Finance Bill

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Dawn Primarolo: Certainly. My hon. Friend raises an important point about how the tax credit operates. It will encourage research and development in the United Kingdom, particularly in industries that large multinational companies may be financing from outside the UK. My hon. Friend's example was of the tyre industry being financed from outside the UK when its R and D occurred here. Such an industry would qualify for tax credit.

The hon. Member for Arundel and South Downs made a slightly different point. He wanted to ensure that companies did not get double credit—from the United States and from the United Kingdom—for the same R and D. My response was that the operation of tax treaties, and the rules for calculating tax, would ensure that that did not happen. A multinational that accessed R and D tax credit in another part of the world could not access R and D tax credit in the UK—even if it tried to get it for different R and D—because that would make for complicated rules on distinguishing where research happened. We want our tax treaties and tax system to operate normally by ensuring that there is no double relief. I hope that I have reassured the hon. Gentleman that we are quietly confident that our rules will prevent behaviour that could cost the Exchequer money.

Mr. Flight: I am pleased to hear the Paymaster General's response, for which I thank her. The fundamental objective is to ensure that R and D happens here. I understood from discussions with CBI representatives last autumn that we are in a competitive game, particularly with Canada where there are attractive incentives—hence the argument in favour of the provision. The double dip is a secondary point. It strikes me that the schedule has been cleverly crafted, particularly within EU constraints, so that the net effect is that virtually all R and D takes place here. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Jack: I beg to move amendment No. 77, in page 189, line 30, after 'incurred', insert ', whether directly or indirectly'.

The Chairman: With this it will be convenient to take the following amendments: No. 78, in page 189, line 32, after 'stores', insert ', or

(c) on accommodation.'.

No. 79, in page 189, line 32, at end insert

    ', or

    (c) on applicable direct overheads, such amount to be calculated on a just and reasonable basis.'.

6.30 pm

Mr. Jack: Amendments Nos. 77 and 79 are conveniently linked because they deal with aspects of staffing costs relating to the research and development tax credit. Amendment No. 78 deals with matters concerning accommodation. I would like to proceed carefully through this small series of amendments because their implications are quite technical.

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Amendment No. 77 deals with the fact that many large companies and groups outsource certain expenditure. Indeed, many groups have a service company through which all their staff are employed, and where the costs are recharged to the relevant individual companies. As the Paymaster General will know, in terms of the R and D tax credit, matters connected with staffing costs that are allowable are provided for by paragraph 17(b) of the schedule, which states when read in conjunction with the first part of the paragraph that the provisions of paragraph 5 of schedule 20 to the Finance Act 2000 apply for the purposes of schedule 12 as they do for schedule 20. The definition of staffing costs of a company provided for by paragraph 5 of schedule 20 to the Finance Act 2000 is the one relevant to amendments Nos. 77 and 79.

As for amendment No. 77, the proposed legislation does not accommodate the fact that outsourcing costs or group recharges would qualify for relief even when expenditure relates to staffing costs, as the payroll is not undertaken by the company carrying out the research and development. I understand from those in the accountancy profession that that is likely to be a significant issue for large companies and groups. In their judgment, it does not seem to be in the spirit of the legislation, which is what the Paymaster General outlined in her earlier remarks: to encourage research and development in the United Kingdom. The amendment would ensure that relief would be given for outsourcing costs and intra-group recharges, where such expenditure would otherwise fall in paragraph 4(3).

Amendment No. 79 uses as its base the same analysis of the staffing costs, so I will not repeat that. Again, we have a situation in which many large companies calculate a fixed-cost rate when they apply to relevant projects being undertaken in order to provide suitable costing information for management accounting purposes. The cost rate typically includes employee costs and a measure of overhead, and I am sure that the Paymaster General will immediately appreciate that that is an important accounting point.

In order to comply with the proposed legislation, apart from determining which projects are qualifying research and development, many large companies will have to deconstruct the project cost rate to separate out the pure employment costs—hence the point I was making about the definition of allowable employment costs in the provision. To determine the qualifying staffing costs on that strict basis, as referred to in the previous amendment—paragraph 5 of schedule 20 to the Finance Act 2000—many companies will have to set up completely new systems of recording time and costings.

Although the basis of schedule 20 may be relatively simple to operate for SMEs with a small number of R and D staff, it is not appropriate for large companies that have several thousand employees engaged in research and development. Again, it is felt that that does not accord with the Government's objective of encouraging R and D in the United Kingdom. Therefore, the proposed solution as exemplified in the amendment is that qualifying expenditure for research

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and development should include not only the staffing costs of those employees engaged in research and development but an appropriate element of direct overhead. It is felt that that would help large companies to continue with their current operating cost management systems and make it easier to apply and reduce compliance costs. That is complicit with what the Paymaster General said was the objection of the large companies.

