Standing Committee H
Tuesday 13 June 2000
[Dr. Michael Clark in the Chair]
(except clauses 1, 12, 30, 31, 59, 102 and 113)
The Chairman: I draw hon. Members' attention to the revised selection list to the end of clause 88, which is available in the Room, as many hon. Members have noted.
Meaning of ``research and development''
Amendment proposed [this day]: No. 91, in page 398, line 14, leave out from ``development'' to end of line 32 and insert
`has the meaning given in paragraph 21 of Statement of Standard Accounting Practice 13'.-[Mr. Ottaway.]
Question again proposed, That the amendment be made.
The Economic Secretary to the Treasury (Miss Melanie Johnson) rose-
Mr. Oliver Letwin (West Dorset): On a point of order, Mr. Clark. This is a genuine point of order, for once.
Miss Johnson: Would the hon. Gentleman like to make any admissions in relation to earlier points of order that he has raised?
Mr. Letwin: No.
I fear that we are remorselessly advancing towards the point next week at which we will encounter the dreaded schedules 30 and 31. It would greatly assist the Committee if the Income and Corporation Taxes Act 1988 and the Taxation of Chargeable Gains Act 1992 were available in the Room. It is almost impossible to make head nor tail of those schedules without them.
The Chairman: I agree with your definition of the word ``genuine''. It is a fair point that those papers should be in the Room. I shall refer the matter to the authorities and do my best to ensure that the documents are here for the benefit of the Committee.
Miss Johnson: The hon. Member for Croydon, South (Mr. Ottaway) asked about definitions of research and development before we adjourned for lunch. I could discuss such definitions extensively, but I shall try to summarise a little.
It is worthwhile to give notice to the Committee that the original approach was based on an Organisation for Economic Co-operation and Development definition of R and D, in what is called the Frascati manual. I do not believe that that has anything to do with wine, although I am not sure how it got its title. It is the internationally recognised standard for statistical reporting of R and D activity. The manual is updated periodically, is 250 pages long, and includes detailed examples and boundaries of R and D activities. We considered using the Frascati definition, but that was rejected by most consultees, who had neither heard of nor seen the manual. They preferred to use statement of standard accounting practice 13, to which the hon. Member for Croydon, South referred.
Commercial and product development, which the hon. Gentleman also mentioned, do not come within the accepted meaning of research and development. The new definition and guidelines clarify what is meant by R and D for tax purposes. They do not change the meaning that has been applied in the past by the Inland Revenue and the Department of Trade and Industry. Instead, they explain it and put it on a clear statutory basis. The term R and D has a specialised meaning, and the definition for tax purposes is based on and has the same scope as the definition used generally for other purposes. It is based on the international standard in the Frascati manual and is aligned with the definition for accounting purposes, which is also based on the international standard-SSAP 13. The DTI uses the same definition for programmes to support and promote R and D. The accepted meaning of R and D is distinguished from non-research activity by the presence or absence of an appreciable element of innovation. It includes experimental research and development, but not commercial and product development.
It is worth pointing out that we consulted on the revised proposal in March, following the Budget. We received many comments from representative bodies on the proposed guidelines on the meaning of the term ``R and D''. The clause and the amendments are concerned with that term-[
The Chairman: Order.
Miss Johnson: A representative of the Institute of Chartered Accountants in England and Wales said of the guidelines that,
in general, I think they provide a very useful tool for the resolution of the difficult borderline issues which arise in this area.
The Institute of Chartered Accountants in Scotland stated:
Within the guidelines, the R&D boundary examples are particularly helpful.
The Chartered Institute of Taxation said that
The guidelines appear to provide a comprehensive summary of the distinction between qualifying and non-qualifying activities sought.
I hope that hon. Members accept that we are offering the definition that will be most helpful to the various accounting bodies and others who need to be clear about whether something constitutes R and D.
Mr. Richard Ottaway (Croydon, South): The mind boggles about the nature of the Frascati manual.
Miss Johnson: I agree.
Mr. Ottaway: What year is it?
