FINANCE BILL

The Committee consisted of the following Members:

Chairs: Mr David Amess  , †Mr David Crausby 

† Ashworth, Jonathan (Leicester South) (Lab) 

† Baker, Steve (Wycombe) (Con) 

Cryer, John (Leyton and Wanstead) (Lab) 

† Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op) 

† Duddridge, James (Rochford and Southend East) (Con) 

† Evans, Chris (Islwyn) (Lab/Co-op) 

† Gauke, Mr David (Exchequer Secretary to the Treasury)  

† Gilmore, Sheila (Edinburgh East) (Lab) 

† Gummer, Ben (Ipswich) (Con) 

† Hands, Greg (Chelsea and Fulham) (Con) 

† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

Javid, Sajid (Economic Secretary to the Treasury)  

† Jones, Mr Marcus (Nuneaton) (Con) 

† Kwarteng, Kwasi (Spelthorne) (Con) 

† Leslie, Chris (Nottingham East) (Lab/Co-op) 

† McKinnell, Catherine (Newcastle upon Tyne North) (Lab) 

McDonald, Andy (Middlesbrough) (Lab) 

† Mearns, Ian (Gateshead) (Lab) 

Menzies, Mark (Fylde) (Con) 

† Mills, Nigel (Amber Valley) (Con) 

† Mowat, David (Warrington South) (Con) 

† Murray, Sheryll (South East Cornwall) (Con) 

Nash, Pamela (Airdrie and Shotts) (Lab) 

† Newmark, Mr Brooks (Braintree) (Con) 

† O'Donnell, Fiona (East Lothian) (Lab) 

† Offord, Dr Matthew (Hendon) (Con) 

† Pearce, Teresa (Erith and Thamesmead) (Lab) 

† Pugh, John (Southport) (LD) 

† Qureshi, Yasmin (Bolton South East) (Lab) 

† Shannon, Jim (Strangford) (DUP) 

† Stephenson, Andrew (Pendle) (Con) 

Stewart, Rory (Penrith and The Border) (Con) 

† Thornton, Mike (Eastleigh) (LD) 

† Uppal, Paul (Wolverhampton South West) (Con) 

† Williams, Stephen (Bristol West) (LD) 

Simon Patrick, Committee Clerk

† attended the Committee

Public Bill Committee 

Tuesday 4 June 2013  

(Morning) 

[Mr David Crausby in the Chair] 

Finance Bill

(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules) 

Clause 29 

Restriction on surrender of losses: controlled foreign company cases 

Question proposed, That the clause stand part of the Bill. 

9.10 am 

Catherine McKinnell (Newcastle upon Tyne North) (Lab):  Good morning, Mr Crausby, it is a pleasure to be here again under your chairmanship. 

Clause 29 is one of the three clauses in chapter 3 that seek to close loopholes in the loss relief rules. I am sure that Committee members will have read the technical note to the clause, which explains: 

“The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Relief is based on the following underlying principles: Brought forward trade losses should only be relievable against future profits from the same trade, carried on by the same legal entity; Tax losses should not be transferable against profits of unconnected parties; The movement of losses between companies should only be allowed where they are under common economic ownership for the accounting period when the losses arise.” 

In line with those principles, companies can therefore offset losses against profits to gain relief in a number of ways, with specific loss relief and reorganisation rules to prevent companies passing the benefit of a loss to a third party. In the words of the technical note however, 

“HMRC have seen a marked increase in companies entering into arrangements to circumvent these rules.” 

The Chancellor consequently announced at Budget 2013 that three specific loopholes identified in the loss relief rules would be addressed through this year’s Finance Bill and should take effect from Budget day—20 March. 

The group relief rules seek to ensure that a loss is first relieved against other profits of the company in which it arose before it is available for surrender, by way of group relief, to other companies in the group. Various categories of losses, expenses and deficits can be surrendered under the group rules. Controlled foreign company apportioned profits are taxed through the UK company at an amount equivalent to corporation tax, so no amount in respect of the CFC-apportioned profits is currently included within the calculation of gross profits, and they therefore do not impact on the restriction outlined in the Corporation Tax Act 2010. That brings us to Clause 29, which amends section 105 of the CTA 2010, so that chargeable profits of a CFC that are apportioned to a surrendering company will be included

as gross profits, and will therefore be included in the threshold, which amounts—listed in four categories under which they can be claimed—must exceed before group relief is available. 

I outline the basic details, because there are a few issues that I would be grateful if the Minister clarified. The tax information and impact note indicates that closing the loophole, alongside the loopholes dealt with in clauses 32 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year, rising to £40 million in 2014-15, before decreasing to £25 million in 2016-17. Additional revenue as a result of closing a loophole is of course extremely welcome, but could the hon. Gentleman shed some light on the meaning of the phrase 

“a marked increase in companies” 

exploiting the loopholes, specifically the loophole dealt with by Clause 29? How many companies? Over what period of time? How was the loophole first identified? Was it identified by HMRC? How much is thought to have been lost to the Exchequer, both before and after the loophole was spotted? Can the Minister explain the variation in the annual yield expected from closing the loopholes? Perhaps awareness of the loophole explains the decrease to £25 million by 2016-17, but I would like to hear the analysis of the yield. Has HMRC assessed any pattern in the types of companies concerned? Does the Minister know whether this particular loophole has been marketed in any way to particular types of company? 

9.15 am 

The Exchequer Secretary to the Treasury (Mr David Gauke):  Thank you, Mr Crausby. It is a great pleasure to serve under your chairmanship once again. I am sure all hon. Members are delighted to be back in Committee. I particularly welcome the Labour Members who have joined us. For some time I feared that the balance of the Committee was inadequate, so I am pleased to see them join us. 

Clause 29 is part of a package of measures, along with clauses 32 and 33 and schedule 13, that amend corporation tax loss relief rules to close three loopholes that have allowed companies to gain greater or quicker relief for losses than was the intention of Parliament. I am grateful to the hon. Member for Newcastle upon Tyne North for setting out some background to the clause. None the less, it might be helpful to the Committee if I say a little more. 

The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Loss relief, since the inception of corporation tax in 1965, has been based on the following underlying principles: brought-forward trade losses should be relievable only against future profits from the same trade, carried on by the same legal entity; tax losses should not be transferable against profits of unconnected parties; and the movement of losses between companies should be allowed only where they are under common economic ownership for the accounting period when the losses arise. Within those principles, companies can gain relief for losses through set-off against profits in a number of ways, and there are specific loss relief and business reorganisation rules to prevent companies from passing the benefit of a loss to a third party. 

However, HMRC has seen a marked increase in companies entering into arrangements to circumvent the rules. Three specific loopholes, which have been exploited to sidestep the rules, have been identified. Two loopholes allow companies to avoid the consequences of rules designed to prevent profitable companies from buying other companies to access relief for those other companies’ losses. Those loopholes are addressed by clauses 32 and 33 and schedule 13. The third loophole is the subject of clause 29. It allows companies to convert gross profits into apportioned profits from a controlled foreign company. This enables the company to secure a greater amount of group relief than should otherwise be available. 

The current rules allow certain expenses and losses to be surrendered for group relief only to the extent that they exceed the gross profits of the surrendering company. The loophole exploits the fact that prior to this change, CFC profits apportioned back to a UK company are not included within its gross profits. Such companies are therefore free to surrender expenses and losses, certain of their own in-year losses, to others in their group without, as the underlying principles of loss relief intend them to do, first setting them against their own gross profits, including amounts apportioned by CFC rules. 

The Government are addressing all the identified loopholes through amendments to strengthen the current UK loss rules in line with the underlying policy principles. Clause 29 amends the group relief rules in part 5 of the Corporation Tax Act 2010 to ensure that chargeable profits of a CFC apportioned to a company are included with gross profits in the threshold, which must be exceeded before certain losses can be surrendered. To ensure that the Exchequer is protected from any further exploitation of that loophole, the change will have effect in relation to any chargeable profits of a CFC falling on or after 20 March 2013, the date of its announcement at the previous Budget. 

The hon. Member for Newcastle upon Tyne North asked how many companies are likely to be affected by the clause. It is not, in truth, possible to answer that question, because the number of companies affected will depend upon the future tax planning choices of companies. However, it would be fair to say that HMRC is aware of the scheme that the clause closes being used in the past 12 months. 

The annual variation in yield is based on the fact that the Office for Budget Responsibility growth predictions, and other factors such as behavioural changes in response to anti-avoidance legislation, are factored into the calculation. As for how the scheme was first identified, four cases have been identified by HMRC so far. It would be fair to say that none of those uses of the scheme has been marketed as such; there has been no particular pattern in the use of the scheme and no particular sector has been represented. It is not possible to say how much has been lost to the Exchequer already, but we have moved swiftly to close the loophole. 

There is, I suppose, a broader question about why we are moving now on some of the avoidance behaviour related to loss relief. Since the economic downturn of 2007-08 and onwards, there has been a sizeable increase in corporation tax losses, which has increased the potential for loss relating to loopholes that relate to corporation

tax losses. The Government want to ensure that companies pay their fair share, which is why we have taken action in the Bill to address those loopholes. 

I am sure that all hon. Members agree that in making the UK corporation tax system as competitive and business friendly as possible it is vital to ensure that it is fair, and that rules and principles cannot be sidestepped. The clause brings loss relief rules more closely into line with their underlying principles and in doing so provides valuable protection to the Exchequer. 

Question put and agreed to.  

Clause 29 accordingly ordered to stand part of the Bill.  

Clause 30 

Loss relief surrenderable by non-UK resident established in EEA state 

Question proposed, That the clause stand part of the Bill. 

Catherine McKinnell:  As with clause 26, which we dealt with before the recess, clause 30 was introduced as a result of a decision by an EU institution. In this case, it is the Court of Justice of the European Union rather than the Commission—I hope that the very mention of those organisations does not induce swivel-eyed behaviour from Government Members. Deriving from the September 2012 Court of Justice decision in the case of Philips Electronics UK Ltd, and first announced on 11 December 2012, the measures in the clause amend the restrictions on when companies resident in the European economic area can surrender losses attributable to their UK permanent establishments as group relief from corporation tax in this country. 

