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

Clause 26 places a cap of €7.5 million on research and development aid on particular projects. I have a few questions for the Minister, in order to understand the reasons behind the clause and also to ask whether it will impose an additional bureaucratic burden on firms. I will start with the second point.

I understand that there are different rules as far as the relief is concerned for research and development for small and medium-sized enterprises and larger companies. In calculating the cost of a particular project, as I understand it, under clause 26 it will be necessary for an SME to calculate the various reliefs and tax credits that it has received in respect of that project, both under the  rules that apply to SMEs and those that apply to larger companies, to ensure that the cap threshold is not exceeded. Is that a correct interpretation of what clause 26 will require? Does the Minister think that that is a burden that may create difficulties?

I believe that the Treasury assessment is that this particular cap is likely to affect only 25 companies. However, given that the definition of SME is being extended—a point that I raised a moment ago—is it possible that it may apply more widely than that? In addition to the complexity, my other concern is with regard to clause 26(1), which states that:

“A company is only entitled to R&D relief in respect of expenditure attributable to a research and development project”.

It goes on to set out the limits. However, what constitutes a research and development project? I do not think that there is any further definition. If one can break up a project into different elements and define it in that way, the cap will be ineffective. Is there a commonly accepted definition of a project? If there is not, it is an ineffective clause, given what it is intended to do.

What is the Government’s intention in this area and why are they introducing the clause? I believe that it is to comply with EU state aid rules. That may not be a surprise to you, Sir Nicholas. Could we have some clarification as to precisely why the Government are introducing the cap? If relief for research and development is a good thing, why is it only a good thing up to a certain amount? I seek the Minister‘s clarification on those issues.

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

In answer to the hon. Gentleman’s final point, as with clause 25 and schedule 9, clause 26 is concerned with ensuring that the SME R and D tax credit and vaccine research relief continue to meet the requirements of the European framework for state aid for research, development and innovation. The clause introduces a cap on the amount of aid that companies can claim under the SME R and D tax credit and VRR schemes in respect of any one R and D project. That is because the EU’s framework requires that aid of more than €7.5 million needs to be notified to the Commission separately and the incentive effect of the aid shown. The Government believe that that would place a significant administrative burden on businesses and seriously reduce their certainty. If the incentive could not be demonstrated, all the aid would be disallowed, not just the aid over €7.5 million.

A cap, which applies to each project, is administratively less burdensome and gives more certainly to claimants where their project is not close to reaching that level of aid. We do not think that the changes will affect many of the 5,000 companies that claim each year for the reliefs. An alternative to introducing the cap would have been to require companies claiming more than €7.5 million in aid in respect of a particular project to individually notify that aid and its effect on their R and D expenditure to the European Commission. I am sure that Opposition Members and, if I may dare add, perhaps even yourself, Sir Nicholas, would not have approved of that. It would have resulted in considerably less certainty and more administrative complexity for claimants. That is why we are proposing to do it in this way—precisely for the reasons that the hon. Gentleman mentioned.

No single claimant has yet come close to claiming €7.5 million. The estimate of the number of companies  takes into account the extension to medium-sized companies. Companies would need to make a calculation only if they came close to that cap.

We have, of course, undertaken and published an impact assessment on that measure. The hon. Gentleman the Member for South-West Hertfordshire asked whether the measure was burdensome. I have explained that it is the most efficient way to do this. The impact assessment published with this year’s Budget estimated that the impact of the change would be an additional total cost of £12,500 per year, for all the companies affected. I am sure that the hon. Gentleman will realise that that is a small amount per firm. I hope that that answers his questions.

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

The definition of “project”?

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

I will have to come back to the hon. Gentleman on that.

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

I do not know whether the Economic Secretary, with time to think further on the matter, will be able to enlighten the Committee a little more on the definition of “project”, or indeed whether her guidance could be written more slowly and therefore more legibly. My point is important, as that seems to be a way in which the cap—I accept her points—might be avoided.

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

I shall ensure that my guidance is written slowly and legibly and sent to the hon. Gentleman.