Clause 52 - Tax relief for expenditure on research and development
Finance Bill
5:30 pm
Mr Edward Davey (Kingston and Surbiton, Liberal Democrat)
I welcome you to the Chair, Mr. Gale. It is important to tease out some of the policy issues that lie behind the approach in the clause. It has been long heralded and there has been significant consultation on the new research and development tax credit. The Government listened to that consultation and changed their original proposals. However, it is worth having a short debate on whether that approach alone is sufficient to achieve the policy objectives.
There has been debate over a long period about the need for a research and development tax credit. Small allowances and support for research and development have been provided, but nothing as substantial as what is proposed now. Governments have said in the past that a tax credit would not do the job and have argued that most of the extra research and development that would gain the credit would have happened anyway, so there would be a high deadweight cost. The Government's proposal seeks to deal with that by trying to achieve extra research and development for
taxpayers' expenditure, but there has always been a question in many people's minds about whether the provision would make a marked improvement.
The reason for that scepticism is that until recently the results of several studies on how other countries use such tax credits were equivocal. Evidence from some countries showed that their effect was limited and that large amounts of taxpayers' money was spent, with no major behaviour change in the private sector.
The Government have been fortunate in many ways because further studies have been carried out in recent years to discover the objective of tax credits. Today's Government policy has been instructed by lessons from other countries. The policy is undoubtedly needed because Britain's performance on research and development has been lamentable for a long period, particularly when military R and D is excluded from the overall figures. I am convinced that we need to pursue the route that we are on, because international evidence is overwhelming—I speak as someone who is generally reluctant to go down the route of extra tax credits and reliefs.
I hope that the general policy direction receives support from all hon. Members. Can the Paymaster General reassure us that the debate does not rest here and that the Government will deal with other aspects of R and D policy? It would be out of order for me to mention competition policy, regulation policy and so on, but a more imaginative use of the grant system is needed. For example, ideas are being developed for an old-fashioned way of promoting R and D, namely offering prizes. The Government, a research institute or a royal society could offer a prize for the first person or body to achieve a particular breakthrough. Emerging evidence from the past few years suggests that that is a cost-effective way to promote R and D. Only one sum of money would be offered, but if one ensured that it was the right amount and that it created the right incentive, an awful lot of extra research would be carried out in the private sector for a small amount of public money.
The international evidence suggests that the provisions in the clause are the right approach, but I hope that the Government have an open mind to alternative approaches so that we can turn Britain's performance on R and D to better effect for our economy's productivity performance over the longer term.