Under section 107 of the Corporation Tax Act 2010, companies resident in the European economic area have been subject to the same rules as non-European economic area resident companies, which meant that group relief was denied to those companies where losses were potentially deductible overseas, even if no overseas deduction had been claimed, in order to prevent the double use of losses. The Court of Justice judgment in Philips Electronics UK Ltd ruled that section 403D of the Income and Corporation Taxes Act 1988—the precursor to section 107 of the Corporation Tax Act 2010—was a restriction on the freedom of establishment that could not be justified by overriding reasons in the public interest, and was therefore unlawful and must be disapplied. 

With the Government’s attempt to make the UK compliant with EU law, and under the provisions of clause 30, with effect from 1 April 2013, there are now fewer restrictions on when EEA-resident companies can surrender losses from their UK permanent establishments as group relief in the UK. The new restrictions are based on the actual use of losses, or part thereof, in any country in any period, rather than on their potential future use in another country. Only the amount that is actually used is barred from group relief. 

According to the tax information and impact note and the updated technical note, the measure will have no impact on the Exchequer. However, as with most things related to Europe and this Government, a number of very serious concerns have been raised. The fairly damning conclusion of the Chartered Institute of Taxation on the Government’s proposed remedy to the Court of Justice judgment reads as follows: 

“The unlawfulness of section 403D (and consequently section 107) relate to the UK’s denying group relief where there is any prospect of any part of the loss of a UK permanent establishment of a non-UK resident EEA company being used by the non-UK resident company in the country of residence of that company. 

The proposed changes to section 107 for UK PEs of a company resident in a country in the EEA are to limit that denial of group relief to where the UK permanent establishment’s loss, or some part thereof, is actually used in another EU country, and then only the amount that is used is barred from group relief. 

In Philips, the UK Government’s justification with regard to the allocation of taxing powers…was rejected by the Court of Justice: the Court of Justice pointed out that the UK Government remained just as able to tax the UK permanent establishment if its losses were wholly or partly used in another country as if they were not. The Court held that the UK as the source country has the primary obligation to give loss relief and that a similar bar does not apply to losses of UK subsidiary companies. 

The proposed changes to section 107 merely narrow the circumstances in which group relief is denied. However, since the Court of Justice rejected the UK Government’s public policy justification for any denial of group relief, these changes do not address the findings of the Court of Justice, whose conclusion was that the section should not apply at all. 

Accordingly, in our view, section 107 will remain unlawful as a matter of EU law even as amended by the proposed changes to be included in Finance Bill 2013.” 

The Institute of Chartered Accountants in England and Wales shares that worrying conclusion: 

“We are concerned that the proposed changes are not sufficient to fully implement this decision.” 

It points out that before the change, 

“group relief [was] not available if losses [were] potentially deductible overseas, even if no overseas deduction [was] claimed. The proposed amendment removes this restriction for UK permanent establishments of EEA companies, and replaces it with a different condition which effectively requires that the loss is not deducted for foreign tax purposes in any period. 

The change means that the provision should operate more proportionately (so that relief is only restricted to the extent that a loss is actually deducted overseas), but we do not consider that this goes far enough to address the Court of Justice decision in Philips Electronics. The issue of proportionality only arises in circumstances where a measure which restricts a fundamental freedom can be justified; in which case the measure must none the less be proportionate. 

However, in the Philips Electronics case the Court of Justice concluded that section 403D(1)(c) of the Income and Corporation Taxes Act of 1988 (now rewritten to section 107(5) and (6) of the Corporation Tax Act 2010) is a restriction on the freedom of establishment which cannot be justified by overriding reasons in the public interest, and that the provision should be disapplied. 

We therefore consider that it would be more appropriate to remove Condition C for UK PEs of EEA companies, without imposing any further conditions for those companies.” 

9.30 am 

So, as with clause 26, we once again find ourselves discussing the Government’s attempts to make legislation EU-compliant, attempts that the leading bodies for tax professionals believe are not up to the mark. Indeed, only last month, in an even more damning assessment of the Government’s approach in this area, the new president of the Chartered Institute of Taxation stated in his inaugural speech: 

“Too often the UK Government acts too late or does too little, and fails in its responsibilities. Take the Finance Bill currently going through Parliament. It contains five provisions specifically

intended to ensure that UK law complies with EU law. In the view of the experts on the Institute’s EU and human rights sub-committee at least four of them will not achieve this objective. This is crazy. This slapdash approach to complying with rules that we help set, and which help ensure that the single market can operate fairly, is failing UK taxpayers. It needs to change.” 

Those are strong words. I would therefore be grateful if the Minister could address the fairly fundamental concerns expressed by both the Chartered Institute of Taxation and the ICAEW. Given the issues just outlined, how confident is he that the clause is compliant with EU law? Will we find ourselves discussing this issue again in a future Finance Bill? Why have the Government chosen to respond to the European Court of Justice judgment in that way, rather than in the way proposed by some of the tax professionals I have cited? Could he also respond to the comments from the incoming president of the Chartered Institute of Taxation, particularly the concern that the Government are acting too late, doing too little, failing in their responsibilities, operating with a crazy, slapdash approach and failing UK taxpayers? 

Mr Gauke:  As we have heard, the clause makes changes to ensure that the UK group relief rules for non-resident companies with loss-making UK branches are compatible with EU law. The current rules prevent non-resident companies with UK branches setting their UK branch losses against other UK profits if they could potentially be relieved against non-UK profits, even where they were not in fact relieved against non-UK profits. The Court of Justice of the European Union ruled in the Philips case that preventing group relief for UK branch losses because they could potentially be relieved against non-UK profits was not compatible with EU law. 

The changes made by the clause will restrict group relief for UK branch losses of companies resident in the European economic area only where the losses are actually relieved against non-UK profits. UK branch losses that are relieved against non-UK profits will reduce the amount that the EEA resident company can surrender as group relief in the UK. If the UK branch losses are relieved against non-UK profits after the losses have been surrendered in the UK, the amount available for surrender is still reduced. Existing legislation requires the surrendering company to withdraw any previous surrenders it made to the extent that they exceed the new lower amount available for surrender. 

The clause was published for technical consultation on 11 December 2012. Respondents to that consultation wanted all restrictions to be removed for EEA resident companies. However, if we were to adopt that approach, which is the approach advocated by the Chartered Institute of Taxation, UK branch losses could be surrendered for relief against UK profits elsewhere in the group, even if they had also been relieved against non-UK profits. That would provide tax planning opportunities for multinational enterprises to obtain relief twice for the same losses. The Government have not therefore adopted this suggestion. 

The clause will mean that the group relief rules will be compatible with EU law without providing tax planning opportunities for multinational enterprises. The Government believe that the amendment is consistent with the judgment in the Philips case, which necessitated the change, but equally, in complying with the Philips

judgment, we do not want to provide an opportunity whereby the same loss could be used for more than one set of circumstances. I hope that satisfies the Committee. 

Question put and agreed to.  

Clause 30 accordingly ordered to stand part of the Bill.  

Clause 31 

Arrangements for transfers of companies 

Question proposed, That the clause stand part of the Bill. 

Catherine McKinnell:  Clause 31 is a technical, tidying-up measure that would take effect from 1 April 2013. It makes specific changes to the types of arrangement that are exempt from the anti-avoidance rule affecting the group relief contained in part 5 of the Corporation Tax Act 2010. 

As hon. Members will be aware, some statutory public bodies set conditions or requirements for companies operating in specific sectors that are members of wider groups and with whom they have certain commercial agreements. Section 154 of the 2010 Act prevents access to group loss relief where there are arrangements in place, meaning that at some point in the current or a future accounting period a company could cease to be a member of a group. The rule is intended to prevent the use of loss relief where it would amount to loss buying, but it is not intended to prevent access to group loss relief where legitimate commercial arrangements are in place. 

However, the anti-avoidance rules in sections 154 to 156 of the 2010 Act have inadvertently restricted access to group loss relief to companies that have commercial arrangements with public bodies. I suppose clause 31 is designed to assist such companies, so that any conditions imposed by or agreed with a statutory public body will not be arrangements that prevent the flow of group relief. 

As the tax information and impact note states, the policy objective of the measure is to 

“ensure the group loss relief anti-avoidance rules are more effectively targeted for the future. They will continue to restrict access to relief where none is intended while allowing improved access where it is, helping to maintain the fairness and competitiveness of the tax system.” 

The Opposition of course support that aim. Companies that enter commercial arrangements with statutory public bodies should not be inadvertently penalised for doing so. 

The note also suggests that the measure will have a “negligible” impact on the Exchequer and on business. Will the Minister confirm how many companies are thought to have been inadvertently affected by the existing legislation, and at what cost? The note, published on 11 December 2012, requires greater clarity. It states that such businesses 

“will not be able to benefit from the Group Relief scheme. To do so, they will face a negligible one-off cost in familiarising themselves with the appropriate regulations and a negligible increase in ongoing administrative burdens from supplying information to HMRC to claim group loss relief.” 

Does that mean that they will not be entitled to benefit from the group relief scheme, or that they will not

derive any benefit because of the cost of doing so? It would be useful to the Committee if the Minister could clarify that. 

Mr Gauke:  As we have heard, clause 31 will change the corporation tax group relief rules to remove an unintended and inappropriate restriction in current anti-avoidance legislation. Corporate tax legislation has long contained rules designed to prevent the abuse of group relief. A part of the rules prevents access to group relief where there are arrangements in place that enable a company at some future point to cease to be a member of a group. 

That rule is intended to prevent manipulation of the control, and thus the group status, of a company so as to enable relief for losses to be transferred between unconnected parties. However, we have become aware that the rule is causing an inadvertent restriction in wholly unintended scenarios. In particular, it has been catching corporate groups undertaking legitimate commercial activities where specific conditions are imposed upon them by a statutory body. 

