Finance Bill

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Dawn Primarolo: It would make it far easier for me, as the Minister, to respond if we could deal with the points in context. If my hon. Friend the Member for Crosby (Mrs. Curtis-Thomas) will allow me, I shall return to her point on how the large company tax credit will operate vis-a-vis not-for-profit organisations—universities, for example—when we debate the amendments.

My final two points of concern set the scene for the clause. The first is the issue of intellectual property rights. Small and medium-sized companies must retain some, however small, intellectual property rights within their R and D. There are obvious reasons for that, given their size. There is no requirement on large companies, and we must ensure that the United Kingdom research and development of foreign multinationals qualify in order to encourage inward investment, because that is part of the issue.

My second point concerns the definition of research and development. First, for small and medium-sized credit, we are using the DTI guidelines. After a great deal of discussion, we are using the same guidelines for large companies. They are based on the research and development definition of the Organisation for Economic Co-operation and Development and underpin the UK accounting standards and the R and D credits of other countries. That becomes crucial when making international comparisons and considering the possibility of what might be called double dipping, or getting credit from two different countries for doing the same research. That issue is part of the subject of the amendments. Although I welcome hon. Members' contributions to date, perhaps we are just setting the scene for how the provisions vary so that now we can tease out in the amendments why they do so. I should perhaps conclude my remarks on the clause and save further detailed discussion for the debate on the amendments.

The Chairman: I call Mr. Jack, but very specifically on clause 52.

Mr. Jack: Indeed, Mr. Gale, I would not have risen had I not wished to make a specific point while we are considering things in the round. In the Red Book, the amount of money that the Government are going to expend on research and development tax credits in the financial years 2003-04 and 2004-05 is shown as a flat figure of £400 million. Will the Paymaster General put my mind at rest on that? For example, if the R and D tax credit is more successful than she has outlined, can I assume that that £400 million is not an upper limit, that this is not a cash-limited figure?

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I was intrigued as to why the sum was deemed as flat instead of, for example, a rising trend of numbers. There may well be a very good explanation, for which I would be grateful.

Dawn Primarolo: The figure is not cash-limited and the figures assume the ability of the companies, on the information we have to date, to draw down on new investment to do that new R and D work. The right hon. Gentleman is quite right. If the measure is astronomically successful, the figure could rise. That would be good for the British economy as a whole, good for all the figures in the Red Book and not something of which the Government would take a dim view.

Question put and agreed to.

Clause 52 ordered to stand part of the Bill.

Schedule 12

Tax relief for expenditure on research and development

Mr. Flight: I beg to move amendment No. 25, in page 189, line 9, after 'enterprise', insert—

    'or a small or medium-sized enterprise which makes an election pursuant to paragraph 16A below'.

The Chairman: With this it will be convenient to consider amendment No. 26, in page 194, line 35, at end insert—

    'Regulatory simplification

    16A. (1) In respect of any financial year any small or medium-sized enterprise may elect to forego the reliefs available to it under Schedule 20 to the Finance Act 2000 (tax relief for expenditure on research and development) and instead claim relief under this Schedule as if it were a large enterprise.

    (2) Any election pursuant to this paragraph must be made in writing to the Inspector of Taxes prior to the end of the financial year in question.'.

Mr. Flight: The two amendments are straightforward and echo the brief remarks that I made at the beginning of the stand part debate on clause 50. It is entirely understood and correct that the reliefs available to SMEs are more favourable than those offered to large enterprises. However, comments that we have received from industry leaders lead us to believe that some of the conditions attached to the reliefs for small companies could be onerous and it might be simpler for small companies to claim a less restricted, albeit less generous, relief under this new measure. It would also, obviously, for those who chose to do that, render the transition from small to large much simpler. Both the IOD and the CIOT have suggested that it would be sensible to move to a simple, volume-based system in general.

The Chairman: The issues are complex and inter-related. As is my custom, I am perfectly prepared to allow a wide-ranging debate on the understanding that we do not then have a schedule stand part debate at the end. Insofar as Members find it convenient to discuss broader issues I am perfectly happy for that to happen.

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Mr. Davey: The principle behind the amendment needs applauding. If the Minister is not going to accept it, I hope that she can explain how she envisages companies growing and developing from one tax credit to the next.

The Minister was gracious to the Committee in the previous debate and explained the background and how the credits would work. That was a helpful reminder but I am still not clear whether, if a company grows over the period of the R and D investment and moves from one definition to the next, it will suffer penalties. How will the transition in its growth be managed within the tax system? That is an important issue. We should be grateful to the hon. Member for Arundel and South Downs for tabling the amendment because, if the R and D is successful, the company will grow. The Minister might argue that if the company is successful, the tax credit should be capped because the earnings that result from its growth will mean that it no longer needs the subsidy.

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Investors will be putting in risk capital and expecting a certain return. Has the Minister analysed the relation between the two credits? Will she be able to reassure investors that their expected returns will not suddenly diminish because of the complex interrelations in the system?

