Income Tax and Research Expenditure

– in the House of Commons on 25th April 1944.

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For taxation purposes research expenditure is divided between that incurred by a central body on behalf of a section of industry and that carried out by a trading concern in its own works. It has been the practice of the Inland Revenue, since the last war, to allow as a deduction, in computing profits, all annual payments made by a trading concern to a central research body approved by the Department of Scientific and Industrial Research, though this allowance did not extend to a particular payment earmarked for a special capital project. As regards a trader's own research, the general principle has been to distinguish between expenditure of a revenue character and capital expenditure, allowing the former and disallowing the latter, though in practice there has been no undue insistence on this distinction.

In my view, and I think the Committee will agree, expenditure on research stands on a different footing from the other expenditure of a trader. It is not immediately related to the making of profits, as in the case of expenditure incurred in the manufacture and sale of goods, nor do the benefits accrue mainly to the originator. I think therefore that there 's a case for modifying in favour of research expenditure the distinction which the Income Tax Acts draw, and must indeed draw, between capital and revenue expenditure.

My proposal is that any research expenditure of a capital character, which means normally expenditure on laboratory buildings, plant and machinery, should be allowed over a period of five years, or over the life of the assets if shorter, as a deduction from profits for Income Tax purposes. In addition, all current research expenditure such as salaries, wages, cost of materials, repairs, and so forth, will be allowed as and when incurred by the trader.

This allowance of capital expenditure over a period of five years will be the rule for research carried out by a trading concern on its own account. In addition I propose that any payment, whether for a capital purpose or not, made by a trader to a central research body approved by the Department of Scientific and Industrial Research shall be allowed, as and when made, as a deduction in computing the profits of the concern. Contributions to research being carried out by a university or college on matters of concern to the trader's business will similarly be allowed.

I hope that the Committee will agree that in this comprehensive attempt to relieve from taxation altogether funds devoted by industry to the support of fundamental research, to the translation of laboratory research to production, and to the full-scale development of the product, the Board of Inland Revenue have tackled the problem with a sense of realities born out of their close interest in the effects of taxation upon industrial recovery and the buoyancy of the revenue.

I believe that in what I propose, I am meeting all the reasonable claims of industry for adapting taxation policy to the development of industrial research. There is too much evidence that before the war we were falling behind other important industrial countries in the range, although not necessarily in the quality, of our industrial research and its application. As I have said the war has demonstrated to the world that the quality is there, and the war gave financial opportunities of an extended range. I am trying to carry forward, within practical limits, to the solution of our urgent peace-time problems of production, significant financial help. I have no doubt that industry will respond over a wide field. The ideal towards which we ought to move is a general practice by which each manufacturer devotes a contribution, measured by his own turnover, to the furtherance of scientific knowledge. I hope also that there will be a much wider pooling of ideas and technique in the development of research, even down to the production of what I have heard described as that mysterious catalyst the "know-how." In many fields we have a lot of leeway to make up, and co-operation is economical of time, money and skilled personnel, all of which will be in short supply, and in some cases very short supply, after the war. Further, I think that the industrial research worker should be encouraged to regard himself not only as serving the organisation which pays him, but as contributing to the sum of available knowledge, and enlarging the horizons of the material world. We must provide our research workers not only with the physical apparatus which supplies their needs, but with the motive which evokes their latent powers.