An example of that is where a company contracts with a public body to undertake work or to provide services through a company, the ownership of which is specified to revert back to the public body at the contract’s end. Under the arrangements rule, that entirely sensible structure prevents such a company from accessing group relief. To rectify this, the changes made by clause 31 will expand the types of commercial arrangements that are exempt from anti-avoidance rules affecting group relief. Companies inadvertently restricted from the group relief scheme through specific conditions imposed upon them by a statutory body will no longer have their access to group relief restricted. The amended rules will continue to ensure that they prevent manipulation of company control. 

The hon. Lady asked how many individuals and companies will be affected by these changes. Currently we are aware of a small number of corporate groups affected by the problem, and no individuals. However, the amendment will ensure that any other similarly affected companies will also benefit from improved access to loss relief. 

We believe that the administrative burdens for companies that previously could not benefit from the scheme will be negligible, and companies that are not affected by this clause will not face an additional administrative burden as a consequence of it. It might be helpful to provide a little more detail to explain our estimate of the cost to the Exchequer, which was described as negligible in the tax information and impact note. We anticipate that the Exchequer impact will be about £4 million loss per year over five years. I hope that provides a helpful clarification. I am grateful to the hon. Lady for her support for the intention behind the clause, and I hope that it will stand part of the Bill. 

Question put and agreed to.  

Clause 31 accordingly ordered to stand part of the Bill.  

Clause 32 

Change in company ownership: company reconstructions 

Question proposed, That the clause stand part of the Bill. 

Catherine McKinnell:  We now return to the issue covered in clause 29. Clause 32 is being introduced as one of the three clauses in chapter 3 to close down loopholes in the loss relief rules. Like clause 29, this measure was announced at Budget 2013 and took effect on Budget day, 20 March. 

Clause 32 relates to the treatment of losses in the event of a company reorganisation, resulting in a change of ownership, with a change of ownership defined by the Corporation Tax Act 2010 as where 51% of the company’s shares change hands. As the technical note explains: 

“Where a trade is transferred between companies under common ownership, the normal rules—that company losses should belong to the company and trade that incurred them—are suspended and any losses brought forward are allowed to transfer with the trade. However, different rules apply where trade is transferred between unconnected companies.” 

Intended to counter the practice of loss buying, chapter 2 of part 14 of the Corporation Tax Act 2010 

“sets out that, in such circumstances, restrictions”— 

on the use of losses— 

“apply if there is a major change in the nature”— 

or conduct— 

“of the trade, investment business or UK property business carried on by a company within three years of the change of ownership”, 

or 

“where the change in ownership occurs after the company’s activities in a trade become small or negligible and before any significant revival”. 

I am sure that the Minister will outline some of the more technical aspects of the clause in a little more detail, but I want to draw the Committee’s attention to the technical note that relates to clauses 29, 32 and 33, which states that, 

“HMRC have seen a marked increase in companies entering into arrangements to circumvent these rules.” 

The tax information and impact note indicates that closing this loophole, alongside the loopholes dealt with in clauses 29 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year and £40 million in 2014-15, before decreasing to £25 million a year by 2016-17. 

9.45 am 

I reiterate that that additional yield to the Exchequer and the closure of any loopholes is extremely welcome, but I would be grateful if the Minister would confirm how many companies have been using the loophole identified in the clause, and over what time period. In responding to clause 29, he mentioned that HMRC had acted swiftly to close down that loophole, but he did not state when it was first identified. Will he clarify that and quantify how much may have been lost to the Exchequer? I appreciate that, in relation to clause 29, he explained some of the difficulties associated with giving an exact figure, but will he give a figure, in relation to this clause, of what is thought to have been lost to the Exchequer both before and since the loophole was spotted, and will he tell us whether HMRC has assessed any pattern in the types of companies or sectors who may have used the loophole, or to whom it was marketed? 

Mr Gauke:  Clause 32, as we have heard, is part of a group of clauses, which addresses, in broad terms, the way in which corporation tax loss relief can be used in a manner that is not consistent with Parliament’s intentions, and the principles behind loss relief. I will not run through the full background again as I did with clause 29, but I will set out a little detail about clause 32, which relates to one of those loopholes. 

Loss relief legislation, in part 14 of the Corporation Tax Act 2010, contains rules to counter profitable companies buying losses from unconnected companies. Broadly, the rules apply to restrict relief if there is a change of ownership of a company and, within three years of that change, the trade or business that it carries on undergoes a major change. 

Part 22 of the Act contains rules to enable transfers of trades within any group to occur without restricting or removing the ability to relieve losses. However, an anomaly in the way in which these two parts interact means that the loss-buying rules can be sidestepped if transactions are undertaken in a set order: if an intra-group transfer of a trade took place before the change in ownership of a company, the loss-buying rules applied, but if the trade occurred after the change in ownership, they did not. That has allowed, in certain circumstances, an acquiring group to access relief for losses that it should not otherwise have had. 

The clause moves to address that loophole by inserting a new section 676 into part 14 of the Act, which will restrict relief for losses whether the intra-group transfer of the trade occurs before or after the company’s change of ownership. It will prevent the acquiring group from structuring the acquisition of the loss-making company so as to access relief for losses it should not otherwise have. New section 676 will have effect in relation to any change of ownership of a company that occurs on or after 20 March 2013, the date on which the change was announced in the Budget. 

I was asked how many companies are likely to be affected by the proposals. I cannot answer that precisely, because it depends on companies’ future tax planning choices. I do not have to hand the exact total of recent cases of which HMRC has become aware, but it has seen an increasing number of such cases recently, which is why the Government have taken action to close the loopholes. No figures have yet been collated on how much revenue has been lost to the Exchequer, but the potential problems have been documented by way of companies undertaking reconstructions. Unfortunately, I cannot give precise answers to the hon. Lady’s questions, but there is support across the Committee for ensuring that loss-relief rules more closely reflect their underlying principles and, in so doing, provide a valuable protection to the Exchequer. 

Question put and agreed to.  

Clause 32 accordingly ordered to stand part of the Bill.  

Clause 33 

Change in company ownership: shell companies 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to discuss that schedule 13 be the Thirteenth schedule to the Bill. 

Catherine McKinnell:  Clause 33 is the third measure in this chapter dealing with loopholes in the loss-relief rules, and I am sure the Minister will describe it in more detail. It is designed to counter loss buying with regard to shell or dormant companies, and it is the third part of the jigsaw of welcome tax avoidance loophole-closing measures. 

I want to take this opportunity to ask the Minister for further clarity, either now or in writing when the information is available. In our debate on the previous two clauses, I asked how many companies had been using the loopholes and for how long, and he replied that the number of cases relevant to clause 32 was not readily available. In addition, we do not know when the loophole was first identified and how much revenue has been lost. Through our scrutiny, we seek to find out how the Government have calculated the amount of protected revenue or increased revenue to the Exchequer that will result from the closure of the loophole, and whether that calculation can be relied on. The Opposition support the measures, but it would be useful for the Committee to have further detail on how the figures have been calculated and the number of companies that may be affected. 

Mr Gauke:  Loss relief legislation in part 14 of the Corporation Tax Act 2010 contains rules to counter profitable companies buying losses from unconnected companies. The rules apply to changes in the ownership of companies carrying on a trade, property business or investment business and do not cover shell companies, by which is meant companies that do not carry on a trade, property business or investment business. Corporate groups exploit the loophole by stripping a company of all its activity, making it a shell company but leaving behind certain non-trading losses. The shell company can then be sold to a new group, and those losses accessed, without the rules preventing loss buying being triggered. 

Clause 33 and schedule 13 address that loophole by introducing a new chapter, which applies to a shell company that undergoes a change in ownership, to part 14 of the 2010 Act. Where the new chapter applies, it restricts relief for non-trading losses in the period before the change in ownership. The new chapter will have effect on any change in shell company ownership that occurs on or after 20 March 2013, which was the date of the announcement of the change in the Budget. 

On the basis for the accuracy of the costing, the figures have been based on actual instances. They have been approved by the independent Office for Budget Responsibility, which has been provided with information by HMRC. 

It is difficult to give too much information on all the specifics, but I will, as the hon. Member for Newcastle upon Tyne North has requested, try to provide her with as much information as I can on the instances that led to this action being taken. There is a concern, as I have mentioned, that as many companies have incurred considerable losses over the past six or seven years or so, the opportunity to exploit some of those losses in a way that Parliament did not intend is greater than at other points in the economic cycle. We therefore have to be particularly vigilant to ensure that that does not happen. That has driven the action we are taking in clauses 29, 32 and 33 and schedule 13. I will write to the hon. Lady

and the Committee providing such detail as I can, but it is not always possible to provide exact estimates, such as of the revenue already lost, which would be difficult to obtain. 

With those comments, I hope that clause 33 and schedule 13 can stand part of the Bill. 

Question put and agreed to.  

Clause 33 accordingly ordered to stand part of the Bill.  

Schedule 13 agreed to.  

10 am 

Clause 34 

R&D expenditure credits 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to discuss the following: 

Government amendments 23 to 38. 

That schedule 14 be the Fourteenth schedule to the Bill. 

Mr Gauke:  Clause 34 and schedule 14 make changes to how research and development relief is provided to large companies. The changes will increase the value of large company R and D relief, make the relief more visible in company accounts and provide greater support to innovative loss-making companies. The changes are designed to make R and D relief more effective in influencing large company investment decisions, and to help support long-term growth and productivity through the development of new skills, technologies and processes in the UK economy. Alongside the introduction of a patent box and the reduction in the corporation tax main rate to 20% by 2015, the changes represent another significant step towards the Government’s aim of creating the most competitive tax system in the G20. 

I shall now provide a little background for members of the Committee about these matters. In November 2010, the Government opened a consultation on how to improve the United Kingdom’s R and D tax relief schemes. Smaller companies wanted the Government to make improvements to their existing system, and the Government responded in the Budget 2011 by increasing the rate of the SME R and D tax credit from 175% to 225% and removing several potential barriers to early-stage companies and start-ups claiming under the scheme. 

