Of the 21 measures the Budget introduced, HMRC said 12 are to protect revenue and nine result in more tax coming to the exchequer by tackling fraud, avoidance and unfair outcomes and clamping down on non-compliance both offshore and domestically.

HMRC says it has identified (and prevented) fraud attempts on the SME payable tax credit, worth £300 million in total. In these cases, companies were set up to claim the cash available through the payable credit even though they have no legitimate R&D activity. HMRC also identified structures set up deliberately to claim the payable tax credit despite having no or little employment or activity in the UK.

Philip Hammond announced in the Budget that the amount a loss-making company can receive in R&D tax credits will be capped at three times its total PAYE and National Insurance contributions liability from April 2020.

The Treasury says this will deter abuse because fraudulent companies typically do not employ many people or pay PAYE and NICs. The cap will therefore ensure that the relief goes to companies that have a real UK presence, while close to 95% of companies currently claiming the payable credit will be unaffected.

Nevertheless, the government recognises that some genuine companies with UK R&D activity may have low PAYE and NICs liability relative to R&D spend and therefore could be affected by this measure. In these cases, the companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits. The government will also consult on how the cap will be applied, to minimise any impact on genuine UK businesses.

In addition, the government says it will raise £35m by making directors liable for business taxes owed, where there is a risk of a company deliberately entering insolvency to avoid or evade tax. This comes into force following Royal Assent of Finance Bill 2019-20.

Other anti-avoidance measures in the Budget include targeted legislation that prevents UK traders and professionals from avoiding tax by arranging for their taxable business profits to arise in territories where significantly lower tax is paid than in the UK. The taxable UK profits will be increased to the actual, commercial level. This comes into force on 1 April 2019, and HMRC says clamping down on profit fragmentation will bring in £120m.

There is action on ‘VAT looping’, where insurers reclaim otherwise irrecoverable VAT by exporting their services and then arranging for supply to a UK consumer to be made via an offshore-based associate. This comes into force on 1 March 2019 and will protect £40m.

The Treasury says a further £240m tax will be protected by tightening the guidance for VAT groups, to ensure that UK VAT is paid by businesses on services bought through their overseas establishments. This comes into force on 1 April 2019. An estimated £515m will be brought in by ensuring that the correct VAT is paid to HMRC when the price of a good or service changes (‘regulation 38’). This comes into force on 1 September 2019.

There is an additional £425m of tax avoidance to be prevented by ensuring that VAT is paid to HMRC even when a good or service is paid for by the consumer but not taken up (‘unfulfilled supplies’). This comes into force on 1 March 2019.

Additionally, £50m will be collected by preventing abuse of entrepreneurs’ relief, removing a loophole where companies issue shares with little or no economic rights so that employees can claim a lower CGT rate on disposal. This comes into force on 29 October 2018.

Preventing abuse of R&D development tax relief is here

Budget 2018: avoidance, evasion and unfair outcomes package is here

Report by Pat Sweet