Clause 1 - Permanent full expensing etc for expenditure on plant or machinery

Finance Bill – in the House of Commons at 2:26 pm on 10 January 2024.

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Question proposed, That the clause stand part of the Bill.

Photo of Eleanor Laing Eleanor Laing Deputy Speaker and Chairman of Ways and Means, Chair, Standing Orders Committee (Commons), Chair, Standing Orders Committee (Commons), Chair, Parliamentary Works Estimates Commission, Chair, Parliamentary Works Estimates Commission

With this it will be convenient to consider the following:

Clause 2 stand part.

Schedule 1.

New clause 1—Review of reliefs for research and development—

“(1) The Chancellor of the Exchequer must, within three months of this Act being passed, publish a review of the implementation costs of the measures in section 2 incurred by—

(a) HMRC, and

(b) businesses.

(2) The review under subsection (1) must include details of the implementation costs of all measures related to credit or relief for research and development that have been introduced since December 2019.”

This new clause would require the Chancellor to publish a review setting out the total implementation costs of all changes to research and development reliefs in the current Parliament.

New clause 3—Assessment of impact of Act on business investment and economic growth—

“Within six months of the passage of this Act, the Chancellor of the Exchequer must carry out an assessment of the impact of section 2 and Schedule 1 of this Act on business investment and economic growth, and lay a report of that assessment before both Houses of Parliament.”

This new clause would require the government to produce an assessment of the impact of the Bill’s new regime for research and development carried out by companies. This assessment would need to examine the impact on business investment and economic growth.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury 2:38, 10 January 2024

This Government’s aim is to grow the economy for the good of everyone by removing barriers to private sector investment and delivering a tax system that is supportive of business. At the spring Budget 2023, the Chancellor set out his approach for a highly competitive tax regime. By announcing a package of generous tax incentives, combined with a rate of corporation tax that remains the lowest in the G7, this Government have ensured that the UK continues to be one of the best places in the world for businesses to grow and invest.

The Bill marks our next step in making the UK one of the most competitive tax systems among major economies by enhancing the support that the corporation tax system provides to businesses that drive growth by making long-term investments. It meets the Government’s commitment to introduce permanent full expensing, as announced at the autumn statement, solidifying our international competitiveness and creating the certainty that businesses have told us they need in order to confidently invest. The Bill will also drive UK business innovation by merging the existing research and development expenditure credit scheme with the small and medium enterprise scheme. Merging those schemes will simplify and improve the system for supporting cutting-edge research and development.

Turning first to clause 1, at spring Budget 2023, the Government introduced two new temporary first-year capital allowances for qualifying expenditure on plant or machinery. The first was a 100% first-year allowance for so-called main rate expenditure, known as full expensing, which allows companies to write off the full cost of plant and machinery in the year that the cost is incurred. The second was a 50% first-year allowance for expenditure on special-rate assets such as lighting systems, thermal insulation and long-life assets, allowing companies to write off half the cost of an asset in the year that it is incurred, with the remaining balance written down at 6% in every year afterwards.

The Chancellor was clear that his long-term ambition was to make those new reliefs permanent once the fiscal and economic conditions allowed, and at the autumn statement he confirmed that he was able to do just that. Clause 1 delivers that ambition, making both full expensing and the 50% first-year allowance permanent by removing the end date of 31 March 2026. That means that companies will be able to permanently benefit from full expensing. It solidifies our position as joint top of the rankings of OECD countries with regard to plant and machinery capital allowances, and means we are the only major economy with permanent full expensing.

The change will give companies the certainty they need to make long-term investments, and responds to calls from the CBI, Make UK, Energy UK and 200 other business groups and leaders, and from companies including BT Openreach, Siemens and Bosch, which have said that making the policy permanent would be the single most transformational thing the Government could do for business investment and growth. According to the Office for Budget Responsibility, it will generate almost £3 billion of additional business investment each year and £14 billion over the course of the next five years. The forecast is that GDP will be 0.1% higher by the end of the forecast period and slightly below 0.2% higher in the long term as a result.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

I applaud the Government’s initiative to make full expensing permanent, but of course we know there will be a general election within the next 12 months. Has my hon. Friend heard from the Opposition whether, if they were to be in Government, they would maintain it?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

My hon. Friend is incredibly knowledgeable about this area through some of his previous business and ministerial experience, and that is a question I am intrigued to hear answered by the Opposition shortly. I believe it is vitally important, because the whole point is to give businesses the confidence to invest in the long term, and certainty is key to the investment decisions being made.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

Further to that point, does my hon. Friend not think, as I do, that it is an aspect of a responsible Opposition to be clear, right now as we are debating this in this House, what they would do were they to be in Government?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I think my hon. Friend is kicking off what is likely to be a long debate over the course of the next year, but an important one for our constituents and businesses. The economy will play a pivotal part in discussions this year. It is very clear what we are doing: we are implementing vital changes, asked for by business and in response to business, to provide that business certainty and an environment in which they and therefore our constituents can thrive. I do not think any of us want to put that at risk. However, without the clarification and confidence from the Opposition about what they might do, these issues will be raised and the uncertainty can persist. We on the Government side of the House are committed to this, and my hon. Friend is right to make that clear.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