Large businesses instead favoured a change in the way in which R and D relief is delivered. They wanted to be able to account for relief above the tax line, where it would be more visible to decision makers and of more benefit to foreign-parented multinationals looking to invest in the United Kingdom. They also wanted R and D relief to support and incentivise companies fully with no corporation tax liability, as those companies may be unable to benefit from the existing super-deduction despite having significant R and D investment and employment in the UK. The clause responds to those views by introducing the R and D expenditure credit, also known as the above the line or ATL credit. 

The changes made under clause 34 and schedule 14 introduce legislation for companies to claim a taxable ATL credit for their qualifying R and D expenditure. Unlike the current system, which works by reducing a company’s profits liable to corporation tax, the ATL credit will work in a similar way to a grant, but it will be administered and settled through the corporation tax system. 

Crucially, all companies will be able to benefit from the credit, irrespective of their corporation tax position. While the credit will be used first to settle against any corporation tax liability that a company owes to HMRC, any remaining amount will become payable in cash. That will greatly increase the financial and cash flow support for loss-making companies and help to acknowledge the unique risks and uncertainties that exist for companies investing in R and D, and innovation. It will also allow the credit to be accounted for above the line in a company’s profit and loss account, a key policy objective that will make it easier for companies to demonstrate the true cost of R and D investment to decision makers. 

The measure introduces the credit at a headline rate of 10%. Relative to the current system, that will increase the cash value of R and D relief from around 7% to around 8% of a company’s qualifying expenditure. It further reduces the business cost of R and D investment in the UK, supporting more than 2,450 existing claimants and helping to attract the R and D activity of mobile overseas investors. It also increases the steady state cost of the reform to about £250 million a year. In the current economic and fiscal climate, that represents a strong signal of the Government’s long-term support in such matters. 

The clause introduces the ATL credit alongside the existing super-deduction in April 2013, and legislates for the ATL credit to replace fully the super-deduction in April 2016. In the short term, that will provide time for companies to make the transition to the new system and help to maintain support for companies in the defence sector, while the treatment of R and D relief in Ministry of Defence contracts is reviewed independently. In the longer term, that will allow for a simple system of R and D relief that will incentivise both domestic and foreign-parented companies to invest in R and D in the UK. It also reflects views put forward at the consultation, in which about 70 respondents were in favour of the ATL credit fully replacing the super-deduction. 

It is important that the Exchequer is protected from possible abuse of the ATL credit. The clause will achieve that result by capping the amount of credit that can be claimed by a company with no corporation tax liability by a measure of its UK R and D employment. The cap is not designed to be restrictive for genuine large company R and D claims, and the Government have taken steps to revise the cap in response to issues that were raised at the consultation. 

I now turn to amendments 23 to 38. The ATL credit is intended to provide a consistent level of support to all companies so that they receive the same effective rate of relief irrespective of their corporation tax liability. Such consistency is crucial in ensuring that the credit can be accounted for above the line, where it will be more effective at influencing R and D investment decisions. 

Following discussions with professional advisers, we have become aware that the legislation does not achieve the consistent treatment of profit and loss makers in certain circumstances. The amendments therefore make changes to address that and ensure that the legislation functions in line with the policy objective. 

The legislation introduced by clause 34 and schedule 14 has benefited from open and extensive consultation. That is further evidence of how we have worked closely with business to ensure that the legislation is effective and that the positive impacts on UK R and D investment are realised. 

In conclusion, the changes brought about by the clause and schedule aim to increase the generosity, visibility and certainty of UK R and D relief, and ensure that it represents best value for money for the taxpayer. Moreover, the changes reflect the importance that the Government attach to helping firms, and the wider UK economy, to increase their productive potential and improve their global competitiveness. I hope that both the clause and schedule will be accepted by the Committee. 

Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op):  It is a pleasure to see you back in the Chair on this sunny morning, Mr Crausby, as we make good progress through the Bill. [ Interruption. ] I am glad to hear that we have the support of the Government Whip, who seems to be cheering on the work that the Opposition are doing to scrutinise the Bill, to look at it extremely carefully and, of course, to raise appropriate queries with the iron discipline for which we are renowned. It is perhaps now best to move swiftly on. 

I am grateful to the Minister for outlining the purpose of clause 34, schedule 14 and Government amendments 23 to 38. Clause 34 gives additional relief for expenditure by a large company on research and development, which is currently given in a super-deduction against corporation tax profits. The amount of tax payable is therefore reduced. The Minister made it clear that the measure was designed to encourage more R and D by large companies, and that it replaces the current deduction system with the above-the-line credit to all large companies, including those that have no corporation tax liability. It is intended to make the benefits more visible and certain, and therefore to encourage greater investment. We are generally supportive of such measures. 

The Minister stated that there has been consultation, which he referred to as “extensive”. I should probably recognise that he seemed to understand that the consultation had gone on for a considerable period. At least we are now in a position to take forward the views of the industry, which is, I understand, in agreement with these measures. 

Fiona O'Donnell (East Lothian) (Lab):  I am grateful to my hon. Friend for giving way. Nowhere is our iron will more strongly embodied than in her contributions to the Committee. Does she agree that it is vital that the Treasury examines closely how effective this measure is in Scotland? There is added uncertainty about the future there, not just because of the Government’s failing economic policy, but because of the uncertainty over the constitutional future of Scotland. 

Cathy Jamieson:  My hon. Friend makes an important point in relation to Scotland at present. The business community is voicing increasing concern about the ongoing uncertainty and the questions that are arising around the proposals by the SNP and the Scottish Government to break Scotland away from the rest of the UK. That is potentially putting off very important investment decisions. We are increasingly hearing that businesses want a degree of certainty in the times ahead. They want to know the tax regime that they will be operating under. They want to know what incentives the Government have to get growth on the agenda. My hon. Friend is right to say that the Treasury has an important role to play. Far be it from me to praise anything that the Government are doing at this stage, but the reports that outline the difficulties, although we have a different view of the way forward, are an important contribution to the debate in Scotland, which she is contributing to by mentioning it this morning. 

To return to the issues in the clause, amendments and schedule 14, the Minister outlined the importance of encouraging large companies to invest in R and D by replacing the current relief with the new proposal. While the rules for the eligibility of expenditure on R and D remain essentially the same, the Government state clearly in the impact assessment that the measure 

“will increase the attractiveness of the UK as a location for large company R&D investment by introducing a more visible, more certain, and more effective form of R&D relief.” 

The Minister referred to the consultation, which started back in November 2010. In one response to the several rounds of consultation, the ICAEW said that the change to the above-the-line credit 

“could have an impact for larger companies where the people involved in the R&D are likely to be more ‘disconnected’ from the accounting for the tax credits. We have always believed that if the R&D tax credit could be given in a way that directly impacts the budgets of those responsible for the R&D spend, then this should lead to an increase in the overall R&D spend.” 

We all want to see that taken forward. 

The Opposition welcome the changes being made to boost R and D investment by large companies and the knock-on effect that that would have on jobs in the economy. We strongly believe that the way to move out of these difficult economic times is to boost the economy and to get growth in our manufacturing and intellectual property sectors. The best way to ensure that people in our local communities have more money in their pockets is to get them into well-paid work. The opportunities that come from R and D and the knock-on effects on jobs in the economy are important. 

Fiona O'Donnell:  I wonder whether my hon. Friend shares my concerns. On Friday, I visited the largest manufacturing employer in my constituency and it seems to be unaware of many of the measures that the Government are introducing. Does she have any indication of how the Treasury is working with Scottish Enterprise to ensure that Scottish businesses get the message? 

Cathy Jamieson:  I thank my hon. Friend for that intervention. I must say that I do not have any indication as to how the Treasury is working with Scottish Enterprise, but I do know from visiting a number of companies and organisations both in my constituency and more widely in Scotland that there is a need to ensure that the links between the UK Government and the Scottish Government, and the connections through Scottish Enterprise, UKTI

and all the other sources of support to business to encourage them to grow, continue. When the Minister responds to my questions, he may want to add my hon. Friend’s question to the list. I am sure that he will answer in due course. 

For my part, I am pleased to see that after the many rounds of consultation there now appears to be a degree of consensus across the industry as to the benefits of the changes. However, bearing in mind the impact that the measure could have on the economy and the fact that the large companies affected by the measure are those with more than 500 employees, an annual turnover in excess of €100 million and gross assets in excess of €86 million, can the Minister clarify a few points in his response? 

10.15 am 

First, what assessment has been made of the measure’s likely effect on jobs and the economy? My hon. Friend raised that matter and I am sure all members of the Committee would be interested to know what the Minister thinks the most likely impact of the measure will be. As he explained, the new measure opens up relief for R and D expenditure to companies with no current corporation tax liability—they will be able to get a cash benefit at the end of the subsequent accounting period subject to the PAYE/NIC cap—and to loss-making SMEs, which should be able to get an element of cash credit for expenditure that they currently have to claim under the large company scheme rules. He said that the Government were responding to issues faced in the consultation. Those are some of the issues that were raised. How many extra companies will be eligible for R and D expenditure relief as a result of this measure and what will be the cost to the Exchequer? How does he expect that to figure in his overall calculation? 

Ian Mearns (Gateshead) (Lab):  Will my hon. Friend ask the Minister to reflect on whether, with big business in this country sitting on such a huge amount of cash, which could be invested in research and development, it is companies on the margins that will invest money, which they would not otherwise have, through these credits, or are we just providing money that business would automatically invest in research and development anyway, given the amount of funds at the disposal of the large business sector? 

Cathy Jamieson:  I thank my hon. Friend for that intervention. I am sure the Minister will respond in due course. It is important to recognise that some businesses are potentially sitting on pots of cash. They are concerned about what the future will hold and are perhaps not investing as much as they might in a whole range of ways. We want to see businesses invest, particularly with a view to creating jobs and increasing growth. Businesses need to recognise the value of R and D. If we can encourage them to spend on that and to improve both their products and their productivity, that will be very important for job creation. 

Fiona O'Donnell:  Just to prove that we Scots can never be accused of being parochial, would my hon. Friend also ask the Minister what discussions he has had with other Government Departments, particularly the Department of Energy and Climate Change, about opportunities in green growth, jobs and investment? Britain is sadly falling down the league table. 

