but in the meanwhile it has gone around the vicinity and all the competitors that they are getting money.
Lord Turnbull: HMRC has to distinguish between whether more R&D has been done or whether more things have been described as R&D, and I suspect that it is that more things have come in and got a description as R&D that were not there at the start of the scheme. That is where it has become very slack.
David O'Keeffe: I do not think it is, in a sense, HMRC’s job to say what R&D is being done, other than in the context that, if someone puts a claim in front of it, it is its responsibility to be comfortable that what is being claimed as R&D, on the balance of probability, is R&D. I am choosing my words carefully because we operate in a self-assessment regime, and HMRC operates a pay now, question later policy—quite rightly, given the resource levels. One problem is that that question later does not always come and then, as Charlotte said, the thing builds up; a claim has been put in and it is put in again for the next year’s expenditure. It was wrong to start with, so that error builds up and compounds.
Lord Turnbull: I think you are also saying that the changes that are being proposed do not really tackle the problem.
Charlotte Barbour: They will help, but they will not resolve it completely. That is partly, as you said, because it is a self-assessment system: you assess what you are due and pay tax or make your claim.
Lord Turnbull: Self-assessment, or what I call “Help yourself”. I will leave it there.
The Chair: Thank you. The next question was answered, so we move to Viscount Chandos’s.
Q8 Viscount Chandos: This is not quite from the sublime to the ridiculous, but to the very practical. It is proposed that R&D claims will be made digitally in the future. Are there other process simplifications in that vein that you think could be introduced?
Richard Jones: A limited change that has come in is submitting them in electronic form rather than submitting them on paper. We would like to see more integration into the company’s tax account with HMRC so that you have a one-stop shop. Obviously, that involves a much bigger change than just R&D, but having a more integrated approach would perhaps help to remove some of the third-party agents coming in and saying, “We’ll just help you with the R&D”. If there was a more trusted relationship with the single agent who had agent access to their account, it might help to make it a bit more of a seamless process.
David O'Keeffe: Integration is the thing. As Richard said, it is digital because it will be submitted online rather than by sending an attachment with an email, but with some of these changes there could still be multiple forms to complete, so the company will have to file its corporation tax form, the CT600. There is already an addendum to that—CT600L—for R&D claims.
There will be one separate form, if not two forms, that will not, if I understand correctly, go in at the same time and in the same system as the two CT600 forms; they will be submitted separately, albeit online. We have changes coming in that will complicate the system rather than simplify it in the way that Richard suggested. I think that is the concern.
Viscount Chandos: It goes back to your response to my first question. If it is not onerous, it is at least quite fiddly and not that effective. You think it could be both simplified and made more effective at catching both the outright fraud and the claims where it is marginal and arguably the wrong side of the line.
David O'Keeffe: Yes. In my opinion, more focus needs to be put on the aspect of identifying claims that are at risk of being overstated either deliberately or in error. In a sense, it is what HMRC does with compliance. It risk assesses whatever it is—in this case R&D. We would like a more effective process of, for want of a better term, triaging those claims to say, “We’re pretty comfortable that that claim is going to be okay. We are really uncomfortable with that claim there, and we’re not too sure about the ones in the middle, so we’ll allocate our resources accordingly”. At the moment, it feels as if what is happening is a bit of a lucky dip.
Viscount Chandos: The most difficult area is not even just in error, is it? It is interpretation of R&D. If you look back over 30-whatever years, investment in fixed assets has been overtaken by investment in software and intangible assets. It is a moving target, is it not? Therefore, the definition of R&D, whether it is the definition or the application of the definition, may always be evolving a bit.
David O'Keeffe: That is absolutely right, but if I could pick up on the first point you made in your follow-up, there are two types of error in that sense. There is the simple, “I’ve included something that I shouldn’t have done and it was a genuine mistake. I didn’t mean to include it, but I have included it”. The other error is a difference of interpretation between the taxpayer and adviser and HMRC, and that is not uncommon, particularly in an area like R&D. I think it is still, and certainly should be, classed as an error if the claim has to be adjusted.
Viscount Chandos: But that is hard to fit within an automated process. Going back to how much more it can be made digital/automated, it sounds to me like there will be a subjective judgment.
David O'Keeffe: I think that is probably the point that Richard was getting at, without putting words into his mouth: that when it is called digital, it is digital only in the sense that it is submitted online. It is not digital in any clever, whizzy way.