I think the Minister just read out that the assessment is that this measure will create £3 billion additional investment per year. Is that right? If I remember the Green Book correctly from the autumn statement, the annual cost of this measure was £11 billion, which I think equates to £55 billion of extra capital expenditure. Is he saying that £52 billion of that £55 billion is just bringing forward investment that would have happened later, and £3 billion is new, or have I somehow got my numbers wrong and this will generate a load of investment that would not otherwise have happened?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury 2:45, 10 January 2024

My hon. Friend is right to point out the timing element with both full expensing and R&D; I will come on to R&D in a moment, because I think that is the £55 billion figure he mentions, but these measures, particularly the full expensing, will of course have a long-term impact over a long period of time. The cost is up-fronted, but the benefit is over a long period, and anyone who has worked in business understands that. He is right to point out the anomaly, and it is a very important point because a lot of people probably would not understand it, but the fact that the OBR has highlighted the incremental impact on the economy overall shows that there is a clear and transparent net benefit. The timing of the impact changes, but we are talking about additional investment right away, because we will be giving businesses the confidence to be able to make those decisions and invest immediately.

Photo of Matt Rodda Matt Rodda Shadow Minister (AI and Intellectual Property)

I appreciate the Minister’s comments so far. Can he confirm how many times policy has changed in this important area since 2019? While he is making some further points today, it seems that Government policy has changed quite erratically, and that in itself is difficult for businesses to respond to when they are looking for certainty in planning for the long-term.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I agree that certainty for business is pivotal, but with both full expensing and R&D the Government, the Chancellor and others have been indicating the direction of travel for some time and therefore giving increased certainty. As I have said, it was mentioned a while ago that we intended to pursue the policy of full expensing when the economic circumstances allowed, and now they do. R&D, which I will come to in a minute, has been discussed for quite a long time and is the result of extensive co-operation with industry.

It is also the reality, though, that Government policy needs to change in response to the nature of a changing economy and to things such as digital, the cloud and so on. When it comes to other investments, we need to make sure that new and emerging policy areas are covered as well. We have seen today, as we saw in the autumn statement, a very clear direction of travel from the Conservative side of the Chamber, which is about incentivising businesses and cutting taxes. Permanent full expensing also simplifies the capital allowances regime overall, as companies can claim the full cost in year one, reducing the need to claim writing-down allowances year on year.

Turning to clause 2 and schedule 1, the Government have also announced the closure of the R&D tax relief review launched in 2021—the point I was just making to Matt Rodda—alongside a set of changes to simplify and improve the system. Clause 2 makes changes to merge the current R&D expenditure credit and SME schemes for expenditure in accounting periods beginning on or after 1 April 2024, simplifying the system and providing greater support for UK companies to drive innovation.

The merged scheme will have an above-the-line mechanism similar to the R&D expenditure credit, with a rate of 20%. That will make the benefit more visible and easier for companies to factor into their investment decisions. Additionally, small and medium enterprise lossmakers will now be able to carry forward their losses rather than having to surrender them, which will give a total benefit of up to £45 per £100 of R&D expenditure.

There will also be a reduction in the rate at which the merged scheme credit is taxed for lossmakers, from 25% to 19%. That is worth around £120 million per annum to non-intensive lossmakers and will increase the up-front cash benefit for lossmakers. Subcontracting rules in the merged scheme will allow the company taking the decision to do R&D to claim relief on contracted-out R&D. That approach is based on the current SME scheme, which was identified as the best option in the consultation we delivered, and has been refined further following engagement with industry last summer.

Subsidy rules will also be removed, allowing SMEs to claim relief for work for which they receive a grant of a subsidy. This represents an increase in generosity for SMEs as well as being a major tax simplification.

The Government are also legislating for enhanced support for loss-making R&D-intensive SMEs. That was announced at spring Budget 2023 and will benefit 23,000 SMEs a year by providing further support to the most R&D-intensive SMEs while merging the current schemes. The Government are promoting the conditions for enterprise to succeed. Companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.

At the summer statement, the Government announced several improvements being made to that enhanced support. The R&D intensity threshold is being lowered to 30% from 40% from April 2024, meaning that around 5,000 more companies will benefit from the support. A one-year grace period is being introduced, providing greater certainty by ensuring that companies that dip under the 30% threshold will continue receiving relief for one year. The same subcontracting rules as the merged scheme will apply to this enhanced support, further helping to simplify the system with one set of rules that both SMEs and larger companies will follow.

Overall, R&D reliefs will support an estimated £55 billion of business R&D expenditure in 2028-29—a 25% increase from £44 billion in 2021-22. Expenditure on R&D reliefs is forecast to increase in every year of the scorecard period. We will also restrict nominations and assignments for R&D relief payment. That measure ensures that genuine businesses get the payment for their R&D claim directly, rather than receiving it through an agent, and is designed to benefit genuine claimants and reduce non-compliance.

Subject to limited exceptions, no R&D tax credit payments will be made to nominee bank accounts, and any R&D tax credit payments must be paid directly to the company that claims for the R&D, so claimants will now receive their payments directly, giving them more control. That will ensure that the person claiming the relief has better oversight of the claim and receives the money into their account quicker. Claimants will also be clearer on exactly how much money is being charged by their agents, rather than just receiving a net amount after fees have been deducted. That builds on previously announced measures and policy changes to help to ensure greater company control over R&D claims.