Cathy Jamieson:  Again, I thank my hon. Friend for that intervention. I am sure that the Minister will want to speak for himself and the Government on that point when he seeks inspiration to answer in detail the ever increasing list of questions that have been posed. It would be interesting to hear what recent discussion has taken place about so-called green jobs and renewable technologies. At one stage the Government wanted to suggest that they would be the greenest Government ever. That claim has perhaps disappeared from the agenda. There is certainly not much evidence to suggest that that is a credible claim now. Again, I am sure that the Minister will wish to pick this up. 

I return to the point I was making about the measures that have been proposed and the Government amendments. As the Minister will know, concerns were raised during the consultation rounds about companies undertaking sub-contract work being disadvantaged by some of the proposals, as the credits would have to be deducted when calculating prices for Government non-competitive contracts. The Government have countered that by stating that the issue will be addressed by the single source regulations office, which will be tasked with amending and overseeing single source pricing regulations. Can the Minister address that? As I said earlier, there is a growing list of technical questions and policy issues for him to respond to in his summing up. Can he update the Committee on the progress made in setting up that office and his plans for the work it will do to address that specific problem? Also, what assurances can the Government give to affected companies that they will not be overly disadvantaged before the single source regulations office is set up and running? 

Concerns were also raised during the consultation rounds about the complexity of the accounting, including the incorporation of some relatively complicated offset rules. What advice or guidance has been issued to the industry on those changes and does the Minister plan to provide any further guidance, especially once the above-the-line credit becomes mandatory on 1 April 2016? The Government’s impact note on the clause states: 

“There will be some additional costs in terms of revised guidance and business support. Due to the nature of this particular change, the Company Tax return CT600 will also require some design alteration.” 

Bearing in mind the questions raised by my hon. Friend the Member for East Lothian about businesses understanding what is available and being fully up to speed with the opportunities that might be available, it is important for the Government, if there are complexities or issues to be ironed out before the scheme becomes fully operational, to give some steer at this point as to how they intend to take the matter forward. Can the Minister confirm what assessment he has made of the additional costs referred to in the impact note? Can he also say a little more about what business support will be offered? 

Fiona O'Donnell:  Can my hon. Friend add to the list of questions whether the Minister will spell out what mechanisms will be used at local level to deliver information to businesses, given that the Government are undermining enterprise support in local council areas? 

Cathy Jamieson:  I am sure the Minister has heard my hon. Friend’s question. I think we must be up to about 10 questions on which the Minister will have to give us information. My hon. Friend makes an important point about what happens at local level. 

The impact note states: 

“The measure will be kept under review through regular communication with affected taxpayer groups.” 

Can the Minister elaborate on what form that review will take? Committee members will have heard me say that I am always wary when Ministers, often as inspiration strikes them during the debate, say that everything is under review all the time. As I have mentioned before, that does not mean anything if it is under review sitting on a shelf somewhere, waiting for someone to come up with a solution. The Minister might want to illuminate us as to how the matter will be kept under review. What action will be taken? Who will be consulted? How will the regular communication be taken forward? Who are the affected taxpayer groups? How will the Government engage with business? When will we get some indication of what changes might be made and what further policies might be developed in response to the review? How will the people who are interested in the matter be able to continue to look at it once the Committee completes its proceedings and we move on to deal with other things? 

James Duddridge (Rochford and Southend East) (Con):  It is a pleasure to serve under your chairmanship, Mr Crausby. 

This debate illustrates an issue with the Budget. Too many of my constituents think that the Budget is a single-day process that happens and then goes away. Although clause 34 will not be on the front pages of The Mail, The Express, or indeed the Southend Echo tomorrow, it is an important part of the whole process. Sometimes it is the technical detail that will get Britain back to work. It is an important part of the growth strategy. Just because it is a bit techy and complex does not mean that it is not incredibly important. 

For whatever reason, certain companies look at profit before tax, particularly in looking at business on an ongoing performance basis. That is sensible. If a company has a management team in the US, in Asia and in Southend, it would be unfair to compare its performance in the UK, where it may receive advantageous tax treatment, with that in other tax entities. However, this proposal has an ongoing impact that could make the UK look more favourable. The change between above the line and below the line will certainly assist. Providing a credit or grant above the line is certainly welcome. 

Comment has been made about the time it has taken to implement the policy. I would suggest that it is better to take the time and get it right rather than have it unravel. QinetiQ, a company in my constituency, said that the process has been exceptional and commended not only the Minister but his team of officials for their work. It also said that it had a high degree of confidence. It is important to get the policy right for QinetiQ. If it is not in the top 10 of R and D spend in the UK, it is certainly not far off it. 

Cathy Jamieson:  I hear what the hon. Gentleman is saying and I know the company that he is referring to. Does he agree that, having established a good working relationship with industry, further review and ongoing communication and discussion on whether the policy is working in practice are particularly important? 

James Duddridge:  I do not want to get too het up on terminology. The Government should always be open to review. The hon. Lady is making it sound as if putting the policy under a slightly more formal review would be a good thing, but it has a cost. Her suggestion argues against the case she was making about long-term tax certainty. The Government should always be open if things have not quite worked out and come back and fine-tune legislation, but I do not see the need to formalise that process. I would be horrified if the Minister leapt to his feet and said, “Yes, we should review this, and we will have a little task force doing it every six months.” People would look back and ask, “Why are we doing this?” and the answer would be, “Way back in 2013, a point was made about reviews, so it was formalised.” I was exaggerating, but I find the words of reassurance sufficient in the context of what has been called an exceptional relationship with the Minister and his team. 

The policy is not just about getting new business into the UK, but about retaining existing business. QinetiQ talked to me about its E-X-Drive, a transmission mechanism used in military vehicles. It is quite exceptional technology that the US buys from a UK company; it does so because the technology is the best in the world. More than 35 people are employed directly in R and D, providing the technology to military equipment. Those jobs are constantly under the pressure to move away. These changes will make sure that those jobs remain in the United Kingdom. 

10.30 am 

On a broader point, R and D expenditure and development and projects are quite often looked at over a period of 10, 15 or 20 years. I have some concerns about the projects that have had tax structures and arrangements set up in the past, looking forward over a 10, 15 or 20-year period. 

I note that in part 3 of the Bill there is an arrangement by which companies can use the existing tax treatment up to 1 April 2016. Will the Minister put some meat on the bones of what will happen on that date, to confirm that that is still right? Out of curiosity—this is not desperately relevant—will he also tell us why that arrangement is for 1 April rather than 4 April? I would have thought that 4 April would have been easier in terms of everyone’s tax treatment, but, as a non-accountant, I am sure that there are good reasons. 

In concluding my remarks, while not relevant to the points I made here, I draw Members’ attention to my entry in the Register of Members’ Financial Interests, as I serve a small but growing financial services company in Liverpool. 

Steve Baker (Wycombe) (Con):  I wish to make two points. Without wanting to be unhelpful, I observe that paragraph 37 of the explanatory notes states: 

“The ATL credit will be a taxable receipt and will be paid net of tax to companies with no corporation tax liability.” 

I ask the Minister, in this era of deficit spending, where will the money come from? I am sure that, with the Government closing loopholes elsewhere, there must be a good idea of that. 

The other point is, in relation to the clause, a lot was said by Opposition Members about holdings of cash, and also about certainty. My hon. Friend spoke about projects that run for 15 to 20 years and one of the

reasons why large companies hold on to cash, the most liquid asset, is to deal with uncertainty. I ask the Government to make sure that long-term certainty is assured in this measure. 

Mr Marcus Jones (Nuneaton) (Con):  I agree with my hon. Friend the Member for Rochford and Southend East that these types of measures are not necessarily those that catch people’s eyes on Budget day; they are more pre-occupied with fuel duty, beer duty and all the simple measures that we all notice as consumers. However, this measure, which the Government are pursuing, is extremely important and the Minister knows that I have advocated it for some time. 

The measure is extremely important for my constituency, where many work in the motor manufacturing industry and have done traditionally. When we look back at the history of that industry, whose demise was gradual, we can see that the root causes included the poor management of many of those companies; the poor industrial relations and militant unions that we had over many years; and the severe lack of research and development funding, which meant that companies were churning out car models that people did not want to buy. We were overtaken by companies from abroad who invested substantially in research and development and modernised their models continually. The British public, and the public around the world, wanted to buy those models and we fell behind. 

That is why this measure is so important. The resurgence of the motor manufacturing industry, particularly in Warwickshire and the west midlands with companies such as Jaguar Land Rover, has been driven by the investment in research and development in the last few years. The number of jobs created in that region under this Government, supporting companies such as Jaguar Land Rover with this type of measure, has been phenomenal. That is also having a positive effect on small and medium-sized enterprises in constituencies such as mine, which are now expanding at some pace to meet the demand in the supply chain from companies such as JLR. 

The Government have been right to take their time over implementing this policy and to engage with industry and speak to all those who may be affected. Not all those companies were positive about this measure, but it seems that the Government have been able to work with them. Companies such as those in the defence sector now seem to be comfortable with what is happening. That is important because Governments of all colours are often criticised for bringing in policies that affect industry with little notice or thought. That is the perception of business. 

It is, therefore, important that before any measure such as this is put in place, business is fully consulted and the implications of the policy are known by Government. I commend the Minister and the Treasury team who have done that with this policy and have brought the measure forward. I am sure that the measure will create many thousands of jobs over the next few years, not just in Warwickshire and the wider west midlands area but across the country. 

Mr Gauke:  I thank members of the Committee who have spoken in support of the measure. I am delighted that there is consensus that this is the right step forward. R and D tax credit proposals should be put in the

context of various measures that we are taking as a Government to make the UK tax system more competitive. That includes, of course, the cutting of the main rate of corporation tax from 28% to 20% by April 2015; the introduction of the patent box with the reduced 10% rate of corporation tax on profits arising from patents; and the introduction of competitive new tax reliefs for animation, high-end television and video games industries. 

