Schedule 3
Finance (No. 2) Bill
12:30 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I should like to pick up on some of the Financial Secretary’s comments and those of some of my hon. Friends. Schedule 3 refers to the harmonisation of the timing of claims rules for R and D tax credits. In other contexts, harmonisation might not be welcomed, but it is in this one.
I shall talk about the claiming of tax credits. New clause 5 calls upon the Chancellor to
“publish a review in relation to the cost of making claims...before 1st March 2007”
and to
“consult with organisations which have a special interest”
in that particular area.
The Government and the Financial Secretary are proud of the introduction of tax relief for R and D expenditure, but the fact that it is available does not necessarily mean that it is accessible to all businesses. The Treasury needs to think about the cost of claiming those credits and how it might be made easier, and about who is currently excluded by the complexity of the system.
The Institute of Chartered Accountants commissioned independent research into the R and D tax credit, and the claiming of it. In the context of the debate on the schedule and the new clause, it is worth reflecting on that research. The report highlighted some of the challenges faced by businesses without the resources to make claims, and the impact on those businesses.
A large business with a well-funded R and D programme will find it relatively straightforward to make a claim, because it will have the systems and procedures in place, and the technical expertise to claim efficiently and effectively. The institute’s research indicated, however, that that did not necessarily lead to an increase in R and D expenditure, because the business had already maximised its programme. That is, the business would already have made the decision on how much to spend, and the decision would not be particularly affected by the nature of the offered incentives.
Medium-sized businesses, on the other hand, did actually benefit from the tax credits. They tend to be have better resources and to be better able to go through the process of making claims. The view was that the tax credit has been very helpful for them and has enabled businesses to grow without having to seek further venture capital funding. Businesses that have taken advantage of the tax credit have commented to me that it has aided their cash flow, and that they have not had to raise funding from outside sources.
The area of greater concern is that of smaller companies, and the Government need to think about that. The report quoted the example of a small business run by two scientists, which did not have adequate human resources to complete the returns, and so did not submit a claim. It therefore missed out on the incentives brought by the R and D tax credit.
As to the cost of preparing the returns, the indications were that it could cost approximately £12,000 to employ a chartered accountant to fill out the returns fully and to provide all the necessary support and administrative back-up. That is quite a significant sum. The taxpayer would need to consider the cash-flow benefit that it would receive from submitting the return and obtaining the tax relief, and whether it would be worth spending £12,000 of the small resources available to most small companies in order to make the claim.
Alternatively, the company could decide that it needed only to be briefed by a chartered accountant, in which case it could submit a claim itself. It was estimated that such a briefing would cost approximately £3,000, but the HMRC would come back and question the claim. I am not disputing the need for HMRC to ensure that claims are valid, but there is a cost in time and resources, including financial resources.
In preparing for the debate I looked at the guidance that is available to small businesses on the HMRC website, because one might ask why one should spend £3,000 on a chartered accountant if one can go to the HMRC website to find the information. In saying that I am probably doing a great disservice to fellow accountants who are still practising, but on looking at the website I was struck by why it would be difficult to complete a return without professional assistance. There is a series of user steps that companies need to take to determine whether they qualify, and there is a web page entitled “Is it worth reading any further?” which has a flow chart with more than a dozen boxes. If I were hard pressed for time I think I might question whether it was worth reading further.
Nevertheless, I continued, and I came across theR and D tax credit claim template for SMEs, which has a number of different lines for completion relating to, for instance, consumable items, consumable stores, computer software, staffing costs, externally provided workers, payments to staff providers, issues about connected persons, underlying relevant expenditure, subcontracted activities and payments to subcontractors. That is a lot for a small business to consider and I can understand their having difficulty with it. However, there are pages of helpful guidance to underpin it. I have one here headed “CIRD82400—R&D tax relief: categories of qualified expenditure: consumable items: meaning of consumed or transformed.” That sounds fairly hopeful. The first sentence begins:
“It is not possible to offer a simple definition”—
that supports my case that we need more chartered accountants to help by providing us with advice. However, it continues—
“because of the variety of possible circumstances.”
It goes on to say that it is specified in statute that
“the term ‘consumable or transformable materials’ includes water, fuel and power...Apart from these specific items, we then have to deal with the generality of the wording.”
I am reminded of the comments of the Financial Secretary during the last debate in which we discussed the importance of using general wording so that we do not need specific items. However, specific items might be helpful for somebody completing an R and D tax relief claim. The form says that
“A good example of a consumable item would be a laboratory chemical used in the R&D process which is used up...or converted to an unusable product.”
I am sure that scientists will be able to work their way through that. I quote this not for cheap laughs but to demonstrate the complexity that businesses face in trying to deal with some of the issues. Another page of guidance, “CIRD82500—R&D tax relief: categories of qualifying expenditure: software”, sounds as though it could be fairly straightforward. It rightly mentions that software, directly employed, can be used. However, it goes on to talk about the apportionment of software that a business might already have:
“Where software is only partly employed in direct R&D an appropriate apportionment of the expenditure should be made.”
So I suppose that if a business bought a licence to use Microsoft Office, and used Excel spreadsheets for the purpose of tracking the expenditure for R and D tax credits but also for some of the calculations that are required for research, it could apportion the cost of that software to the R and D tax credit. It rightly says that a pragmatic approach should be adopted. I make these comments to illustrate the scale of the challenge that is faced by businesses trying to claim these reliefs.
The other aspect is not the complexity and the record keeping that is required, but the degree of uncertainty about the likelihood of success of a claim. Companies with a stable and recurring path of expenditure find it relatively easy to claim tax credits. However, evidence collected for the ICA report suggests that that is not a universal experience; there can be issues about what constitutes R and D expenditure according to HMRC. Often, people’s decisions to invest in R and D are irreversible. Once the die is cast, that is it: they are going forward. Particularly in the case of a smaller business, the extent to which the likelihood of success of a claim is under question might have an impact on its willingness to make that irreversible decision.
In that context, the Financial Secretary was right to highlight the importance of setting up dedicated teams to tackle R and D tax credits. A concern that was highlighted by a number of respondents to the survey was that although some tax offices are very experienced—I should imagine that the one that serves Silicon Fen in Cambridgeshire would be very adept at dealing with such claims—there could be problems for somebody whose tax office did not have that experience. The dedicated teams that the Minister mentioned will help to tackle that.
I hope that in ironing out the wrinkles, to use the metaphor introduced earlier by my hon. Friend the Member for Braintree, the Financial Secretary will reconsider the cost of making claims, and think about what further steps can be taken to simplify claims, to provide better guidance to taxpayers who might want to take advantage of the relief, and to ensure that tax relief is not just available but accessible to smaller businesses.