Clause 52 - Tax relief for expenditure on research and development
Finance Bill
5:45 pm
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
That is the subject of one of the amendments, but I shall make my general comments now. I have taken the challenge to compare and contrast that the right hon. Gentleman often poses to Ministers. Perhaps if I give my response in the general debate on the clause, it will set the matter in context. I shall compare and contrast how and why the small and medium-sized enterprises tax credit is different from the larger company tax credit.
The obvious headlines are the rate of relief and whether it is payable; the subcontractor issue, which relates to the point that the right hon. Gentleman is making; intellectual property rights—there is a variation there—and the definition of research and development. Every one of those subjects relates to amendments, but I shall just discuss them briefly now.
The rate of relief for research and development costs for small and medium-sized companies is 150 per cent.; it is 125 per cent. for large companies. We have to draw a line somewhere. I should also just say as a caveat that in all the consultations the industry and professional associations were clear that we had to have simplicity, transparency and certainty. There was much discussion about the different ways to operate the credit, whether based on volume or incrementally. Hon. Members will have seen the outcome of that debate.
A reason for the difference between 150 and 125 per cent. is that small and medium-sized companies face particular difficulties attracting finance, especially for research and development. For example, banks often find it difficult to assess the worth of a project. That is a real problem for small and medium-sized companies. In addition, the difference in the effective rate of the subsidy is smaller for larger companies. Typically, it is 9.5 per cent. for small companies and 7.5 per cent. for large companies, because smaller companies pay tax at a lower rate. We are considering the introduction of a system, and more detailed explanations will come up when we deal with the amendments.
Another issue is whether relief is payable. For small and medium-sized companies, the credit is payable for a loss-making company, whereas it is not for larger companies. Loss-making companies carry credits forward until they make a profit, but smaller companies cannot always do that. Obviously, we are trying to create an environment in which research and development are undertaken in this country. That is the purpose of the measure. The reasons that apply are the same as those that I gave for the size of the credit. For instance, the difficulty that small and medium-sized companies have in finding financing reflects the fact that the finance market sometimes fails specifically to assist them.
A payable credit also has public expenditure and state aid implications, and we had to be very careful and consider the laws. On subcontractors, we might discuss Rolls-Royce again when we deal with the amendments later. For small and medium-sized companies, the company funding the contract gets the credit, but for large companies, the company undertaking the research and development gets the credit. It is a natural preference to give the credit to the funding company, as it makes the decisions and takes the risks. However, for the large company, the credit essentially rewards all UK-based research and development, whether or not it is funded from abroad. That would not occur, on the whole, for small and medium-sized companies. By their very nature, they operate in one country.
To answer the right hon. Member for Fylde, we do not want to give credit, if we can possibly avoid it, for R and D undertaken elsewhere, by non-resident subsidiaries of UK multinationals. When we discuss the amendments, we shall see how our measures interact with tax treaties and other issues to ensure that that does not happen. By focusing on UK R and D, we have been able to deliver an enhanced rate of credit for the same Exchequer cost. What we have tried to do has been to produce a usable credit that maximises the rate at which we can pay it, by ensuring that it benefits UK investment. We have been greatly assisted in our detailed discussions in relation to tax by both the companies and the professional accounting bodies.