It is important that the UK is able to compete. It is important that the UK is a destination of choice for companies that can choose to invest in a number of locations. R and D tax credits fall into line with that approach. The reforms that we are making are designed to support long-term growth and productivity through the development of new skills, technologies and processes in the UK economy. I am pleased that that has the Committee’s support. 

My hon. Friend the Member for Wycombe raised the point that some cases will involve an amount being paid even though there is no corporation tax liability. He asked where the money comes from. The ATL credit is designed to be more effective at influencing large company investment decisions and to provide better value for money to the Exchequer. The ATL will increase the cost of the relief by around £350 million a year. However, in ensuring that it is paid out whether a company is making a profit or not, it will provide a degree of certainty to businesses, which will know that when they make an investment decision in an area involving R and D expenditure they will benefit from this approach. We believe that will support long-term growth and productivity and make the UK a more internationally competitive location for innovation. 

I will respond to the point raised by the hon. Member for Gateshead about whether the measure is cost-effective. It is worth pointing out that R and D relief is designed to address a number of risks and market failures that cause firms to under-invest in research and development. Costings assume, in line with empirical evidence, that £1 of R and D relief translates into £1 of additional R and D investment. There are then positive spillovers of skills, technologies and processes across the economy that are not included within the costing but would clearly help benefit the UK economy. 

We have to remember when we talk about businesses having large sums of cash reserves that they can choose to invest, that they can choose to invest in a number of different countries. The Government want to do everything we can to encourage that investment in the UK. 

Ian Mearns:  I understand the point being made. AkzoNobel, the largest private sector employer in my constituency, has its international research and development division for marine paints at Felling in Gateshead and, of course, it is important that that multinational business carries on its function. It is doing some exciting work with local universities and attracting graduates into its research and development function. However, I am wondering how much more it will be doing as a result of the measure. 

Mr Gauke:  As I said a moment ago, the evidence that we have analysed suggests that £1 of tax relief results in an additional £1 of R and D investment, with additional spillover effects to the advantage of the UK economy. It

is also worth pointing out that a lot of R and D investment in the UK may be made where there is no corporation tax liability because the companies can be capital-intensive, operate in cyclical industries or have long product development cycles. The ATL credit will provide greater financial and cash-flow support to those companies, making the UK a more competitive location for them to invest in R and D, and bring products and technology to the market. 

As for reviews and so on, it is important that we have certainty and stability within the regime. We are talking about investment decisions made for the long term, which is why it is important for the regime to be correct, and why it is right that we have a proper consultation process and ensure that we bring matters into place in a way that is sustainable. I am grateful for the remarks about the consultation process. We certainly have engaged heavily with businesses, which is the right thing for Governments to do in such circumstances. We will, of course, keep R and D relief under review to ensure that it is effective, and that it is incentivising private sector R and D investment and providing value for money to the Exchequer. 

The Treasury and HMRC hold regular working groups and consultative committees to look into the concerns of interested parties and inform policy debate, and I am sure that such meetings will continue to be held at forthcoming fiscal events. I agree with my hon. Friend the Member for Rochford and Southend East that formalising a review process in such circumstances would be unnecessary. I fear that the Opposition have perhaps missed an opportunity to table an amendment requiring a formal review, as that theme has been running through our debates. However, I am sure that it is not too late for such a request to be tabled for our discussions on Report. We shall wait to hear. Perhaps there is an iron discipline— 

Cathy Jamieson:  It is a new regime. 

Mr Gauke:  It is a new dawn for the Opposition, and how refreshing that is. 

Ian Mearns:  If we table an amendment, I am sure that we can quote the Minister and say what a good idea he thought such a process was. 

Mr Gauke:  That would be a selective quotation. 

Of course, we keep such matters under review, but what we have put in place is a regime that should provide some long-term certainty, which is why we have implemented it in such a manner. I shall refer to defence contractors in a moment or so. 

I now wish to provide a little more information about the beneficiaries of the regime. As I said in my opening remarks, there are about 2,450 claimants of large company R and D relief. About 50% of those companies are assumed to have no corporation tax liability, either temporarily or permanently. The ATL credit will increase the cost of R and D relief by around £350 million a year. 

10.45 am 

National Statistics records information relating to R and D claims for businesses in Scotland. In 2010-11, there were 135 claimants of large company R and D

relief, which was worth £19 million. Those companies will benefit from a more visible, certain and effective form of R and D relief that is payable in the absence of corporation tax liability. 

The Treasury is working closely with the Department for Business, Innovation and Skills and UK Trade and Investment to increase awareness of UK R and D relief. HMRC and BIS have held a number of joint workshops to raise awareness of the relief and HMRC has also attended events organised by UKTI to promote R and D relief. HMRC guidance will be published shortly to assist businesses claiming the credit. It is merely the mechanism for claiming that has changed; the underlying rules have not. Guidance on how to complete the relevant form—the CT600—has been provided in the guide that accompanies it, and HMRC has a number of specialist units that can assist businesses in making their R and D claims. When R and D tax credits were first brought in, businesses raised a number of concerns about how difficult the process of making claims was. To be fair to HMRC, specialist teams were brought in during the previous Parliament and the process was substantially improved; the complaints that we heard about in 2005 and 2006 had dissipated by 2010. HMRC has a record of effective implementation in these matters. 

There is also the issue of what more we can do to publicise the steps that we have been taking. I am sure that when visiting businesses in their constituencies all members of the Committee will want to point out the many things the Government have done to improve the competitiveness of our tax system, such as the patent box, R and D tax credits and the cuts in corporation tax. I am sure we can all be ambassadors for the tax competitiveness of the UK economy as it currently stands. I look forward to hearing many reports of hon. Members visiting businesses in their constituencies and informing them of the measures that we are taking. 

It is of course also the case that professional advisers will be well aware of the measures. Looking at this particular measure, which applies to large businesses, there should be considerable awareness of the opportunities with R and D tax credits. 

Cathy Jamieson:  I shall resist the temptation to ask the Minister how many times he put his name to amendments that suggested reviews when he was in opposition. I have a serious question for him, which relates to the point raised by my hon. Friend the Member for East Lothian, about Scotland, and how Scottish Enterprise links to HMRC, BIS and UKTI. Is he aware of any specific initiatives in that context to ensure that Scottish Enterprise and UKTI are able to promote these measures and that there is ongoing take-up in Scotland? 

Mr Gauke:  I can certainly take the hon. Lady’s comments on board, and ensure that Scottish Enterprise is fully informed—as I am sure it already is—of the measures in the clause, as part of our attempts to ensure that businesses are well aware of the steps that we have taken to make the United Kingdom an attractive regime for business investment. 

The single source regulations office has been raised on both sides of the Committee, particularly in the context of companies whose R and D relates to contracts

with the Ministry of Defence. The Government believe that the treatment of R and D relief in the pricing of MOD single-source contracts is a matter of procurement policy and should be reviewed on its merits, as part of the MOD’s response to the Currie review. The SSRO, an independent body due to be set up in 2014-15 by the MOD, will conduct a review to amend and oversee the MOD’s single-source pricing regulations. Following consultation with the MOD and industry, the SSRO will make a recommendation on the fair and reasonable treatment of R and D relief in the pricing of MOD single-source contracts. Consequential amendments to the single source pricing regulations are expected to take effect from April 2016. Companies will continue to claim R and D relief via the existing super deduction until that point. 

In that context, I shall address the question that my hon. Friend the Member for Rochford and Southend East raised about what will happen in 2016. The legislation ensures that only the credit can be claimed from 1 April 2016. From that date, companies will make their R and D claims using the expenditure credit rules. Why is it 1 April rather than any other date? Good question. That is the date from which corporation tax is chargeable for a financial year. I thank my hon. Friend the Member for Nuneaton. He has campaigned vigorously, representing the interests of his constituency and the wider west midlands. He made representations in advance of the Budget about where the R and D above-the-line rate should be. We had indicated that 9.1% was the likely rate; he advocated a 10% rate as being more appropriate, and his representations have borne fruit. I am grateful to him for being a doughty champion of industry in his constituency and the wider area. 

I hope I have managed to address the questions that hon. Members have raised. I am grateful for the support that our approach has won. 

Question put and agreed to.  

Clause 34 accordingly ordered to stand part of the Bill.  

Schedule 14 

R&D expenditure credits 

Amendments made: 23, page 246, line 41, at end insert— 

‘If the amount remaining after step 1 is greater than the net value of the set-off amount (see subsection (2A)), that amount is to be reduced to the net value of the set-off amount.

For provision about the treatment of the amount deducted under this step from the amount remaining after step 1, see section 104NA.

Step 3’.

Amendment 24, page 247, line 1, leave out ‘step 1’ and insert ‘step 2’. 

Amendment 25, page 247, line 6, leave out from ‘(b)’ to ‘is’ in line 7 and insert 

‘the amount deducted under paragraph (a) from the amount remaining after step 2’.

Amendment 26, page 247, line 11, leave out ‘step 3’ and insert ‘step 4’. 

Amendment 27, page 247, line 12, leave out ‘Step 3’ and insert ‘Step 4’. 

Amendment 28, page 247, line 13, leave out ‘step 2’ and insert ‘step 3’. 

Amendment 29, page 247, line 16, leave out ‘step 4’ and insert ‘step 5’. 

Amendment 30, page 247, line 17, leave out ‘Step 4’ and insert ‘Step 5’. 

Amendment 31, page 247, line 19, leave out ‘step 3’ and insert ‘step 4’. 

Amendment 32, page 247, line 22, leave out ‘step 5’ and insert ‘step 6’. 

Amendment 33, page 247, leave out lines 23 to 36. 

Amendment 34, page 247, line 46, at end insert— 

‘(2A) To determine the net value of the set-off amount for the purposes of step 2 in subsection (2), deduct from the set-off amount amount A and, in the case of a ring fence trade, amount B.