The Government are committed to making the UK the best place in the world to do business. Full expensing and R&D tax relief support businesses to grow and invest, which will boost productivity and economic growth. That remains the key way to raise everybody’s living standards and to fund high-quality public services throughout the UK. I commend clauses 1 and 2 and schedule 1 to the Committee.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

Let me start by briefly considering the context in which we are debating clauses 1 and 2. As we know, the Bill follows the Chancellor’s statement on 22 November last year, in which he claimed that he was delivering an “autumn statement for growth”. As the Committee may remember, the Office for Budget Responsibility confirmed on the same day that growth forecasts had been cut by more than half for the coming year, cut again for the year after that, and cut yet again for the year after that. Independent analysts confirmed that, even after all the changes the Government had announced, personal taxes would still rise. In fact, personal taxes are now set to rise by £1,200 per household by 2028-29, with the tax burden on track to be the highest since the second world war. Despite people across the country paying so much in tax, public services are collapsing, the NHS is on its knees, and more and more families are struggling to make ends meet.

That was the context in which we considered the Bill on Second Reading just before Christmas: 13 years of Conservative economic failure had left people across Britain worse off. The only thing to have changed since then is that we now face 14 years of Conservative economic failure. It may be a new year, but those in the governing party face the same cold truth: nothing they can say or do now can repair the damage that they have done to our economy.

People in businesses across Britain deserve so much better. As a foundation of better management of the economy, our country needs and deserves stability, certainty and a long-term plan. It is for that reason that, although we welcome the fact that clause 1 makes full expensing permanent, which we have long called for, it simply cannot make up for the years of uncertainty that businesses have faced. Businesses need stability and predictability to help them plan for growth, and their long-term planning has been held back because the Government have been chopping and changing business taxes and reliefs year after year, with no evidence of anything resembling a long-term strategy.

Photo of Richard Fuller Richard Fuller Conservative, North East Bedfordshire

I was very pleased to hear the shadow Minister say that the Opposition welcome the full expensing. That helps, but maybe he can go further to clarify. In new clause 6, tabled in his name, the Opposition are calling for a review of all business taxes and reliefs, which would include full expensing. He will know, as will Alistair Strathern who is sitting behind him, that there is a particular potential investment decision in our county. Will the shadow Minister make it explicit that the Labour party’s intention is to include in its manifesto for the next election a commitment to maintaining full expensing?

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

As I have said, we have long been calling for full expensing, and we welcome the fact that it is being made permanent. I do not mean to sound jokey in my response—I am deadly serious when I say this—but if the hon. Gentleman wants to know what a Labour Government would do if we got into office, there is one way to see that eventuality come about: we could have a general election sooner rather than later, instead of dragging things on throughout the course of 2024.

Frankly, the country needs to move on from the current Government. Just look at their record on capital allowances since the last general election. Richard Fuller spoke about certainty and the need for stability, but let us look at the changes that have happened to capital allowances over the past four or five years. As I mentioned on Second Reading, back at the beginning of this Parliament, the annual investment had been raised to £1 million on a temporary basis. That temporary basis was extended by the Finance Act 2021, extended again by the Finance Act 2022, and then made permanent by the Finance (No. 2) Act 2023. Meanwhile, over the course of this Parliament, the super-deduction came and went entirely. Last year, full expensing for expenditure on plant or machinery was introduced but only on a temporary basis for three years.

Now, of course, Treasury Ministers are amending what their predecessors announced last year by making full expensing permanent. Although we welcome that policy, I wonder how long it will last. Frankly, I wonder how long any policy can be expected to last under this Government, when they are led—in the loosest possible sense of that word—by such a weak Prime Minister. If we accept clause 1 at face value, we welcome its principle of making full expensing permanent, as that is something that we have long called for. I will focus the rest of my questions on some of the specifics of the Government’s approach.

As ever, I am grateful to the excellent team at the Chartered Institute of Taxation for all their thoughts on the detail of what the Government have proposed in this clause and others. I know that one matter of interest to the chartered institute was the fact that, at the autumn statement, the Government said that they would publish a technical consultation on leased assets. I would be grateful if the Minister told us when that will be published.

Furthermore, both the Chartered Institute of Taxation and the Association of Taxation Technicians—to which I am also grateful for its thoughts on the detail of the Bill—have queried which companies and assets are eligible for full expensing. I would be grateful if the Minister clarified which assets are outside the scope of full expensing, and whether the Treasury will publish a detailed list of what does and does not count as plant and machinery. I would also be grateful if he told us how many firms will not be eligible for full expensing because they are partnerships. I know that many who take an interest in this matter would welcome clarity on that.

