Schedule 12 - Tax relief for expenditure on research and development

Part of Finance Bill – in a Public Bill Committee at 6:15 pm on 21st May 2002.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:15 pm, 21st May 2002

I thank the hon. Member for Arundel and South Downs for his assistance in scrutinising the legislation to ensure both that companies do not use it in a way in which it is not supposed to be used and that expenditure is directed precisely to enrich the research and development capability in the UK.

The hon. Gentleman specifically raised the problem of tax incentives in other countries and how foreign multinationals that are not based here would operate. We raised that issue in last year's consultation. If a company is able to claim a tax incentive in another

country, why should we give another credit in the UK? However, we decided that such a restriction was not justified, and the problem that he has identified would not exist. Our new credit focuses on direct R and D costs—staff costs and consumable stores—of a company within the charge to UK tax, and the bulk of such costs would not be eligible for any foreign tax incentive. We are not giving credit, in general, for the costs of subcontracted work, including work subcontracted to a foreign business. That is another crucial difference between the tax credit for small and medium-sized companies, which would probably not have the ability to subcontract work to a foreign business, and the tax credit for large companies. Very little expenditure will actually qualify for an incentive in more than one country.

If we were to introduce a restriction, it could cause some multinational groups to locate outside the UK research and development activity that might otherwise have been conducted here, which is not the result that we want. The amendment is unnecessary in any case, because foreign R and D relief would almost certainly be cancelled through the operation of double taxation relief. Foreign tax relief will reduce the amount of double tax credit given against UK tax, allowing the UK Exchequer to benefit from foreign R and D credit. A company's overall tax liability will be reduced only by the UK tax credit, and not by a foreign tax credit as well. To go further than that and deny the UK tax credit would just be punitive and unnecessary.

Others have scrutinised that point, and the detailed views that we received in the consultation argued against such a restriction, which would inadvertently work against R and D. As well as large companies, a number of well-respected representative bodies, including the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society, criticised the idea. For those reasons, and after careful consideration of the design, the Government are satisfied that we can prevent such a restriction. However, if it turned out that something untoward was going on, and there was what we politely call ''tax leakage'', we would deal with it. We are trying to strike a balance throughout the Bill between protecting the Exchequer and recognising the commercial reality of the how companies operate.