Amount A is the amount equal to the corporation tax that would be chargeable on the set-off amount if—

(a) it did not include any amount treated as an amount of R&D expenditure credit for the accounting period by virtue of step 3 in subsection (2), and

(b) it was an amount of profits (or in the case of a ring fence trade, ring fence profits) of the company for the accounting period and corporation tax on such profits was chargeable at the main rate.

Amount B is the amount equal to the supplementary charge that would be chargeable on the set-off amount if—

(a) it did not include any amount treated as an amount of R&D expenditure credit for the accounting period by virtue of step 3 in subsection (2), and

(b) it was an amount of adjusted ring fence profits for the accounting period.’.

Amendment 35, page 248, line 12, at end insert— 

‘104NA Amounts deducted by way of tax adjustment

(1) This section applies if—

(a) a company is entitled to an R&D expenditure credit for an accounting period under this Chapter, and

(b) the amount of the set-off amount remaining after step 1 in section 104N(2) is greater than the net value of the set-off amount.

(2) An amount equal to the difference between—

(a) the amount remaining after step 1 in section 104N(2), and

(b) the net value of the set-off amount,

(“the step 2 amount”) is to be applied in discharging any liability of the company to pay corporation tax for any subsequent accounting period.

This is subject to subsection (3).

(3) If the company is a member of a group, it may surrender the whole or any part of the step 2 amount to any other member of the group (the “relevant group member”).

In such a case, section 104Q(3) applies to the amount surrendered as it applies to an amount of R&D expenditure credit surrendered under step 5 in section 104N(2).

(4) If any of the amount surrendered under subsection (3) is remaining after the operation of step 3 in section 104Q(3), it is to be treated for the purposes of this section as if it had not been surrendered to the relevant group member.

(5) Any amounts to be applied under subsection (2) or (3) in discharging any liability of a company to pay corporation tax for an accounting period are to be so applied before any amounts that may be so applied under step 1, 4 or 5 in section 104N(2).

(6) The surrender by a company of the whole or any part of the step 2 amount to another company under this section—

(a) is not to be taken into account in determining the profits or losses of either company for corporation tax purposes, and

(b) for corporation tax purposes is not to be regarded as the making of a distribution.

(7) Any reference in this section to the set-off amount, or the net value of the set-off amount, is to be read in accordance with section 104N.’.

Amendment 36, page 249, line 42, leave out ‘step 4’ and insert ‘step 5’. 

Amendment 37, page 250, line 21, leave out ‘step 4’ and insert ‘step 5’. 

Amendment 38, page 250, line 27, leave out from beginning to end of line 10 on page 251.—(Mr Gauke.)  

Schedule 14, as amended, agreed to.  

Clause 35 

Relief for television production and video games development 

Question proposed, That the clause stand part of the Bill. 

The Chair:  With this it will be convenient to discuss the following: 

That schedule 15 be the Fifteenth schedule to the Bill. 

Government amendments 39 to 45. 

That schedule 16 be the Sixteenth schedule to the Bill. 

Government amendments 46 to 49. 

That schedule 17 be the Seventeenth schedule to the Bill. 

Mr Gauke:  Clause 35 and schedules 15 to 17 introduce the new corporation tax reliefs for companies producing animation, high-end television and video games. The tax reliefs will play an important role in enabling companies in those creative industries to continue to make their valuable economic and cultural contributions to the UK as part of a dynamic and diversified economy. 

Before I set out the detail of the clause and schedules, I shall provide hon. Members with some background to the Government’s decision to introduce such tax reliefs. The UK is a world leader in these industries, with a strong reputation for high-quality work and for the talent and skill of its work force. We are taking steps to ensure that remains the case in the future. 

These are highly skilled, innovative and export-oriented sectors, but they are also highly mobile. Without Government intervention, there is a risk that under-investment in these industries will result in valuable productions moving overseas or not being made at all. It is also the case that, in contrast to a growing number of countries who offer targeted incentives, the UK can be seen as uncompetitive by companies operating in these industries. We intend to address that. 

Clause 35 and schedules 15 to 17 will enable existing animation, high-end television and video games production to remain in the United Kingdom, and will also encourage inward investment. The changes made by clause 35 and schedules 15 to 17 will benefit hundreds of UK companies involved in producing animation, high-end television and video games. They will benefit companies across the UK, from video games developers in Dundee and east London to animators and television producers in Bristol, Manchester and Northern Ireland. These new

reliefs are forecast to provide over £100 million of support for these industries by the end of the scorecard period in 2017-18. 

Let me explain how these tax reliefs will work. These new creative sector tax reliefs are modelled on the existing film tax relief, which provided more than £200 million of support to 320 British films in 2011-12. The new reliefs will benefit companies involved directly in the making of qualifying animated or high-end television programmes or video games. Companies will be eligible for a payable tax credit worth up to 25% of qualifying production expenditure, which equates to an effective 20% rate across the total production budget. That will ensure that they are competitive with incentives available elsewhere in the world. 

Like the film tax relief, productions will need to be certified as culturally British by passing a cultural test or be made under an official co-production treaty in order to be eligible for relief. The cultural test application is straightforward for companies, and will be administered by the British Film Institute, which already administers the film tax relief cultural test on behalf of the Department for Culture, Media and Sport. 

Like the film tax relief, these new creative sector tax reliefs require state aid approval from the European Commission before they can be implemented. The animation and high-end television tax reliefs were cleared at the end of March. They will commence as planned on 1 April 2013. 

As confirmed at Budget 2013, the video games tax relief will be introduced following state aid approval. Since then the Commission has taken the decision to open a formal investigation into the scheme. The process for, and duration of, the Commission’s investigation are determined by the Commission itself. Nevertheless, the Government are working closely with industry to provide the Commission with the evidence it needs to conclude its investigation as quickly as possible. 

James Duddridge:  I thank the Minister for providing the draft statutory instruments. Perhaps this will go straight on to the Department for Culture, Media and Sport, but what consideration have the Government given to reviewing and simplifying for animation the template that is used for films? I have read through the proposed statutory instrument, and it is almost a satirical farce. Points are awarded if three characters are from the UK; if the lead character is from the UK there is one extra point. It is almost as if it is a political satire. I appreciate that this is not about tax treatment, but perhaps there is an opportunity to review some of the historical, cultural tests for films as well as for animation. 

Mr Gauke:  I fully appreciate the concern that my hon. Friend raised. We should always seek to simplify matters as much as possible. To a large extent, we are constrained by having to ensure that the rules satisfy the constraints on state aid, which means that there is a need to take into account cultural tests. It is also fair to say that the revised film tax relief system, as opposed to its earliest form, appears to have been successful. It is widely used and has contributed to a thriving film industry. 

11 am 

Truth be told, minimising complexity and ensuring straightforward compliance was a central consideration in designing these reliefs. That is why we are basing the new reliefs on the existing regime that applies for film tax credits, which is successful and well understood. We have worked closely with industry in determining the design of the reliefs, to ensure that they work for their specific working practices. Officials continue to engage with industry by, for example, attending events to help and advise in the run-up to companies making claims. Ultimately, detailed guidance will be published on the HMRC and British Film Institute websites, to ensure that companies get the support that they need. 

It may help if I outline the extensive, productive consultation on the design of the tax reliefs. The Government’s main consultation on the design of the new tax reliefs took place over summer last year. There were 54 responses from interested parties. The Department for Culture, Media and Sport also conducted a shorter, separate consultation, during October, on the design of the cultural test. There has been constructive, positive engagement with businesses of all sizes during the consultations, including significant input from industry representative bodies and professional groups. That has ensured that the reliefs are designed to work effectively in a way that fits with the specific working practices of each industry, meaning that our final proposals have been widely welcomed. Furthermore, as a direct result of concerns being expressed by interested parties during the consultation, the Government have taken steps to ensure that sufficient investment is made in skills development in the sectors, covered by the creative sector tax reliefs. 

Jim Shannon (Strangford) (DUP):  The Minister has mentioned the advantages for all Administrations, including the Northern Ireland Assembly, the Scottish Parliament and the Welsh Assembly. What discussions have the Government had with the Northern Ireland Assembly, for example, in relation to the creative industries and the film industry in particular? In Northern Ireland we have a growth industry. Lots of jobs have been created and there have been lots of opportunities. Money has been spent and investment has gone in from private enterprises as well. I am keen to ensure that the Northern Ireland Assembly Administration has input into Government policy and works together with the Government. 

Mr Gauke:  There has been an extensive consultation programme. I know, from personal experience, that the First Minister and Deputy First Minister have a close interest in this area. I am not sure that I can provide the hon. Gentleman with details of the correspondence at this point, but I have no reason to believe that there has not been proper engagement with the devolved Administrations. I am well aware that the Northern Ireland Administration have taken a close interest in this area. We have certainly been engaged with them. Representatives of the devolved Administrations have been in touch with Treasury and HMRC officials. There was Northern Irish involvement in the working group that has participated in the process. I hope that that provides the hon. Gentleman with some reassurance. 

We have reflected and responded to representations that we have received. In the autumn statement last year we announced £6 million match funding for skills development in these sectors over the next two years. That was extended to £16 million in the recent Budget. In addition, the Government are keen to explore options to provide further support for the visual effects industry through the tax system; a public consultation on the subject was launched in April. 

Schedule 15 introduces new tax reliefs for animation and high-end television production. It enables qualifying companies engaged in the production of animation and high-end television programmes intended for release to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit. 

Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op):  The Minister will be aware of my interest in such matters given that, although we do not know who the next Doctor will be, we can be pretty sure that he will regenerate in Cardiff bay. What does the Minister mean by “high-end television”? I certainly consider “Doctor Who” and other Cardiff-based productions to be in that category, and I have noted the many exemptions listed in the Bill for what is not covered by tax relief. Will he give us a bit more detail on what is meant by “high-end” and what productions would benefit from such relief? 

Mr Gauke:  I am grateful to the hon. Gentleman for raising his constituency issue, which is closely supported by the Gauke household, where there is great interest in who the next Doctor Who may be. 

Ian Mearns:  Is the Minister making a bid? 