Miss Johnson: I think it is 1993 or 1994.
Mr. Ottaway: I am not sure whether that was a good year for Frascati. I appreciate the way in which the Economic Secretary spelled out her explanation, which was the one that I wanted-[
The Chairman: Order. There has been a lot of noise in Committee on two occasions, and on both it has come from hon. Members on the same side as the hon. Member who was speaking. It is disconcerting for speakers if people are noisy behind them, so I ask members of the Committee to have some respect for their colleagues.
Mr. Ottaway: I think that, in effect, I tabled the wrong amendment. Instead of calling for the accounting definition, I should have tabled an amendment that used the definition ``research and some development''. At least the Economic Secretary was good enough to acknowledge that development relates only to scientific research. Despite the new headline definition of research and development, it is still limited in the same way as it was before. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 19 agreed to.
Clause 68 ordered to stand part of the Bill.
Tax Relief for expenditure on research and development
Mr. Ottaway: I beg to move amendment No. 92, in page 401, line 21, leave out ``£25,000'' and insert ``£24,000''.
The Chairman: With this we may discuss amendment No. 93, in page 401, line 22, leave out ``£25,000'' and insert ``£24,000''.
Mr. Ottaway: We have moved on a schedule and are now dealing with the detail of tax relief for expenditure on research and development. The amendment is designed to probe the issue of why the Government have adopted for R and D a threshold of £25,000, which will be deductible in insurance terms. Most of us could find plenty of small firms in our constituencies to which £25,000 is a substantial sum to spend on R and D. Such firms will be precluded by the threshold from the fairly generous relief of 150 per cent. tax relief for R and D, which is worth having and worth aspiring to.
The thrust of the Budget has been to help smaller firms, which is not something that we want to obstruct or oppose. We could think of other ways to do it, but, given that that is the Government's intention, the Economic Secretary should explain why she has set the relatively high threshold of £25,000.
Miss Melanie Johnson: The threshold was set at £25,000 following consultation. I am a little confused about what the hon. Gentleman meant when he referred to setting such a high threshold. We originally proposed a threshold of £50,000, a figure that most businesses responding to the consultation thought was reasonable. However, several representative bodies said that it might be too high for some fledgling businesses, so we lowered it to £25,000, as had been suggested.
I can give the hon. Gentleman details of the figures suggested by various representative bodies. The British Chambers of Commerce suggested £25,000, and the Chartered Institute of Taxation £10,000; the Confederation of British Industry said that the figure should certainly not be higher than £25,000; the Institute of Chartered Accountants in England and Wales was not convinced that there should be a limit, but that view seemed out of kilter with everyone else's; and the Law Society of Scotland thought that it should be between £10,000 and £20,000. The range of figures was wide, but they tended to be lower than the £50,000 with which we began. Therefore, we arrived at the best compromise figure of £25,000, which strikes a sensible balance between the need to keep administrative and compliance costs down and our desire to encourage businesses to carry out R and D. To go any lower would have made nonsense of the measure, but we have substantially reduced the figure in response to the views expressed in consultation.
Mr. Ottaway: I tend to agree with the Institute of Chartered Accountants, which said that there should be no threshold. Will the Economic Secretary explain why there should be a threshold at all? Is she concerned about the Government's administrative costs, or about the burden on companies? The choice should be for the company to make, if the latter is the case. I remain puzzled.
Miss Johnson: Without a minimum sum for R and D, the measure would make no sense. The ICA suggested that there should be no limit, but it was unusual in that; everyone else suggested a limit, for the reasons I have given. We are trying to encourage R and D. To have a proposal that does not set a minimum level of activity that must be reached before the whole thing engages would be ridiculous. The threshold will encourage businesses to increase their R and D activities to a certain level, help to target tax credits on those businesses carrying out real R and D, and keep administrative and Exchequer costs within reasonable bounds. It is a trade-off between setting a threshold and the administration that goes with the measure. To set no threshold would tie an awful lot of people up in unnecessary paperwork and would not fulfil our overall aim for the economy.