Finance Bill

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Mr. Hoban: The Paymaster General needs to reflect on the fact that many such costs are calculated and apportioned by companies anyway. Their own costing

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systems for R and D for manufacturing will allocate costs among various activities. I am not sure that complying with the terms of the amendments moved by my right hon. Friend the Member for Fylde would require businesses to do much more than they do at the moment. There is a greater risk that they would have to deconstruct their existing cost bases to ensure that they comply with the schedule as drafted.

Dawn Primarolo: I want to come to the point about deconstruction because the hon. Gentleman is making that point with regard to one company only, as far as we know. It is a large and important company, but to make room for the difficulties of one company by making the rules for all companies complex is not a sensible approach and would risk adding distortions and increasing costs. For example, some companies would be able to claim a credit for a proportion of their rent but not for a proportion of the cost of a new building. That is clearly not right, especially given what the hon. Member for Fareham said about competing and contributory costs.

6.45 pm

If R and D is outsourced, the company that carries out the work will qualify, so if we were to allow the principal contractor also to qualify, two payments would be made. That takes us back to the point that I was making about double credit and back to our discussion on a previous amendment about the pressure from large companies to make smaller companies opt out of their 50 per cent. to gain access to 25 per cent. Then there is the subcontracting issue, which is dealt with by virtue of the fact that the SMEs get access to the R and D work.

Work may be outsourced to a company resident in another country. It would be out of the question to allow that because it would be inconsistent with the focus of the tax credit on R and D undertaken in the United Kingdom. As I have said, it would be inappropriate for me to name the company that has recently raised several issues relating to deconstructing costs, the ratio of subcontracting and the huge importance of IT in research and development. At least one large company that has spoken to us will experience some difficulties because of the substantial contracting out of those costs.

I can tell the right hon. Member for Fylde that, although I am not attracted to amending the Bill to make room for one company, because it will make the provisions more complex for others, none the less some important issues are being discussed further with that company to try to ensure that the rules do not inadvertently exclude it from receiving R and D money to which it would have been entitled. Hon. Members must keep it firmly in their minds that the purpose of the tax credits for small and large companies is to recognise that there might be subcontracting, but to bring that R and D to the UK, so that we get the benefit. There would be no point in us funding, through a subcontracted chain, subcontractors outside the UK, because we would not get the benefit

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of the R and D. The principal company will have to consider that, but in asking hon. Members to reject the amendment, I can tell the right hon. Member for Fylde that issues surrounding IT outsourcing and staff costs have been drawn to my attention by a particular company, and we will do our best to address those issues without compromising the underlying principles of the tax credits. I hope that, on that basis and having aired his points, the right hon. Gentleman will feel able to withdraw the amendment, at least for now. If he is not satisfied, I am sure that he will return to the issue in future.

Mr. Jack: I am most grateful for the way in which the Paymaster General dealt with the issue of tax credits. I am in the fortunate position of not knowing to which company she was referring, because those in the accounting profession who raised the matter with me also did not name it. In a way, I am delighted not to know, because she has implied that in relation to the IT outsourcing there may be wider issues.

Returning to the Paymaster General's wider comments, we shall have to see how we go, as we are in uncharted territories. I should say at the outset that it would be foolish to proceed to press to a Division amendments that would act in the context of untested legislation and might not deliver what was required. However, much of what the Paymaster General is saying could form the basis of future discussion. Perhaps in due course some guidance, a practice note or an appropriate publication could be produced to assist people in understanding the area covered by the amendments.

Dawn Primarolo: I am grateful to the right hon. Member for Fylde for giving way immediately. I can assure him that we intend to produce guidance or practice notes, and that the discussions on that subject are taking place. Guidance would ensure that companies could navigate the more difficult points, be clear about their entitlement and receive it.

Mr. Jack: I am most grateful to the Paymaster General. I do not want to detain the Committee with having more forensic examinations and pursuing the cost aspects, but there are some complex matters in the part of the Finance Act 2000 from which I quoted. For example, some may find complex the issue of what percentage of a person's time counts towards R and D and ask whether a smaller percentage does not count towards it.