Viscount Chandos: It is not an algorithm saying, “Yes, this is R&D”.
David O'Keeffe: No.
Q9 Baroness Noakes: Building on that, you mentioned having a triage system. What, in your view, would a triage system look like?
David O'Keeffe: In my view, it would build on HMRC’s risk assessment profiles. I do not know how it risk assesses them. Those things are confidential. The fact is that it looks at—
Baroness Noakes: The risk assessment of the taxpayer.
David O'Keeffe: I am sure it will be risk assessment of the taxpayer, risk assessment of the adviser, and in the context of both of those saying, “I’ve got an R&D claim in front of me. Is it an industry or a company that I would expect to receive an R&D claim from?” It is all the factors that would go into saying, “Maybe this is a claim that we need to look at in more detail”.
One of the proposals is that any R&D agent or adviser who has worked on the claim must be named. I think that is a fantastic idea as long as something is done with that information, as long as the information is then used to say, “Okay, we’ve had four claims from this adviser, and we’ve had a problem with every one of them. Maybe we should be doing something about that”. You have a first line of defence that says, “Okay, here are some claims that we really need to look at more closely with our finite resources. We can divert those to teams who will look at them more closely. With these others, maybe we can afford to pay them out and come back to them later”.
Baroness Noakes: I think you said earlier that you did not think the proposals from the Government were going to make any big difference, but you have just suggested that they can build a triage system on the basis of the information that is being provided.
Charlotte Barbour: It assumes that they build it.
David O'Keeffe: Absolutely. The biggest concern with that particular proposal, the name, is whether HMRC knows what it is going to do with it when it collects that information. Collecting that information is a great first step, but it is utterly useless if nothing is done with it.
Richard Jones: It is fair to say that there is a trend towards HMRC getting more and more information from third parties, but the question is what HMRC will do with it. A lot of the time, it sends it back to the taxpayer: “We’ve got this information. Would you like to check that what you’ve said is correct?” It is almost as if it is not using the information, but actually passing that responsibility back on to the taxpayer.
Baroness Noakes: At the end of the day, it is the taxpayer’s responsibility to put in correct claims.
Richard Jones: Yes, and HMRC could also use it in a way to investigate those who are not making the claims correctly.
Q10 Lord Monks: The general aim of the policy is to encourage R&D carried out in the UK, but there is some elbow room for exceptions. Do you think there should be more exceptions? Can any justification be given for exceptions to support R&D elsewhere?
David O'Keeffe: The key thing in additional exceptions is just to pick on one that has already been given, but to make it clear that where a company is currently using resource overseas, maybe because the expertise is located there and not in the UK, the Government want that resource to be brought into the UK, understandably. It is important that time is given for companies to bring resource into the UK and build it in the UK. If there is a cliff-edge cut-off, our fear is the risk that companies will simply take the R&D overseas where the expertise already is.
Richard Jones: One of the attractions of the R&D regime for larger companies is the fact that you can get relief for some element of overseas expenditure; it is seen as a very favourable global hub. If that is restricted in some way and seen as less attractive, along the lines of what David said, those companies might decide to move that hub elsewhere.
Lord Palmer of Childs Hill: You talked about identifying the agents. In this day and age, agents sometimes change their names and their incorporation. Do you have any comments on that? You can be “A Ltd” one day and “B Ltd” the next, and essentially it is the same people.
David O'Keeffe: The only question would be why you are doing it. I am sure there are genuine reasons why companies change their names, for rebranding or whatever. The sort of thing that you are possibly alluding to is an indicator of concern in the first place.
Charlotte Barbour: There is quite a bit of change in the market at the moment and quite a bit of consolidation going on. Yes, it is a difficulty, if you are going to identify the agent, that they do not stay the same for ever more and you need a means of tracking them. The other difficulty is that, unless they have done something wrong, they are still an agent and they are quite entitled to represent their clients. It is quite a tricky area. HMRC has been working on the business of raising standards right across the piece, including R&D, for some long time. It is a difficult topic.
Lord Palmer of Childs Hill: Even large firms of chartered accountants change their names and amalgamate. I will not press it, but it becomes a bit of an ambiguous area.
The Chair: Thank you. We had one last question, which, if we may, we will put in writing to you at a later date. Thank you very much indeed for agreeing to appear before us. It is much appreciated.