In clause 2, the Government propose changes to the system of tax credits for research and development. As with their approach to business taxation and capital allowances, the Government have failed to deliver any sense of stability when it comes to R&D tax credits, despite certainty and predictability being so crucial to businesses that are making investment decisions. That much is clear when looking at the list of changes that we have debated in Finance Bills over the course of the current Parliament alone: the Finance Act 2020 changed the rate of R&D expenditure credit; the Finance Act 2021 changed how much R&D tax relief small and medium-sized enterprises could claim; the Finance Act 2023 again changed the rates of R&D tax relief; the Finance (No. 2) Act 2023 changed further how the relief operates; and now, the Finance Bill before us changes the system of reliefs yet again. We accept, of course, that some change is necessary and important to enable legislation to function well, but that does not seem to be what we have seen. What we have seen is a Government incapable of providing stability, predictability, and the long-term plan that businesses need to invest and grow. It is clear that after 14 years in office, the Conservatives are incapable of providing that crucial foundation for our economic success.

Photo of Matt Rodda Matt Rodda Shadow Minister (AI and Intellectual Property)

My hon. Friend is making an excellent point, which comes to the nub of the argument: the Government are not capable of providing business with the certainty it needs. That is such a tragedy, because so many wonderful emerging industries in the UK which have incredible potential need that certainty, as indeed do other businesses.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 3:00, 10 January 2024

My hon. Friend is absolutely right. So many businesses in the UK that are keen to invest, grow, and make people across Britain better off are being held back by the lack of stability and certainty from this Government. I cannot help but notice that the Government recognise the symptoms of the problem—that a lack of stability and certainty is indeed a problem for economic growth—but they are simply unable to provide a response to that problem, and provide the long-term plan that Britain so desperately needs.

We know that so much chopping and changing without any clear long-term plan has had a cost for our economy, by undermining prospects for investment, innovation and growth. Indeed, the Institute of Chartered Accountants in England and Wales has shared with us the view of its members that there is a lack of confidence when claiming R&D tax relief within the UK, and their belief that

“this has arisen due to the various changes made to the rules in quick succession over the past few years.”

We also know, of course, that having so many changes one after the other has a direct impact on taxpayers as well as businesses, as the public finances bear the costs for all the impacts on His Majesty’s Revenue and Customs in terms of IT systems and staffing. Our analysis of HMRC policy papers suggests that the changes made and proposed within the current Parliament have had a cumulative impact on operational costs for HMRC of more than £60 million. That sum is likely to include a substantial waste of taxpayer money as a result of so many piecemeal changes rather than coherent and lasting reform.

In order to be clear and transparent on the costs of all the Government changes to R&D tax credits, we have tabled new clause 1. The new clause would require the Chancellor to publish a review setting out the total implementation costs of all changes to research and development reliefs in the current Parliament. I hope Ministers will accept that straightforward new clause, but if not, I look forward to Government Members who would be interested in such transparency joining us in supporting it. Furthermore, if Ministers are not prepared to vote for the new clause or accept it, I would be grateful if they could at least commit to writing to me with the figures that our new clause requests.

Turning to the substantive impacts of clause 2, we should be clear about what the clause does. In the autumn statement, the Chancellor said that the Government were

“creating a new, simplified R&D tax relief that combines the existing R&D expenditure credit and small and medium-sized enterprise schemes.”—[Official Report, 22 November 2023;
Vol. 741, c. 325.]

We have heard similar words from the Minister in this debate. In reality, though, the Government’s plans still effectively maintain two separate schemes: although they seek to merge the two existing schemes, they continue to provide additional support for R&D-intensive SMEs through the existing SME scheme, rather than its forming part of the new merged scheme. Although we recognise that R&D-intensive SMEs may need extra support, the Chartered Institute of Taxation has pointed out that the Government’s plans are

“less a merger than the shifting of most SMEs into a revised scheme based on an ‘RDEC’ approach, with the SME scheme remaining for a smaller group of R&D intensive SMEs.”

The Association of Taxation Technicians has pointed out the impact this may have, saying that

“the introduction of new rules to define R&D intensive SMEs and the possibility of companies moving in and out of the two regimes as their expenditure profile changes will arguably result in an overall increase in the complexity of the R&D relief regime, rather than simplification.”

As I said, we recognise that R&D-intensive SMEs may need additional support, but I would be grateful if the Minister could explain why the Government have chosen to continue operating a separate scheme to provide that support, rather than delivering it as part of the new merged scheme.

Alongside understanding the Government’s intention regarding the design of the new regime, I would also like to question the Minister about the timescales for implementing the measures in clause 2. In the policy documents associated with the autumn statement, it was clear that the new regime would apply from April 2024 onward. In the Bill, however, schedule 1, which clause 2 introduces, makes clear that the changes will apply from an “appointed day”—a day to be appointed by the Treasury in regulations. I would be grateful if the Minister could confirm in his reply what that appointed day will be. Is it 1 April 2024, or will it be a later date?

As April is less than three months away, if the appointed day does indeed fall within that month, is the Minister confident that that leaves enough time for proper consultation, and for any new systems and processes to be put in place by businesses, agents, software providers and HMRC? If, instead, the appointed day is later than April 2024, those affected need to know what is happening. I hope the Minister will be able to provide clarity on that question today; otherwise, sadly, this seems to be yet another example of continued uncertainty for businesses from this Government.

Finally, we know that the Government are concerned about the level of non-compliance with the R&D tax credit schemes. In their policy paper published in November about the merging of the current schemes, they wrote:

“Further action may be needed to reduce the unacceptably high levels of non-compliance in the R&D reliefs, and HMRC will be publishing a compliance action plan in due course.”