Mr Gauke:  Who would want to miss out on the excitement of Finance Bills in order to deal with Daleks, Cybermen and what have you? Perhaps I should not explore that point—[ Laughter. ] To answer the question, the definition of high-end television is based on the cost-per-hour of production, which deals with the more expensive television productions. I am not able to confirm whether “Doctor Who” falls within that category, but I suspect that it probably does. The measure should be helpful to the creative sector, and the hon. Gentleman is right to suggest that it would be significant for Cardiff. 

Both the additional deduction and the payable credit are calculated on the basis of UK core expenditure up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying animation or high-end television programme, of which at least 25% of the qualifying expenditure must be on goods or services used or consumed in the UK. The animation or high-end television programme must be certified as a culturally British product to qualify for the tax credit. 

Schedule 16 introduces a new video games development relief. As with schedule 15, it will enable eligible companies engaged in the production of qualifying video games intended for supply to the general public to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender those losses for a payable tax credit. 

Nigel Mills (Amber Valley) (Con):  This may be a naive question, but I could not find a definition of “video game” in the provisions. Are we just talking about games for the Xbox or similar or will an app on an iPad or iPhone count? 

Mr Gauke:  It is a question of meeting certain requirements, rather than a game necessarily having to be on the Xbox. 

Nigel Mills:  Other consoles are available. 

Mr Gauke:  Indeed. All platforms are covered, which includes whether a game is boxed, online or an app. I hope that that provides some clarification. 

Fiona O'Donnell:  I wonder whether the Minister would take this opportunity to say whether he regrets that the Government did not act sooner to support the sector and to take forward the commitment that was in the Labour party’s manifesto. Not doing so has damaged the sector in cities such as Dundee. 

Mr Gauke:  We did look closely at the evidence and, if truth be told, the evidence for a video games tax relief has grown stronger over the course of this Parliament. We looked at the evidence and decided to proceed with video games tax relief. That will be of particular benefit to Dundee, which is strong in the sector, and we hope that it will go from strength to strength. If I remember correctly, the Scottish Affairs Committee looked at the issue in 2011 and did not actually recommend going forward with a video games tax relief. I am sure that the hon. Lady will correct me if I am wrong, because she was a member of that Committee at the time. 

Ian Mearns:  I have an interest inasmuch as in my constituency, Gateshead, there is a video games company called Eutechnyx, which is thriving, but could be doing even better. It is very much involved in the international market. The video games industry is not unique, but it is certainly niche in that it generates international competition that is easily moveable. I really think that the Minister should think again about the issue because the market in which companies are operating is so fluid. 

Mr Gauke:  The hon. Gentleman underlines why we want to proceed with video games tax relief. He is right that there is international competition—for example, Canada has a very generous tax regime for the sector. There is a risk that UK business could be lost. That is why we have introduced schedule 16, within which the additional deduction is 100% of qualifying core expenditure and the payable tax credit is 25% of losses surrendered. The credit is based on the company’s qualifying expenditure on the production of a qualifying video game, for which at least 25% of qualifying expenditure must be on

goods or services used or consumed in the UK. The game must be certified as a culturally British product to qualify for the tax credits. 

Fiona O'Donnell:  I apologise to the Minister that I was unable to get to my feet to respond sooner. As the hon. Member for Warrington South—who passed the Minister a note—well remembers, because he was also a member of the Scottish Affairs Committee, I voiced concerns at the time about the recommendations of that Committee report, and I think that the Scottish Affairs Committee would now agree that on that occasion it got it wrong. 

Mr Gauke:  I stand corrected. I am not a member of the Scottish Affairs Committee; that is something that I aspire to almost as much as becoming the next Doctor Who—[ Laughter. ] If the hon. Lady is telling me that the Committee recommended against a video games tax relief but she was in favour, I will take that. 

Fiona O'Donnell:  Given that time travel back to the time of that report is not quite possible for the Minister—yet—I was saying that he got it right about the Committee’s report, but that the Committee got its recommendations wrong. 

Mr Gauke:  I take that. She is right to detect that my hon. Friend the Member for Warrington South, who had the privilege of being a member of that Committee at the time, was suggesting that that was the case. I do not think that there were any minority reports or divisions on the matter. I am not sure where the Scottish Affairs Committee finally stood on the issue, but I note her points. 

11.15 am 

Cathy Jamieson:  I do not wish to return to the Scottish Affairs Committee, although I was also a member of that Committee at that time. I want to return to the Minister’s point on the draft regulations and the cultural test. The draft regulations state: 

“The cultural tests do not stipulate content, location of production, or selection of practitioners, but the tests do ask for a reasonable amount of production activity”. 

I worry when we have terms like “a reasonable amount”. Will the Minister give some indication of what is “a reasonable amount” of production activity taking place in the UK for something to qualify as British? 

Mr Gauke:  The hon. Lady will be aware that we need to ensure that we comply with the requirements on state aid. There are cultural tests within that that we need to comply with. It is worth pointing out that the film tax relief requires a production to pass a cultural test to be eligible, and that has not stopped an effective scheme from operating. We do not expect that the cultural tests will stop the schemes being effective with the new creative sector tax reliefs. 

As for the specific requirements for how much activity should occur within the UK, it would be fair to say that it is difficult to nail down a definition of “reasonable amount” for these purposes. The game must be certified as a culturally British product to qualify for the tax

credit, and part of that relates to activity in the UK. I am not sure that we can be too specific about that at this point. 

Schedule 17 introduces consequential amendments to other parts of the Tax Acts relating to the introduction of the new reliefs. 

As for the future changes, an animation, high-end television programme or video game must be certified as culturally British to be eligible for tax relief. Schedules 15 and 16 include a power to introduce points-based cultural tests for each new relief. Those tests will help determine whether a programme or video game may be certified as culturally British by the Secretary of State for Culture, Media and Sport. A statutory instrument will be introduced through the negative procedure immediately after the Bill receives Royal Assent. As we have already heard from my hon. Friend the Member for Rochford and Southend East, who, as ever, is assiduous, a draft of the statutory instrument has been provided to the House. We will keep the new relief under review alongside other measures in the Government’s package of corporate tax reforms to ensure that businesses are benefiting in the way we intended and that the new regimes are not being exploited for tax avoidance or fraudulent purposes. 

Nigel Mills:  I have a quick question about the definition of video games, which excludes anything produced for advertising or promotional purposes. The Minister may not be aware that some downloaded games are free, but occasionally have an advert popping up. I guess that that is how they make the revenue to justify the game, but will that mean that the game does not qualify for the relief? Is it a balance of things? If the whole game is not designed as an advert for one person from the start, but has a series of small and occasional adverts, would that be okay? It would be helpful to have clarity on how the rules will be interpreted. 

Mr Gauke:  My hon. Friend makes a detailed point. I may address that particular concern before I sit down or perhaps later in these proceedings. No, let us not beat about the bush; I shall turn to this important issue. I say to him that the game itself will qualify, but the expenditure on the adverts themselves will not qualify. I hope that that provides clarity on that question. 

Returning to Government amendments 39 to 49, in light of the ongoing Commission investigation, the amendment that we are discussing now provides the Government with limited powers to update schedule 16 of clause 35 to reflect any changes needed to ensure that video games tax relief is compliant with state aid rules. It will also ensure that the Government are in a position to legislate on changes at the earliest opportunity. Without it, businesses and investors would need to wait for legislation to progress through the next Finance Bill. It will therefore prevent any such uncertainty, and it underlines the Government’s commitment to introduce the relief as quickly as possible. 

In conclusion, the new creative sector tax reliefs will help to maintain the UK’s position as a world leader in producing animation, high-end television and video games, encouraging investment and promoting long-term sustainability within those industries. I hope that the clause and schedules can stand part of the Bill. 

Stephen Doughty:  I just want to ask the Minister one final question. I am a member of the Performance Alliance here in Parliament and I attended a reception that it organised before Christmas. There were many representatives there from the video games industry. They will undoubtedly welcome the support for the industry that is being proposed here. However, one of their concerns was the very low rates of pay, particularly for some of the contributors to video games, especially those in composing and other activities, who are often asked to work for free. Does he hope that the expansion of this industry in the UK will also see an expansion in the compensation provided to the contributors to the industry? 

Mr Gauke:  What I would say in response to that question is that, as I mentioned earlier, we are also providing match funding to improve skills and so on, and the purpose behind these tax reliefs is to ensure that we have thriving industries. As we have heard, these creative industries can be very mobile industries, they rely on skilled individuals and these are sectors that could potentially become much larger; they are already significant, but they could become much larger during the years ahead. 

Indeed, the UK already has a strong reputation in all of these sectors, including animation; I am minded to repeat the line about Wallace and Gromit that the Chancellor used in the Budget 2012 speech. However, whether it be the video games industry—we have already heard about the strength of that industry in Dundee and elsewhere—or the high-end television sector—the hon. Gentleman has provided an example from his own constituency about that sector—these are important

sectors and we want them to flourish. Of course, that would benefit those individuals working in those sectors, resulting in stronger pay and a thriving sector. 

I hope that the clause and these schedules can stand part of the Bill. 

Steve Baker:  This clause will stand for ever as a magnificent rebuff to all those in Opposition who have said that this is a laissez-faire, liberal Government. [ Laughter. ] At the beginning of this Parliament, a number of Opposition Members described the Government as Hooverite. I might say that this clause is Hooverite, but only in so far as Opposition Members have misunderstood Hoover’s legacy; he was an interventionist to whom—of course—FDR attributed many of his own policies. 

The reason why I bring that up is that this clause seems to be a product of industrial policy, whereby we pick sectors to subsidise, in particular those sectors that seem to have a comparative advantage, and we then give them a tax break to help them along. However, we have to ask who pays? It seems that if we subsidise all those industries with a comparative advantage, those who pay will be those firms that are struggling. It is important to remember that the art of economics is not just to see the short-run consequences of any particular policy on one group but to see the long-run consequences on any group. I find myself wondering if, in due course, we will return to the video games industry and— 

11.25 am 

The Chair adjourned the Committee without Question put (Standing Order No. 88).  

Adjourned till this day at Two o’clock.