Dawn Primarolo: I am not attracted to amendments Nos. 25 and 26. In fact, they represent real danger for small and medium-sized companies with regard to the entitlement to the 50 per cent. addition. If there were an opt-out, they could come under pressure, because the 50 per cent. is given in return for what they undertake themselves. Subcontractors may be attached to a larger company, which will be entitled to the larger company benefits.

The hon. Member for Kingston and Surbiton referred to what happens when companies grow. The amendments would allow a small or medium-sized company to opt out of the tax credit for those sizes of company and be treated as a large company instead. It is far from clear why a company would want to opt out of receiving 50 per cent. in favour of receiving 25 per cent.

Under our proposals, a small or medium-sized company will be able to claim the existing credit for a company of that size on its own R and D and an extra deduction of 50 per cent., rather than the 25 per cent. that will go to the larger companies. There will be a possibility of a cash payment if the venture is loss making. If the company opts out, it will lose the cash payment option and its tax credit is reduced from 50 to 25 per cent. In addition, a small and medium-sized company, having protected its position vis-a-vis the 50 per cent., may still be able to claim the large company credit for expenditure on work financed by someone else—for example, subsidised work or work by a subcontractor for a large company.

The proposed new paragraph in schedule 12 is headed ''Regulatory simplification,'' but it is hard to see what the simplification is or what other benefits it would allow. It would add to the length of the Bill,

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create new uncertainty over the status of the small and medium-sized company and could cause serious problems. Hon. Members may find it easy to imagine a contract being drawn up between a large company that wants access to a tax credit and a smaller company that would receive a tax credit at a greater rate, that would benefit to a greater extent and that might come under pressure for contract reasons to opt out of the better entitlement. Therefore, I am not at all attracted to the amendment.

The hon. Member for Kingston and Surbiton suggested that the Bill would make the rules for small and medium-sized businesses too complex. He asked how a business would move from one category to another and suggested that it would be simpler to allow them to choose. The Government and officials at the Inland Revenue and the Department of Trade and Industry have put a huge amount of effort into discussing with small and large companies how to make the rules as simple as possible, while allowing benefits to flow from that.

Mr. Jack: I am following the Paymaster General's argument carefully. Will she say what would happen if a large company took over an SME, whose R and D activity it found to be especially attractive, thereby giving the smaller company the enhanced credit that she mentioned a moment ago? Would the status quo of the smaller company remain, although it had become a wholly owned subsidiary of the larger company?

Dawn Primarolo: Perhaps I can answer that question in a slightly different way. It is not always possible to provide in legislation for such changes of status, and some discussion with the Inland Revenue will still be necessary. Of course, we hope that SMEs will grow into larger companies, and we want to encourage that. However, we should recognise that they will go through a transition. The effects of that transition will be eased by the definition of ''small or medium-sized enterprise'', which will allow a small company to continue qualifying as such in the year after it ceases to meet the criteria. None the less, at the end of the transition period, the company may fall within the definitions of ''large company'' and therefore fall within the tax credit regulations. We recognise that SMEs will be under a different pressure.

We have tried to keep the scheme as simple as possible but it must be able to operate. The precise definitions of ''R and D'' and how they will work in practice following the DTI guidelines are still being discussed with the CBI and other trade and accountancy bodies, as was referred to on the Floor of the House. The detail of many of those issues will need to be set out, but the essential point is to recognise that SMEs operate under different conditions and, therefore, if they are to be able to undertake R and D, will attract slightly different rules from large companies. The two sets of rules must co-exist as simply as possible to deal with the transition across boundaries. That is what the Government have tried to achieve, and that is why the consultation exercise opted for a volume-based rather than an incremental

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scheme. The points that hon. Members are making about complexity would be writ large if we had an incremental scheme.

Both the Chartered Institute of Taxation and the Law Society of England and Wales are of the view that the way in which the credit will operate will provide for a clear system in terms of how companies claim. Until we see that in operation, I cannot say that all of the matters are settled and dealt with. However, we believe that companies and professional bodies should continue discussing with us the finer qualities of the provisions.

I return to a point made by the hon. Member for Kingston and Surbiton. This debate is not the final word on how the provision will operate or on how we should review it and make sure that it improves. Nor it is the final word on Government policy in continuing to encourage research and development, growth and productivity because of their clear benefits to the British economy in terms of jobs and skill levels.

I hope that Opposition Members realise that an opt-out for small and medium-sized companies would be bad, because they could come under pressure to give up what clearly are good benefits. We want the two credits to interact with a sufficiently light touch to ensure that SMEs do not find themselves squeezed, or having to operate under unreasonably complex rules. That is certainly what everybody is saying to us. Frankly, if it is good enough after all the consultation, we should give the legislation the opportunity to work before adding complexities to provide for things such as opt-outs.

I ask the hon. Member for Arundel and South Downs to wait and see how the tax credit operates. If people still have problems, I am sure that the Opposition will come back next year, if the Government do not, with suitable amendments. I ask the hon. Gentleman to withdraw the amendment.

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