Clause 167 - Relief for research and development
Finance Bill
7:14 pm
Mr David Laws (Yeovil, Liberal Democrat)
The clause is still relatively uncontroversial and seems to have been welcomed by many of the tax practitioners and others who comment on the Finance Bill each year. However, before we move on, I want to shed a little light on the clause and ask the Economic Secretary to respond on a number of points.
I particularly wanted to pick up on the clause because it relates to the other side of the debate. We have been considering Government efforts to close tax loopholes and reduce the leakage in taxes that results from legitimate and legal tax avoidance. With this clause, we have the flip side of that situation. We have a Government-sponsored tax loophole that is designed to promote a particular activity that the Government feel is beneficial.
Even the measures that update the research and development tax credit that used to exist are not insignificant in their effect, because they involve expenditure of some £20 million in the 2003–04 tax year, rising to £40 million and then £50 million in the years that follow. It is easy to wave such measures through Finance Bills; people tend not to speak against proposals that involve the Government giving away their money, or the public's money. However, those measures can come to grief in later years when the Government discover that in trying to establish tax reliefs to promote particular activities, they have ended up creating the type of tax avoidance that they have to return to later to close loopholes that they have opened. The Government's experiences in relation to the film tax relief show us why we should be relatively cautious about such measures.
Will the Economic Secretary tell us whether there has been a specific study by the Treasury of the measures that are being brought in under the clause and the associated schedule? Has there been a study of the effects and the potential for tax avoidance under the clause, particularly in respect of the items that are being introduced and that explain the rising costs£20 million, £40 million, £50 millionto the Government of the measures? Has there been an assessment by the Treasury of the scope for tax avoidance and are the Economic Secretary and his colleagues considering any measures to reduce the risks?
To return to the point made by the right hon. Member for Fylde, has there been an assessment of the economic benefits of the measures? We know roughly what the Treasury expects their cost to be over the next few years. It would be useful to have a little information about why, in percentage terms, the cost of the measure rises so rapidly over three years. Has
there been an assessment of the economic benefit of the expenditure from the public purse and of how much of the expenditure will essentially be deadweight cost relating to research and development that would have occurred anyway? How much new research and development do the Government expect to be initiated by the measures that they are bringing in?
There is also the complexity that results from such measures. That is probably the only point on which there has been general criticism of the clause from the various tax bodies. The tax law committee of the Law Society of Scotland criticises the clause for its complexity. It believes that the legislation remains too complex and that the changes being introduced merely add to that complexity for businesses.
Obviously, there is tension when making legislation more complex to avoid the risk of stimulating tax avoidance; we might come to that in the debate on schedule 31, so I will not go into it now. However, there is clearly tension between simplicitythe objective that the tax law committee does not feel that the Government have metand measures to ensure that opportunities for tax avoidance are not opened up. The Government's effort to control the scope for tax avoidance may then lead to complexity that requires companies, for example, to employ outside advisers to assess the ways in which they can exploit those loopholes. That must then have an effect on the benefit of the measures, because other costs arise from policing them and helping companies to understand them, which may diminish the value of reliefs such as the research and development tax credit and the new measures being introduced.
The final point that I want the Economic Secretary to touch on is whether he is contemplating a time limit on this relief in the same way as the Government have set time limits in other clauses that we have debated. We have, we hope, an assessment of the risks of tax avoidance activity and the potential benefit or costs of the measures; in addition, built into the process is an evaluation by the Treasury and Parliament to see whether these types of relief are working.