David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

I do not know whether you are able to enlighten us, Sir Nicholas, as to whether it is easier to chair a Finance Bill Committee or call the numbers in a bingo hall. I do not know whether anyone has done both, but I expect that if anyone has done, it is probably your good self.

Clause 24 is the first of four clauses relating to research and development relief and vaccine research relief. Clause 24 incorporates schedule 8, which makes changes to the rates of those reliefs. Given that the Government are changing the rates, I would like to probe their policy in that area. I am sure that there is common ground across the Committee on the belief that research and development are an important element of our economic policy and the way in which the UK will prosper in the coming years. The question is how we go about ensuring that that happens. The context in which the Government seek to increase the rates of research and development relief is one in which manufacturing is not having the best of times. I recently became aware of OECD figures that showed that in manufacturing growth in the past 10 years, the UK comes second from bottom, above only Norway. All other countries have done better.

I mention that, because if manufacturing is to prosper in the years ahead, it will do so in the highly developed value-added area. That will not be achieved by doing things on the cheap because of increased international competition. Research and development play an important role. The question I want to probe—I stress, “probe”—is how effective the Government’s approach to research and development is, and how effective taxation incentives are in developing research and development in the UK, given that manufacturing industry, which is presumably its ultimate objective, has not grown substantially.

We should be aware, and I do not want to digress, other than very briefly, that many other aspects of the taxation system have an impact on manufacturing. We have already debated the fact that the likes of Shire Pharmaceuticals appear to have been driven out of the UK by taxation matters and the headline rate. The Committee has already debated the balance between exemptions and reliefs, and the need for a lower headline rate. We all have to address that matter, but I should be grateful if the Minister told us what assessment the Treasury has made of the effectiveness of research and development reliefs and credits, as opposed to a policy of lowering rates.

There are a number of reasons why research and development reliefs and credits have not been as effective as they might have been, including administrative costs involved in making a claim. We will come back to this  point in other clauses, but I am conscious that there are always issues of state aid in this context, which limit the actions that the Government may take. Do they consider that an impediment to the action that would be necessary for a more effective regime? To give one example, in the Finance Act 2007, we legislated for an extension of the small and medium-sized enterprise definition so that it would incorporate more companies. As of a few weeks ago, that had not come into effect. Has agreement now been received from the European Commission to do that? There are other examples too. In 2006, I think, we legislated so that payment to clinical trial volunteers was eligible for these reliefs and credits. Again, I should be grateful for an update from the Minister. I should like to hear what assessment the Government have made as to the effectiveness of this area, given that we are going to increase the rates available to businesses.

I wish to make a specific point about the circumstances in which large companies pay mainstream corporation tax. It perhaps relates to the detail in schedule 8, but it would prevent my having to make any further comments. We have seen a reduction in corporation tax from 30 per cent. to 28 per cent., yet for large companies, the relevant rate has gone up from 125 per cent. to 130 per cent. To save time, I shall not set out all of the numbers of a worked example, but an example I have seen suggests that to have retained the position regarding the amount of tax relief available for a large company, the rate would have had to increase to 133.5 per cent., because corporation tax has been reduced. I would be grateful for confirmation from the Minister that that is the case.

It is always necessary to consider these reliefs and credits critically, by which I mean assessing sensibly whether they are working. I wonder, given that UK businesses appear to be very critical of the tax system and a number of them are seeking to move abroad, because our headline rates are not as low as those of some of our competitors, particularly Ireland, whether the Government have looked at reducing some of these reliefs, which would enable them to fund a reduction in rates. I should say for the sake of clarification that I do not particularly advocate that policy. It was set out—and no doubt the Minister will refer to this—by the tax reform commission led by Lord Forsyth. It is a recommendation that he made, but it is not one that my party has adopted as such, and our policies will become clearer nearer the time of the next election. It is a legitimate area for debate, whether for the Opposition or the Government, to keep these matters under review and I would be grateful for the Minister’s assessment of where we are.

Nicholas Winterton (Macclesfield, Conservative)

Before I call the Minister, may I seek to be helpful to the Committee? A particular clause is linked to a particular schedule—clause 24 to schedule 8; clause 25 to schedule 9; and clause 26 to schedule 10. For the convenience of the Committee, I am sure that if hon. Members who are going to participate in the debate wish to refer to the schedule when dealing with the clause, that will be sensible and will remove the necessity of a separate debate on the schedule. Is that agreeable to members of the Committee? [Hon. Members: “Yes.”] Excellent.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

The 2007 Budget announced a package of reforms to the business tax system, including changes to the rate of corporation tax and the capital allowances  system. As part of those reforms, the Government intended to promote innovation by increasing the generosity of enhanced tax deductions available to companies undertaking research and development that qualified for the research and development tax credits, which were introduced by the Government in 2000 for small and medium-sized enterprises and in 2002 for large companies.

That means making changes to the vaccine research relief, which allows companies to claim an additional tax relief on top of R and D tax credits. The small and medium-sized enterprises scheme and the VRR are both notified state aids and are subject to the requirements of the framework for aids for research, development and innovation. That is the combined effect of clause 24 and schedule 8.

I turn to the points that have been raised, including the more general point raised by the hon. Gentleman. We think and all the analysis shows—which I shall lay out to him as briefly as possible—that the R and D tax credits are having a positive effect on R and D spending. It is with some amusement that I listened to him waxing lyrical about the manufacturing industry, given what happened to it when his party was in power. If future manufacturing success depends on research, development and innovation, why was it that the previous Government slashed the science budget, which has now doubled under our Government? I am slightly resistant, in the friendliest possible way, to taking lessons from the Conservative party on these matters.

I am sure that the hon. Gentleman will be delighted to know that the 2005 independent survey of almost 1,000 R and D performing companies—the largest survey of its kind—showed that three quarters of companies that had claimed R and D tax credits found the process fairly or very easy. The survey found positive signs of the early impact of the scheme, bearing in mind that the legislation was introduced for large companies only three years previously, in 2002. Some 55 per cent. of the companies that had successfully claimed reported that they had been able to change the amount or type of R and D activity that they undertook as a result of claiming R and D tax credits.

Those results and the highly successful take-up of R and D tax credits to date suggest that the scheme was of sufficient value to influence R and D investment, and that is why we are expanding it. The full effects of the fiscal incentives are known to emerge only over the long term. The Institute for Fiscal Studies has said that it could be as long as 10 years, but the results have been encouraging so far, which is why we are proud of the policy. International work by the OECD has led to a general consensus about the positive relationship between R and D tax credits and the amount of R and D, and we are comfortable with that.

The hon. Gentleman made some broader points about competitiveness in taxation that, strictly speaking, are not within the scope of this part of the Bill. It is something that we are always extremely aware of, and that is why my right hon. Friend the Financial Secretary has set up a new group of people in industry to look at such issues more broadly. It is not our policy to raise R and D tax relief to fund a reduction in corporation  tax, which is at an historically low level—indeed, much lower than it was in 1997. It has had a positive effect on our competitiveness.

David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)

The Minister made a point about competitiveness. Yes, corporation tax is lower than it was, but it is not as low as it was compared with our competitors, and it is that problem that the Government must address.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

As I have said, we are ever vigilant to make sure that our economy is as competitive as it can be, given our other public objectives. That is why we shall be examining such issues under the group chaired by my right hon. Friend.