Finance Bill

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Clause 25

Companies in difficulty: SME R&D relief and vaccine research relief
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: I wish to ask some brief questions about the clause and follow the precedent set under the previous clause and address them equally to schedule 9. SMEs in difficulty will no longer be able to apply for R and D relief and vaccine research relief. The clause requires them to be going concerns. If a company is in difficulty, but has a legitimate expectation of succeeding, why should it not be able to claim R and D relief and vaccine research relief? Directors are personally liable for trading while insolvent, so why is that not sufficient to prevent companies from claiming if they are in difficulty? Within VAT regulations, there is already a regime that restricts what companies may do so that they are not insolvent or in liquidation. Why should the test be that they are a going concern, as opposed to not being insolvent or in liquidation?
Does the Minister consider that the clause will affect many companies? Perhaps she can give an historical analysis of any companies that have claimed R and D or VRR, when they were not a going concern. Having asked for an analysis, however, we must appreciate that the economic conditions might be somewhat bumpy, to use the words that the Governor of the Bank of England used yesterday. In a downturn in the economy, the provision might become increasingly important. The main point is that the last accounts show that the company is a going concern. Does the Minister anticipate that some companies may be seeking to make applications for R and D relief or vaccine research relief slightly earlier in the process than they would otherwise do in order to ensure that they put the applications in before accounts are published?
A point made, perhaps not surprisingly, by the Institute of Chartered Accountants in England and Wales is that the measure may create certain pressures on auditors, who may be placed in a slightly more responsible position than they were previously. Does the Minister think that that an issue of any concern?
My main concern is: why is the clause particular? Was there not an alternative formulation on the basis of companies not being insolvent or in liquidation that would have perhaps been clearer for companies and perhaps not distort behaviour, as there may be a danger that this clause and schedule will do?
Kitty Ussher: The hon. Gentleman gets to the point in his questions and I am grateful to him for that. Perhaps I can explain why these changes are being introduced, which will answer his questions. During the notification of changes announced in the 2006 and 2007 Budgets, the EU introduced a new framework for state aid for research, development and innovation. That has led to a longer notification process than might otherwise have occurred and the Commission has looked more at the fundamentals of the scheme and how they comply with the framework.
One of the requirements is that state aid should not be used to support firms that are in need of rescuing or restructuring, which this measure meets. Recent examples from elsewhere in Europe have seen illegal aids challenged and withdrawn. Therefore, it is obviously in our interest to make sure that we meet the requirements of the framework, which we are now seeking to do.
Tax relief is designed to encourage and support companies to invest in and undertake R and D. If a company is no longer a going concern any tax relief paid to it will be used to meet creditor liabilities rather than being used to invest in and undertake R and D. That is effectively British taxpayers’ money and should not happen. A company must make a claim for R and D relief in its annual tax return and in doing so must consider its eligibility, including the eligibility criteria around a going concern, in line with the scheme rules. If that places an extra burden on auditors, that is not necessarily a bad thing. I welcome my relationship with the ICAEW. Auditors need to exercise their duties with responsibility. We can keep talking about that perhaps.
I hope that that answers the hon. Gentleman’s questions.
Question put and agreed to.
Clause 25 ordered to stand part of the Bill.
Schedule 9 agreed to.

