Schedule 12 - Tax relief for expenditure on research and development

Part of Finance Bill – in a Public Bill Committee at 6:30 pm on 21st May 2002.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:30 pm, 21st May 2002

Unfortunately, I have to tell the right hon. Member for Fylde that I do not think that his amendments will be helpful. If it came to a vote, I

would have to ask my hon. Friends to vote against them. I hope that I shall be able to explain why. The hon. Member for Fareham (Mr. Hoban) touched on what industry might say to us. It would be inappropriate for me to name companies. However, to date with regard to, for instance, outsourcing IT, staffing or accommodation costs, we have received only one representation from one company. We are discussing that with that company, which is not in pharmaceuticals.

The response so far from all the companies involved, given that the matter has been in consultation for so long, has been very positive. Of course we accept, as do the companies, that it is difficult to draw lines, particularly in relation to staff costs where staff are involved in R and D to varying extents. However, the R and D guidelines on this issue attempt to make a reasonable distinction. In developing those guidelines we have been, and continue to be, in detailed discussions on the operation of the new tax credits with the very industries to which Opposition Members refer.

The amendments are designed to include as qualifying expenditure for large companies—interestingly enough, no equivalent measure is proposed for SMEs—''indirect expenditure'' and two new items of expenditure besides staffing costs and consumables, namely accommodation costs and overheads.

The inclusion of indirect costs by amendment No. 77 could give the principal credit for some element of subcontracted expenditure, which could effectively mean that a double credit would be awarded. The international situation, where a company could receive a credit from more than one country, which we were discussing in a previous debate, could occur here in the UK through the operation of those rules. The companies would receive a double credit, as the design of the large company scheme assumes that credit goes to the person carrying out the work. The amendment might not work, as paragraph 4(2) already requires a company to carry out R and D directly.

Including the amendment would mean that the Government might pay twice for the same research and development, perhaps raising our costs by as much as £100 million, which does not seem sensible. In addition, it would require complex rules to define the term ''indirect''. By widening the scope of the R and D tax credit, amendments Nos. 78 and 79 would also increase the cost. If the credit is to achieve its aims, it needs to remain focused. The more things that qualify, the lower the rate we can afford and the less the impact of giving that boost to R and D. That has to be part of the equation and of the balance in the Government's consideration of how much can be afforded and where that can be directed to greatest effect.

The amendments would add complexity. Companies would have to track a wider range of costs, for example making more apportionments for shared costs such as electricity.