Amendment No. 78 deals with accommodation costs. I do not want to put words into the Paymaster General's mouth, but it seemed implicit that the subject might be reconsidered. The Government would surely not want to make it unnecessarily difficult for specialist facilities required for R and D to benefit from the provisions of the credit. I know from my constituency experience with BAE Systems that the company has had to construct a specialised facility to design the stealth characteristics of modern fighter aircraft. I would hate to think that the financing of such a facility could not benefit from credit relief because of a small technicality.

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I take comfort from the way in which the Paymaster General responded, and look forward to reading the clarifying material. As she says, we may want to return to the matter when we all have more experience under our belts. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Dawn Primarolo: I beg to move amendment No. 61, in page 192, line 24, leave out 'any' and insert 'that'.

The amendment corrects a deficiency in paragraph 11. As with the credit for small and medium-sized companies, our aim for the large company measure is to keep the concept of R and D in step with accounting definitions. Accounting principles allow a company in some circumstances not to reflect R and D expenditure in the profit-and-loss account but to defer it to a future year when it may be matched by some income from the activity. In line with that, we wanted to give the R and D tax credit when expenditure appears in the profit-and-loss account, but the Bill as drafted produced the opposite effect by using the word ''any'' in paragraph 11(2). I know that the Committee will accept the amendment as I have explained and apologised for the drafting error.

Amendment agreed to.

Mr. Jack: I beg to move amendment No. 80, in page 194, line 44, at end insert—

    '17A (1) Paragraph 5(1) of Schedule 20 to the Finance Act 2000 shall be amended as follows.

    (2) In paragraph (a) delete ''other than'' and insert ''including''.

    (3) In paragraph (b) after ''company'' insert ''together with any Class 1A national insurance contributions paid by the company''.'.

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The amendment again goes to the minutiae of the measure, but it is on an interesting detail. As I understand the proposals, when an employee takes a cash option instead of a company car, the cash option will qualify for R and D relief. However, the provision of a company car as a benefit in kind will not. The amendment addresses that issue, which is undoubtedly important to those to whom the company car matters.

Dawn Primarolo: The amendment broadens the cost base of the credit and reduces the rate of the relief, which can be ill afforded in such a targeted measure. It would be distortive, because although we give R and D tax credits on current expenditure, the credit for benefits in kind and class 1A national insurance would not all be for current expenditure. The design of the scheme tries to avoid the complexity and distortion that are created by focusing on simple staff costs and consumable stores, which are the main extra costs of R and D. The scheme tries to stay clear of complex apportionments.

I believe that the right hon. Gentleman's amendment would give us much more complexity for no increase in R and D expenditure, so I ask my hon. Friends to reject it if it is put to the vote.

Mr. Jack: My amendment was very much a probing one, and in a way I felt that it was slightly mean to table it in the light of the bigger picture that the Paymaster General outlined. None the less, it is important to have heard the Government's view on the subject. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 12, as amended, agreed to.

        Further consideration adjourned.—[Mr. Sutcliffe.]

        Adjourned accordingly at three minutes to Seven o'clock till Thursday 23 May at half-past Nine o'clock.

The following Members attended the Committee:

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Gale, Mr. Roger (Chairman)
Boateng, Mr.
Burnett, Mr.
Chope, Mr.
Cruddas, Jon
Cunningham, Mr. Jim
Curtis-Thomas, Mrs.
Davey, Mr. Edward
David, Mr.
Field, Mr. Mark
Flight, Mr.
Grayling, Chris
Harris, Mr. Tom
Hendrick, Mr.
Hoban, Mr.

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Jack, Mr.
Kelly, Ruth
Luff, Mr.
Luke, Mr.
McKechin, Ann
Marris, Rob
Pond, Mr.
Primarolo, Dawn
Ryan, Joan
Smith, Mr. Andrew
Smith, Angela
Southworth, Helen
Sutcliffe, Mr.
Wright, David

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