Amendments Nos. 77 and 79 are conveniently linked because they deal with aspects of staffing costs relating to the research and development tax credit. Amendment No. 78 deals with matters concerning accommodation. I would like to proceed carefully through this small series of amendments because their implications are quite technical.
Amendment No. 77 deals with the fact that many large companies and groups outsource certain expenditure. Indeed, many groups have a service company through which all their staff are employed, and where the costs are recharged to the relevant individual companies. As the Paymaster General will know, in terms of the R and D tax credit, matters connected with staffing costs that are allowable are provided for by paragraph 17(b) of the schedule, which states when read in conjunction with the first part of the paragraph that the provisions of paragraph 5 of schedule 20 to the Finance Act 2000 apply for the purposes of schedule 12 as they do for schedule 20. The definition of staffing costs of a company provided for by paragraph 5 of schedule 20 to the Finance Act 2000 is the one relevant to amendments Nos. 77 and 79.
As for amendment No. 77, the proposed legislation does not accommodate the fact that outsourcing costs or group recharges would qualify for relief even when expenditure relates to staffing costs, as the payroll is not undertaken by the company carrying out the research and development. I understand from those in the accountancy profession that that is likely to be a significant issue for large companies and groups. In their judgment, it does not seem to be in the spirit of the legislation, which is what the Paymaster General outlined in her earlier remarks: to encourage research and development in the United Kingdom. The amendment would ensure that relief would be given for outsourcing costs and intra-group recharges, where such expenditure would otherwise fall in paragraph 4(3).
Amendment No. 79 uses as its base the same analysis of the staffing costs, so I will not repeat that. Again, we have a situation in which many large companies calculate a fixed-cost rate when they apply to relevant projects being undertaken in order to provide suitable costing information for management accounting purposes. The cost rate typically includes employee costs and a measure of overhead, and I am sure that the Paymaster General will immediately appreciate that that is an important accounting point.
In order to comply with the proposed legislation, apart from determining which projects are qualifying research and development, many large companies will have to deconstruct the project cost rate to separate out the pure employment costs—hence the point I was making about the definition of allowable employment costs in the provision. To determine the qualifying staffing costs on that strict basis, as referred to in the previous amendment—paragraph 5 of schedule 20 to the Finance Act 2000—many companies will have to set up completely new systems of recording time and costings.
Although the basis of schedule 20 may be relatively simple to operate for SMEs with a small number of R and D staff, it is not appropriate for large companies that have several thousand employees engaged in research and development. Again, it is felt that that does not accord with the Government's objective of encouraging R and D in the United Kingdom. Therefore, the proposed solution as exemplified in the amendment is that qualifying expenditure for research
and development should include not only the staffing costs of those employees engaged in research and development but an appropriate element of direct overhead. It is felt that that would help large companies to continue with their current operating cost management systems and make it easier to apply and reduce compliance costs. That is complicit with what the Paymaster General said was the objection of the large companies.
I turn to amendment No. 78. Under the Finance Bill provisions, we are aware of what qualifies in terms of relief for R and D. However, the definition of qualifying expenditure does not include accommodation costs. Where a lease is entered into for the purposes of providing relevant accommodation for R and D, tax relief will be available only on 100 per cent. of the rental payments, rather than 125 per cent. of the new provisions. Given, for example, the unique conditions, such as sterile environments, that might be required for research and development in the electronics or aerospace industry, it is felt that it is inconsistent not to allow research and development relief for relevant accommodation costs. The proposal for that, therefore, is that qualifying expenditure for R and D should include not only the staffing costs, to which I referred in previous amendments, but the relevant accommodation costs.