Tackling non-compliance is of course very important, so I would be grateful if the Minister could confirm in his reply when HMRC will be publishing the promised compliance action plan.

I am also very aware from meetings I have had with smaller businesses that they often face a great deal of confusion over the guidelines associated with R&D tax credits. Whereas larger businesses will typically have the resources and institutional capacity to navigate those rules, I am concerned that smaller businesses often do not, and may find themselves having to pay for expensive consultants to help them understand them.

HMRC could have a role to play in supporting small firms with clarity about the guidelines on R&D tax credits, as well as, of course, in its role in tackling genuine fraud. Indeed, the Startup Coalition—an organisation that advocates for policies to support innovative firms in the UK—has highlighted the need for HMRC to improve, and has called for improved

“transparency around adjudicating whether activity is R&D to provide certainty for firms.”

The ICAEW has made similar points, stressing the need for guidance and education and making clear that

“the new rules will significantly affect all sizes of companies including those smaller entities with limited professional tax resource.”

I therefore urge the Minister to make sure that any plan for improving compliance with the rules also focuses on making the rules easier to comply with wherever possible, and on working with small, innovative firms to help give them the certainty they need to thrive.

To conclude, Labour will not be opposing either of the clauses, but I urge Treasury Ministers to accept our new clause 1 and, when they reply, to respond to the specific points that I have raised. More widely, it is clear from their approach to capital allowances and R&D tax reliefs that the Conservatives are incapable of providing stability and a long-term approach. Their failure is letting down businesses across our country who stand ready to play their part in growing the economy and making people across Britain better off.

Photo of Maggie Throup Maggie Throup Conservative, Erewash

I am delighted to be able to speak in Committee on the Finance Bill, which I believe emphasises the Conservative principles of encouraging entrepreneurs, free enterprise and innovation. Many in this Chamber will know that I do not have a traditional finance background, but I did run my own business for 19 years, which I think qualifies me to identify when fiscal measures are really going to help business. That is what I see in the Bill, especially clauses 1 and 2, which I will speak to today.

First, I will take the opportunity to speak in favour of clause 1, which will support UK business by making full expensing permanent. In the spring Budget 2023, the Chancellor introduced major reforms to the system of capital allowance by replacing the super-deduction system with three years of full expensing. The new measure, which was initially put in place until 1 April 2026, allows companies to claim the full cost of their expenditure on plant or machinery against tax when the business investment is made. That measure was well received by businesses across the UK, as my hon. Friend the Minister has already stated; he quoted a number of large plcs, but the measure has also allowed a number of Erewash-based businesses to benefit and prosper.

Dales Fabrications Ltd previously claimed a super-deduction, the predecessor of full expensing, on a very significant piece of machinery. It sounds quite complicated to me, but it is a 4-metre press break with lots of bespoke options. The benefits of the super-deduction were of such significance that the business purchased additional and highly beneficial tooling concurrently with the machine. The now chairman of the business said to me:

“In reality, we would have inevitably deferred that additional tooling purchase without the super deduction, thus meaning we wouldn’t have had 100 per cent of the benefits of our new machinery from day one and would have been effectively denied access to some types of work that went beyond typical industry-standard sizes.”

The owner of another business, Millitec, said:

“Super deductions are really good and a real incentive for us to invest.”

The successor of the super-deduction, which means being able to expense fully the cost of plant and machinery on a permanent basis, as proposed in clause 1, will undoubtedly continue to be a huge incentive for businesses across the UK to invest in their futures and in UK plc. I know from speaking to my local businesses that they really welcome this, and see it as one way to be able to expand and grow their business. However, I have a question for my hon. Friend the Minister. The terminology of plant and machinery is very broad, so when he responds could he provide some clarity for my Erewash businesses about what is defined as plant and machinery, to help them understand what is in scope? For example, does it extend to IT equipment? I think that having a better understanding of the terminology will really help businesses of all sizes to take full advantage of what is on offer.

The contents of clause 1 shows that the Government are on the side of business. Ahead of the autumn statement last year, 200 businesses—including AstraZeneca, which was so instrumental in the covid vaccine roll- out, and Toyota, a major employer of many of my constituents—wrote a joint letter to my right hon. Friend the Chancellor asking for the 1 April 2026 expiry date to be removed, so making full expensing permanent. Today, by supporting clause 1 and making full expensing permanent, we are backing businesses and helping them to succeed. It also shows that the Government are listening to businesses and making sure they are putting in place measures that will really help them grow their business.

Clause 1 will provide businesses with the biggest tax cut in modern history, worth over £10 billion a year, making the UK capital allowances regime one of the most generous in the world. Since the introduction of temporary full expensing in April 2023, the UK has become an appealing place to invest. The UK has had the second highest investment growth in the G7 and three times that of the US. Making full expensing permanent can only perpetuate that growth. Will my hon. Friend say when he winds up whether plans are in place to extend full expensing to plant and machinery that is either leased or hired? Those two options are often the only affordable ones for businesses with big ambition, but limited capital.

