Schedule 12 - Tax relief for expenditure on research and development

Part of Finance Bill – in a Public Bill Committee at 6:00 pm on 21st May 2002.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:00 pm, 21st May 2002

Perhaps I can answer that question in a slightly different way. It is not always possible to provide in legislation for such changes of status, and some discussion with the Inland Revenue will still be necessary. Of course, we hope that SMEs will grow into larger companies, and we want to encourage that. However, we should recognise that they will go through a transition. The effects of that transition will be eased by the definition of ''small or medium-sized enterprise'', which will allow a small company to continue qualifying as such in the year after it ceases to meet the criteria. None the less, at the end of the transition period, the company may fall within the definitions of ''large company'' and therefore fall within the tax credit regulations. We recognise that SMEs will be under a different pressure.

We have tried to keep the scheme as simple as possible but it must be able to operate. The precise definitions of ''R and D'' and how they will work in practice following the DTI guidelines are still being discussed with the CBI and other trade and accountancy bodies, as was referred to on the Floor of the House. The detail of many of those issues will need to be set out, but the essential point is to recognise that SMEs operate under different conditions and, therefore, if they are to be able to undertake R and D, will attract slightly different rules from large companies. The two sets of rules must co-exist as simply as possible to deal with the transition across boundaries. That is what the Government have tried to achieve, and that is why the consultation exercise opted for a volume-based rather than an incremental

scheme. The points that hon. Members are making about complexity would be writ large if we had an incremental scheme.

Both the Chartered Institute of Taxation and the Law Society of England and Wales are of the view that the way in which the credit will operate will provide for a clear system in terms of how companies claim. Until we see that in operation, I cannot say that all of the matters are settled and dealt with. However, we believe that companies and professional bodies should continue discussing with us the finer qualities of the provisions.

I return to a point made by the hon. Member for Kingston and Surbiton. This debate is not the final word on how the provision will operate or on how we should review it and make sure that it improves. Nor it is the final word on Government policy in continuing to encourage research and development, growth and productivity because of their clear benefits to the British economy in terms of jobs and skill levels.

I hope that Opposition Members realise that an opt-out for small and medium-sized companies would be bad, because they could come under pressure to give up what clearly are good benefits. We want the two credits to interact with a sufficiently light touch to ensure that SMEs do not find themselves squeezed, or having to operate under unreasonably complex rules. That is certainly what everybody is saying to us. Frankly, if it is good enough after all the consultation, we should give the legislation the opportunity to work before adding complexities to provide for things such as opt-outs.

I ask the hon. Member for Arundel and South Downs to wait and see how the tax credit operates. If people still have problems, I am sure that the Opposition will come back next year, if the Government do not, with suitable amendments. I ask the hon. Gentleman to withdraw the amendment.