I turn to amendment No. 78. Under the Finance Bill provisions, we are aware of what qualifies in terms of relief for R and D. However, the definition of qualifying expenditure does not include accommodation costs. Where a lease is entered into for the purposes of providing relevant accommodation for R and D, tax relief will be available only on 100 per cent. of the rental payments, rather than 125 per cent. of the new provisions. Given, for example, the unique conditions, such as sterile environments, that might be required for research and development in the electronics or aerospace industry, it is felt that it is inconsistent not to allow research and development relief for relevant accommodation costs. The proposal for that, therefore, is that qualifying expenditure for R and D should include not only the staffing costs, to which I referred in previous amendments, but the relevant accommodation costs.

Mr. Mark Hoban (Fareham): I congratulate my right hon. Friend the Member for Fylde on the way in which he has introduced the series of amendments. He has picked up some important issues about what forms a cost base for R and D activity, and he has highlighted the Bill's narrow definition of the type of costs that will gain, in the words of the Paymaster General, super-plus relief.

We have to recognise that a lot of R and D takes place in very expensive premises. People who travel up the M1 regularly will have seen the research centre of GlaxoSmithKline in Hertfordshire. That is an obvious and powerful embodiment of the issue of whether we give the extra, enhanced relief to office costs and the costs of property that large companies incur when they engage in significant amounts of R and D. If we are to encourage and stimulate research and development in the United Kingdom, we must ensure that a broad base of costs is taken into account. I shall be intrigued—if the Paymaster General has the information—to know what representations have been received from pharmaceutical and electronics companies about the structure of costs that they incur. My concern is that if we give relief on a relatively small part of their cost base, it will not trigger the increase in R and D expenditure that we hope would arise from the introduction of this relief for large companies.

I support the amendments proposed by my right hon. Friend. He has raised some valid points that strike to the core of whether the relief will be attractive and will stimulate the growth in R and D expenditure that the Paymaster General hopes for.

Dawn Primarolo: Unfortunately, I have to tell the right hon. Member for Fylde that I do not think that his amendments will be helpful. If it came to a vote, I

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would have to ask my hon. Friends to vote against them. I hope that I shall be able to explain why. The hon. Member for Fareham (Mr. Hoban) touched on what industry might say to us. It would be inappropriate for me to name companies. However, to date with regard to, for instance, outsourcing IT, staffing or accommodation costs, we have received only one representation from one company. We are discussing that with that company, which is not in pharmaceuticals.

The response so far from all the companies involved, given that the matter has been in consultation for so long, has been very positive. Of course we accept, as do the companies, that it is difficult to draw lines, particularly in relation to staff costs where staff are involved in R and D to varying extents. However, the R and D guidelines on this issue attempt to make a reasonable distinction. In developing those guidelines we have been, and continue to be, in detailed discussions on the operation of the new tax credits with the very industries to which Opposition Members refer.

The amendments are designed to include as qualifying expenditure for large companies—interestingly enough, no equivalent measure is proposed for SMEs—''indirect expenditure'' and two new items of expenditure besides staffing costs and consumables, namely accommodation costs and overheads.

The inclusion of indirect costs by amendment No. 77 could give the principal credit for some element of subcontracted expenditure, which could effectively mean that a double credit would be awarded. The international situation, where a company could receive a credit from more than one country, which we were discussing in a previous debate, could occur here in the UK through the operation of those rules. The companies would receive a double credit, as the design of the large company scheme assumes that credit goes to the person carrying out the work. The amendment might not work, as paragraph 4(2) already requires a company to carry out R and D directly.

Including the amendment would mean that the Government might pay twice for the same research and development, perhaps raising our costs by as much as £100 million, which does not seem sensible. In addition, it would require complex rules to define the term ''indirect''. By widening the scope of the R and D tax credit, amendments Nos. 78 and 79 would also increase the cost. If the credit is to achieve its aims, it needs to remain focused. The more things that qualify, the lower the rate we can afford and the less the impact of giving that boost to R and D. That has to be part of the equation and of the balance in the Government's consideration of how much can be afforded and where that can be directed to greatest effect.

The amendments would add complexity. Companies would have to track a wider range of costs, for example making more apportionments for shared costs such as electricity.

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