Let me turn to clause 2 and schedule 1. The Bill will simplify research and development rules by merging the small and medium-sized enterprises and the R&D expenditure credit schemes. Whether it is trialling and distributing the successful covid vaccines, which helped us defeat covid-19, or testing and developing new innovations that will enable us to meet our net zero targets, R&D businesses play a vital role in growing our economy. At the spring Budget 2023, my right hon. Friend the Chancellor announced enhanced support for R&D-intensive SMEs worth around £500 million per year, a consultation on the potential merged R&D tax relief scheme and support for those loss-making R&D businesses. As a result, the measures in this Bill show the Government’s unwavering support for R&D businesses.

Specifically, clause 2 and schedule 1 will help reduce bureaucracy and ensure that taxpayers’ money is spent as effectively as possible by simplifying the R&D tax system. That will stop many businesses having to navigate the complex transition between the two existing schemes. It is anticipated that the reduction of the intensity threshold in the R&D-intensive businesses scheme from 40% to 30% from April this year will allow around 5,000 extra SMEs to qualify for an enhanced rate of relief. A one-year grace period will also be introduced, providing certainty for companies dipping under the 30% threshold that they will continue to receive relief for one year. This is a vital measure for so many R&D-focused businesses, which inherently have peaks and troughs of activity. Taken together, these changes will provide £280 million-worth of additional relief per year by 2028-29 to help drive innovation in the UK.

As a former biomedical scientist and someone who continues to take a keen interest in the area, I know that the measures in clause 2 and schedule 1 will undoubtedly benefit the bioscience sector. The Government are adopting an interesting position on subcontracting. The Bill will allow the decision maker to claim for subcontracted R&D work. Will the Minister confirm that proposed new section 1133(3) will mean that if a company is contracted to do work that is not research and development but then decides to carry out some related R&D work, it will be entitled to claim relief for it? Will he also confirm that the new measures will allow a business that contracts out to a research organisation qualifying activities, such as a clinical trial, to claim for the costs of the contract? If this is the case, I am sure that R&D subcontracting will increase collaboration and knowledge sharing, which are crucial for economic growth.

I have no doubt that the measures announced in the Bill will be the ignition that accelerates the UK’s economy and leads us to a brighter future. I will support the Bill throughout today.

Photo of Drew Hendry Drew Hendry Shadow SNP Spokesperson (Economy)

I am only going to make some brief remarks on the two clauses. The UK Government are clearly scrambling to fix an economic mess of their own making, and the Bill is full of such measures.

On clause 1, during the autumn statement I welcomed this move, but it does little to deal with the damage to business that has been caused by the big grey elephant in the room that none of the parties wishes to mention, which is Brexit. Far from the ideal of removing red tape and decreasing bureaucracy, as we have heard thrown about in this Chamber, it has actually led to more red tape and more difficulties for business. This is just one of the measures the Government should be taking, among many others they must consider in future. I hope to come to those later in the debate.

The “years of uncertainty” that James Murray mentioned have indeed been years of uncertainty caused by this Government, but they have definitely been impacted by the Brexit that Labour now supports, along with the Liberal Democrats. People are struggling with a cost of living crisis, and it is affecting domestic sales too, so they need other fixes. Again, I will have some questions about that later.

Clause 2 and schedule 1—I hope this will be helpful for the Minister—are like trying to make a jigsaw puzzle with no box, no picture and just some random bits and pieces to try to plug together to make something out of. Productivity does not work without the skills required in research and development. We do not get the advance or the boost we need without that and, once again, the spectre of Brexit means that we have a skills shortage across the nations of the UK. That is particularly affecting Scotland, which needs its own immigration rules. It is something we would ask to have powers over, short of our call—it would of course be the absolute best result—for Scotland to have independence so it can make these decisions itself.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

It is a pleasure to speak in this debate. I want to direct my remarks to clause 1, on permanent full expensing for the purchase of plant and machinery, which I discussed during the autumn statement and on Second Reading.

This is actually quite a radical and expensive policy. We have, probably for longer than all our lifetimes, given companies relief for capital expenditure using capital allowances. That was originally quite a generous 25% in the first year—I suspect that most plant and machinery had a longer life than that when the rules were produced. We have chosen to do that for all these years, rather than just letting a business deduct its own accounting calculation of depreciation, because we did not want the manipulation of tax deductions by businesses doing their tax returns. We chose to do it this way.

The tool that Governments of all colours for decades have had when the economy hits trouble is to give first-year allowances and various enhancements. I remember a 40% first-year allowance and a 50% first-year allowance. We have had full expensing up to £1 million, as the shadow Minister referred to. That has been the way of incentivising investment in a period of economic recovery for probably as long back as there has been a toolkit.

Now we have landed on permanent full expensing, so businesses get full relief on plant and machinery spend in the first year. What are the Government expecting to happen differently here? Are we expecting capital investment by businesses of more than £1 million a year that otherwise would not be economically viable and would never have happened? Are we expecting investment to be brought forward and to take place earlier than it otherwise would have? That would be entirely welcome and would probably modernise businesses, protect jobs and give them a chance to grow in a way that they perhaps would not have had, which is not a bad policy aim at all. Or are we just giving business an earlier tax relief than they otherwise would have had, whereby they bank that and are happy but it does not change behaviour?