Clause 26

Cap on R&D aid
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: Clause 26 places a cap of €7.5 million on research and development aid on particular projects. I have a few questions for the Minister, in order to understand the reasons behind the clause and also to ask whether it will impose an additional bureaucratic burden on firms. I will start with the second point.
I understand that there are different rules as far as the relief is concerned for research and development for small and medium-sized enterprises and larger companies. In calculating the cost of a particular project, as I understand it, under clause 26 it will be necessary for an SME to calculate the various reliefs and tax credits that it has received in respect of that project, both under the rules that apply to SMEs and those that apply to larger companies, to ensure that the cap threshold is not exceeded. Is that a correct interpretation of what clause 26 will require? Does the Minister think that that is a burden that may create difficulties?
I believe that the Treasury assessment is that this particular cap is likely to affect only 25 companies. However, given that the definition of SME is being extended—a point that I raised a moment ago—is it possible that it may apply more widely than that? In addition to the complexity, my other concern is with regard to clause 26(1), which states that:
“A company is only entitled to R&D relief in respect of expenditure attributable to a research and development project”.
It goes on to set out the limits. However, what constitutes a research and development project? I do not think that there is any further definition. If one can break up a project into different elements and define it in that way, the cap will be ineffective. Is there a commonly accepted definition of a project? If there is not, it is an ineffective clause, given what it is intended to do.
What is the Government’s intention in this area and why are they introducing the clause? I believe that it is to comply with EU state aid rules. That may not be a surprise to you, Sir Nicholas. Could we have some clarification as to precisely why the Government are introducing the cap? If relief for research and development is a good thing, why is it only a good thing up to a certain amount? I seek the Minister‘s clarification on those issues.
Kitty Ussher: In answer to the hon. Gentleman’s final point, as with clause 25 and schedule 9, clause 26 is concerned with ensuring that the SME R and D tax credit and vaccine research relief continue to meet the requirements of the European framework for state aid for research, development and innovation. The clause introduces a cap on the amount of aid that companies can claim under the SME R and D tax credit and VRR schemes in respect of any one R and D project. That is because the EU’s framework requires that aid of more than €7.5 million needs to be notified to the Commission separately and the incentive effect of the aid shown. The Government believe that that would place a significant administrative burden on businesses and seriously reduce their certainty. If the incentive could not be demonstrated, all the aid would be disallowed, not just the aid over €7.5 million.
A cap, which applies to each project, is administratively less burdensome and gives more certainly to claimants where their project is not close to reaching that level of aid. We do not think that the changes will affect many of the 5,000 companies that claim each year for the reliefs. An alternative to introducing the cap would have been to require companies claiming more than €7.5 million in aid in respect of a particular project to individually notify that aid and its effect on their R and D expenditure to the European Commission. I am sure that Opposition Members and, if I may dare add, perhaps even yourself, Sir Nicholas, would not have approved of that. It would have resulted in considerably less certainty and more administrative complexity for claimants. That is why we are proposing to do it in this way—precisely for the reasons that the hon. Gentleman mentioned.
No single claimant has yet come close to claiming €7.5 million. The estimate of the number of companies takes into account the extension to medium-sized companies. Companies would need to make a calculation only if they came close to that cap.
3.15 pm
We have, of course, undertaken and published an impact assessment on that measure. The hon. Gentleman the Member for South-West Hertfordshire asked whether the measure was burdensome. I have explained that it is the most efficient way to do this. The impact assessment published with this year’s Budget estimated that the impact of the change would be an additional total cost of £12,500 per year, for all the companies affected. I am sure that the hon. Gentleman will realise that that is a small amount per firm. I hope that that answers his questions.
Mr. Gauke: The definition of “project”?
Kitty Ussher: I will have to come back to the hon. Gentleman on that.
Mr. Gauke: I do not know whether the Economic Secretary, with time to think further on the matter, will be able to enlighten the Committee a little more on the definition of “project”, or indeed whether her guidance could be written more slowly and therefore more legibly. My point is important, as that seems to be a way in which the cap—I accept her points—might be avoided.
Kitty Ussher: I shall ensure that my guidance is written slowly and legibly and sent to the hon. Gentleman.
Question put and agreed to.
Clause 26 ordered to stand part of the Bill.
Schedule 10 agreed to.

Clause 27

Vaccine research relief: declaration about effect of relief
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: Clause 27 requires claimants of vaccine research relief to make a declaration about the effects of that relief. That declaration would state that the relief resulted in more expenditure on research and development. I simplify, but that is the gist.
I would be grateful if the Economic Secretary confirmed the purpose of the clause. Again, I think that the answer is, to comply with EU state aid obligations. This point applies equally to clause 26. Will the Government provide some reassurance that the UK will not be at a competitive disadvantage, and that other member states either do not have the research and development regime that we have or are required to have in place the same restrictions and requirements that appear in clauses 26 and 27?
I am not aware of other parts of the tax system in which recipients of relief make a statement of this sort. Do the Government consider this a precedent that could be used in other areas? Will future Finance Bills contain divisions whereby companies make such statements? It is not entirely clear what the purpose of such a declaration is other than, once again, satisfying the EU state aid rules, and I would be grateful if the Minister provided some clarification.
Kitty Ussher: Perhaps I can help the hon. Gentleman by setting out a little context. Vaccine research relief is a closely targeted scheme providing extra incentives, on top of R and D tax credits, for research and development into vaccines and medicine for the prevention and treatment of TB, malaria, HIV and certain types of AIDS, which occur predominantly in the developing world. Such a specialised scheme will, by its nature, have a small take-up. Because it is a new scheme, and given the time lags inherent in the tax system and the small number of large companies that make claims, there is insufficient evidence—we have only anecdotal evidence—to demonstrate the incentive effect of the scheme as a whole. We cannot demonstrate the necessary incentive effect to the European Commission at this point, because we are at an early stage.
That is why we have introduced this self-declaration system, which applies only to large companies. We presume that the additional administrative burden is miniscule, and we do not think that it will have an incentive effect for or against incurring the actual spend in the first place. We anticipate that in due course there will be sufficient time-series data to make our own evaluation, and it may be possible to return to the Committee and say that the measure is no longer required. For the moment, we feel that it is the simplest way to ensure that we do not end up in complicated proceedings against the European Commission.
That answers the point about whether this puts us at a competitive disadvantage—absolutely not. Every country is subject to the same framework. To give some context, the Spanish Government recently lost a case at the European Court of Justice because their R and D tax credit system was in breach of European rules. We think that by doing this simple thing, we can ensure that we are not in that situation with vaccine research relief. On the contrary, by having a European state aid-approved system like VRR, our companies will be at a comparative advantage, and that is obviously in the interests of all.
Question put and agreed to.
Clause 27 ordered to stand part of the Bill.
The Chairman: May I express the hope that all members of the Committee will have a fulfilling and restful weekend, that the weather improves for the test match and that you begin next week refreshed? The Committee is adjourned until 10.30 am next Tuesday, when I will not be in the Chair as I shall be in Taiwan. My fellow Chairmen will be standing in for me very well as they always do.
Further consideration adjourned.—[Mr. Blizzard.]
Adjourned accordingly at twenty-four minutes past Three o’clock till Tuesday 20 May at half-past Ten o’clock.
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