It is hard to get behind the numbers on this measure in the Green Book. As I said earlier, the estimate at the end of the five-year period, and probably the first full year that making this permanent will make a difference, is a tax cost of £10.9 billion just for this measure. If we run the numbers, bearing in mind that businesses will already have had 25% tax relief on that same expenditure in that year, that means we expect a £55 billion higher claim to get tax relief in that financial year than otherwise would have happened. However, the Minister said that only £3 billion of that is estimated by the OBR to be additional investment that would not otherwise have taken place at some point. It suggests that we have a lot of investment being brought forward with a lot of more generous tax relief that would have happened anyway. Will the Minister explain what the Government are aiming to achieve and what is being forecast? Is the OBR being unduly cautious? That would enable us to understand how we judge whether the measure has been successful.

Are we expecting to see whole loads of investment in plant and machinery that never would have been viable before, or are we expecting to see it brought forward? If what we are getting is brought forward, at some time the cost should start to taper down, because this is not a new tax relief that businesses would not have already had; it is just an acceleration of tax relief and businesses will pay more tax in all subsequent years, because they are not getting the relief they used to get. The measure could cost £11 billion in the first year and gradually that would level down and in the fullness of time there would be no more annual cost, in effect. Can the Minister clarify that?

It is not immediately clear how the Government plan to assess whether the measure has worked or is working. I assume that from electronic corporate tax returns we can track down to the pound the amount of investment claimed for full expense relief every year. We could have a report within six months of the end of a calendar year on how much of these 100% allowances has been claimed and compare that with the total amount claimed for capital allowances in whichever preceding years we like. We could see whether full expensing was driving behaviour change. Will the Minister talk us through what he expects to happen and how he will assess whether this has been an effective way of boosting productivity and increasing investment for £11 billion a year? It is probably one of the most sizeable line entries we have seen in a Finance Bill in my 14 years here. Normally we expect the big number to be a tax cut for individuals, and this measure is significant.

As we are making this measure a permanent feature of our tax system, it shines a light on what we are trying to get from our corporation tax system. There will not be any kind of compliance saving. The Minister made a brave attempt at saying there might, but effectively all that will change is that the number that a business currently puts in its additions to its writing down allowance pool will now be put in the 100% first-year claim box. It is the same number in a different box; that is the only compliance change we have here. It throws into question some previous policy decisions we have made, because for a business to get full benefit from this, it needs to be paying enough tax to use the full relief in that first year.

If a business cannot use the full relief, the incentives are not as powerful as they would otherwise be, because then the option is effectively to carry that excess deduction forward, but we introduced rules a few years ago that are strict on how many losses a business can use in a year. If we really think that giving people the earliest possible cash tax benefit for capital investment drives investment, we should probably take away that restriction on using losses, so that businesses can get the benefit as early as possible and not have it spread over a number of years going forward. Will the Minister explain whether the Government will look at that and make sure we are not accidentally undoing some of the benefit we are seeking to get?

My second question is: what do we do with the legacy writing down allowance pool that relates to plant and machinery expenditure for God knows how many past years? On a reducing balance basis of 25%, it takes many, many years to get full tax relief for expenditure, so every business will have a large pot of money that it has not yet had tax benefit for. Are we expecting them to run that down at 25% reducing balance a year and still be doing so in 23 years’ time, by which point no one will have any idea what on earth that balance ever was? Or should we say, “That is a bit of a nonsense. Why do we not just let you take the whole balance at 20% a year over the next five years and finish that problem off, because we do not need to be focusing on that?”? We could find any number we like there, but it would draw a line under that past expenditure in a way that genuinely simplifies things.

We then have the question of, “What do we do with capital expenditure on items that are not plant and machinery?” The tax relief we give on structures and buildings is not generous, but if we are trying to drive an increase in productivity and large businesses to invest in new gigafactories to build batteries for electric cars or for electricity storage or whatever, do we not want to incentivise them to build the factory building as well, rather than either giving them no relief or giving it over a long time? If we are spending £11 billion a year to encourage investment in plant and machinery, should we not spend a little money on trying to encourage other things that are key for industrial investment to take place, by being a bit more generous on buildings and structures? Has the Minister any thoughts on that?

The Government did a capital allowances review only a year or two ago, which did not look at permanent full expensing as one of the options, but it would be interesting to see whether they have had any further thoughts on that. We are now asking every business to go through and track every item of capital that they spend and treat it differently in their tax return from how they treat it in their accounting records. Then we have all manner of different laws depending on whether it is a long-life asset, a short-life asset, a car or an environmentally friendly car—I could go on. For the amount now at stake, and given that we have given full relief for plant and machinery, which is the biggest amount, do we really need all that cost and complexity? Or should we just say for all those other items, “You can just have your accounting calculation”? Okay, businesses might take it a bit quicker than we would like, but in actual fact the cost of that is not all that material in the grand scheme of things.

We could move to a system where the only adjustment someone has to make to their tax return is to claim a very generous tax relief on plant and machinery, and they would not have to touch anything else. That would be a more coherent corporation tax regime, now that we have spent all this money incentivising plant and machinery. It would then genuinely be a compliance saving for a business in that situation.

I support the measure and truly hope that it works, but, as a significant amount is being spent, it would be helpful to understand what we are trying to achieve and how we will know whether we have been successful. I hope that the Government will move on to think about how we can slightly recast our tax system so that it makes sense, having made this radical and generous change.

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

I thank hon. Members for their contributions. I will take a few moments to respond to quite a few questions raised during the debate. First, I reassure hon. Members that further guidance will be provided on these schemes. Of course, we do not want all the schemes just to exist; we want them to be used so that they have a real-world impact. More information will therefore be coming out about a variety of areas over a period of time.

I gently remind James Murray, who yet again took the opportunity to talk the UK economy down—the Opposition always do—that every single Labour Government have ended with unemployment higher than what they inherited from the Conservatives. I think the public are well aware of that pattern.

I turn to the many questions raised. I thank my hon. Friends the Members for Amber Valley (Nigel Mills) and for Erewash (Maggie Throup), and indeed Opposition Members for their contributions. On timing, the Government have been clear since the merged scheme consultation was published in January last year that the intended implementation date for the scheme is April 2024. Importantly, in response to that consultation and in recognition of comments, the merged scheme will apply to accounting periods starting on or after 1 April 2024 rather than to expenditure incurred from that date. Again, we will provide further guidance on that.

On leasing and hiring, which was raised by my hon. Friend the Member for Erewash and the hon. Member for Ealing North, the Government committed at the spring Budget to engaging with stakeholders with a view to extending the scope of expensing to include assets for leasing and hiring. As the autumn statement confirmed, that will continue to be considered. We will launch a technical consultation on draft legislation shortly—in early 2024.

Several hon. Members asked about the perfectly valid and important point of what specifically will be included. I have a whole list of what is defined as plant and machinery—as I said, I reassure hon. Members that further guidance will be provided: it includes things such as computers, printers, office equipment, vehicles, vans, lorries, tractors, forklift trucks, tools, ladders and drills, and equipment such as excavators, compactors, bulldozers and so on. That is quite a comprehensive list, but more information will be provided.

My hon. Friend the Member for Amber Valley raised an important point about buildings. Of course, while they are not included in full expensing, businesses can instead receive relief through the separate structures and buildings allowance that the Government introduced in 2018.

On fraud, which was raised by the hon. Member for Ealing North, over the last three years HMRC has significantly increased the number of people working on R&D compliance to over 500. We have also announced policy measures to counter non-compliance in R&D schemes and will follow-up with a more detailed compliance action plan outlining of how HMRC will reduce error and fraud. That will be released in due course.

Photo of Debbie Abrahams Debbie Abrahams Labour, Oldham East and Saddleworth 3:30, 10 January 2024

Following on from the comments of Nigel Mills about the impact of the schemes and given the Federation of Small Businesses’ request for some publication about the impact of these tax reliefs on R&D levels, will the Minister also publish a report on their impact on different regions and subregions?

Photo of Nigel Huddleston Nigel Huddleston The Financial Secretary to the Treasury

All taxes are kept under review, as are their impacts, so some of the calls for further analysis are not necessary because we do that as a matter of course. It is important to stress that many external studies have found that when full expensing has been introduced in other countries, it has been very effective in supporting investment. Of course, the OBR forecasts predict a boost of £3 billion each year. The analysis of the impact of the super-deduction is already taking place, but companies have 12 months from the end of their accounting period to amend their tax returns, so HMRC will not have complete data on the impact of the super-deduction until 2024. However, we will provide further analysis in due course.

My hon. Friend the Member for Erewash mentioned a whole range of real-world impacts from these measures and the previous measures, including the super-deduction, as well as, importantly, the annual investment allowance of £1 million, which affects the 99% of smaller businesses that can effectively benefit from full expensing. In the autumn statement, we announced full expensing for larger businesses: the top 1%, who conduct about 80% of full investment.

I am aware of time, but will cover a couple of other key points that were raised. My hon. Friend the Member for Erewash raised subcontracting. Again, we engaged extensively with stakeholders on this issue over the summer, and the Government have developed an approach that will allow the person taking the decision to do R&D to claim that relief. That was the preferred result of the consultation. However, an exception will apply in the important area that she mentioned of companies doing R&D—such as in a clinical trial—in the UK for another company that is ineligible for relief because, for example, it is an overseas customer. That is to make sure that the impact is there for everyone to benefit from. The hon. Member for Ealing North also mentioned partnerships; a corporate partner is eligible for full expensing, but an unincorporated partner is not. Again, the annual investment allowance of £1 million covers the investment needs of almost all unincorporated partnerships.

The hon. Member keeps harping on about taxes rising. I strongly advise him to look at his December payslip and compare it to the one he will get shortly. Maybe he will have the decency to come to me and tell me whether his tax is lower or higher. Each fiscal event needs to be taken separately. At the last one, the autumn statement, we cut taxes—national insurance is down 2p. [Interruption.] If the hon. Member does not believe me, I pose this challenge to him: if his payslip shows that his taxes are lower, perhaps he will do me the courtesy of coming to me and apologising, or give the difference to a charity, to put his money where his mouth is.

We do not believe that new clause 1 is necessary because the information has already been published in the tax impact and information notes alongside each change, which give a clear explanation of the policy objectives, along with details of the implementation costs for both HMRC and businesses. Therefore, the new clause is not necessary. I urge the House to reject it, and I commend clauses 1 and 2 and schedule 1 to the Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2 ordered to stand part of the Bill.

Schedule 1 agreed to.