Clause 53 - Tax relief for expenditure on vaccine research etc

Finance Bill – in a Public Bill Committee at 9:30 am on 23rd May 2002.

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

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Good morning, Mr. Gale. The Opposition want to use this clause stand part debate to find out why the Government have chosen a rather complex system of tax credits when a more straightforward system of grants would surely have been more suitable. Hon. Members will be aware that we tabled a new clause on the issue, but it went outside the scope of the Bill and was not valid. The crucial question is, however, why the Government have introduced fairly complex fiscal legislation when the matter could be handled more simply through grants. Dare I suggest that this has something to do with the Treasury taking unto itself powers that might more suitably rest with the Department for International Development?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Clause 53 and schedules 13 and 14 introduce a new tax relief for spending on medical research and development. The new relief will apply to spending on vaccines and medicines for preventing or treating tuberculosis and malaria, vaccines for preventing HIV infection, and vaccines and medicines for preventing and treating forms of AIDS that are found mostly in developing countries.

The hon. Gentleman asked why we chose a tax credit rather than grants, and I expect that he will have some sympathy with the answer when he takes time to reflect on the matter. The tax credit is targeted at a

specific case of market failure. When it comes to treating most of the diseases and conditions that affect the developed world, we and our constituents can rely on the pharmaceutical industry, which has an excellent track record on research and development. In that respect, this country is pre-eminent in the world, and that is true in terms of its history and tradition and of its current market position. Although we can rely on the industry and the market to deliver on most health issues, there has been a market failure in this case, and we are promoting a market-based solution.

We could have used grants, although that might have cost more. That approach would not, however, have been as successful in underpinning the market. As I have told the hon. Gentleman before, the Government believe in the market and in its ability to deliver if it is properly regulated. It is strange to find that all the market sceptics are on the Conservative Benches. Who would have thought that that day would come? However, it explains why we are sitting here and they are sitting there.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am most grateful to the Minister for letting me intervene. Can he help me by defining what he means by market failure and can he analyse why he thinks that the market has failed in this case?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I can give the right hon. Gentleman a very simple explanation of our thinking. It has been informed by the work that we are doing with DFID and the pharmaceutical industry. The companies involved are the first to tell us that they have two concerns. First, they have shareholders whom they must satisfy and to whom they have certain fiduciary responsibilities. Secondly, they see themselves, as health providers, as having a moral purpose and a degree of corporate responsibility. They recognise that they have skills and an infrastructure for research and development, but—they are very upfront about it—there is no market because the developing world does not have the resource base available to it either to put in place the infrastructure or to fund the research and to buy its product. Having been involved in creating the structure of the credit, they are looking to us to prompt and assist the research and development by putting that incentive in place. But of course—this is where the hon. Member for Arundel and South Downs (Mr. Flight) is so wrong—we do that in co-operation with DFID.

The notion that the Treasury is seeking to take powers unto itself could not be further from the truth. The further away that Conservative Members are from any return to the Treasury, the more sceptical they become about its taking powers unto itself—hence the state of extreme scepticism that the hon. Gentleman lumbers in when he makes that sort of point. I know where he is coming from, but I hope that my explanation has set his mind at rest. Given that a fifth of the world's population—1.2 billion people—survive on less than a dollar a day, if we are to stimulate a market in that sort of health provision, we have a responsibility to take the action that we are taking.

That was the thinking behind the measure. Companies undertaking or sponsoring such research will be entitled to deduct from their corporation tax profits an additional 50 per cent. of their own expenditure or the cost of subcontracting such research to other companies or institutions. They will also receive relief in full on contributions to independent research into the target diseases by universities, charities or scientific research organisations—that has been particularly welcomed by those organisations and institutions. The relief will be on top of either the new R and D tax credit for larger companies detailed in clause 52 or the R and D relief for small and medium-sized companies introduced in the Finance Act 2000. Small and medium-sized enterprises and companies with insufficient profits to offset the relief in full will be able to claim a vaccines tax credit equivalent to 24 per cent. of the cash cost of qualifying research.

I hope that the clause and its schedules will find favour with the Committee.

Photo of Michael Jack Michael Jack Conservative, Fylde

Good morning, Mr. Gale, and welcome again to the Chair. As it looks likely that the Government will find their way to obtaining the Committee's approval on the clause and the schedule, I shall probe the Financial Secretary further about the choice of the qualifying activities as defined in paragraph 4 of schedule 13. Paragraph 4(4) clearly states that

''references to vaccines or medicines are to vaccines or medicines for use in humans.''

The Financial Secretary will be aware that many infections that pose risks to animals subsequently, for economic reasons, pose risks to humans. Indeed, in the case of bovine tuberculosis there is a potential direct risk to humans. He will also be aware of the intense debate during the recent outbreak of foot and mouth disease about the particular role that so-called smart vaccines might play in that context.

In the less-developed world, foot and mouth disease is endemic. I do not want to trespass too far on to a debate about animal diseases, but I hope that I have illustrated that there is a case to be made for giving assistance to the development of appropriate medicines and vaccines to counteract animal diseases, particularly in the context of the less-developed world. Foot and mouth exists outside developed Europe and if it is discovered somewhere, that means an immediate ban on the import into the United Kingdom of meat from that place. That can have an economic effect just as devastating as some of the illnesses that are prevented by the vaccines that the clause already defines.

Photo of Chris Grayling Chris Grayling Shadow Minister (Health)

Does my right hon. Friend accept that taking the steps that he is describing would have practical, material benefits for the United Kingdom, given that foot and mouth may have been caused by meat smuggled illegally or legally?

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Order. The hon. Gentleman must address the Chair.

Mr. Jack: I accept what my hon. Friend says, but I do not want to stray into a full-scale debate on areas that are not subject to the clause. I use the animal illustrations to exemplify my concern about the restriction in paragraph 4 of schedule 13.

The provisions currently focus on particular diseases. On the World Health Organisation's website, the organisation's department of communicable disease surveillance and response publishes a current list of conditions that are serious in global terms. The list includes cholera, dysentery, influenza, HIV/AIDS, Leishmaniasis, meningococcal disease, plague, sleeping sickness, rabies and viral haemorrhagic fevers, including Ebola and Lassa. BSE is also mentioned, as are salmonosis, brucellosis and anthrax.

I am intrigued, because if the World Health Organisation identifies those diseases as being of major importance and ones on which the world should be focusing, why does the schedule identify the principal diseases as tuberculosis, malaria and human immuno-deficiency virus conditions? I can understand that the Treasury would want to reduce its exposure by ensuring that the measure does not include everything in the field of medicines and immunisation—there is an element of targeting. However, if we are to address issues of global poverty and global disease in a world of highly mobile individuals, it would enable the Treasury to be more flexible if there were some relationship between those diseases that the WHO identifies as risks and what we are prepared to help to counter.

Paragraph 4(3) of schedule 13 states:

''The Treasury may make provision by regulations further defining the purposes referred to'' in the sub-paragraphs. If I have understood those correctly, they deal with the definitions of what may currently be helped. Will the Financial Secretary give me some comfort by telling me that the provision is a first stab, and that there may be more to come?

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 9:45 am, 23rd May 2002

My right hon. Friend has made an important point, which is that the definition as a tax relief in the provision makes it somewhat inflexible to the changing needs of medical priorities. His point is that even the priorities of today do not appear to be adequately covered.

In the Red Book, the Government state that they expect the provision to cost nothing in 2003-04, £10 million in 2004-05 and £20 million thereafter, so they do not think that there will be a particularly material effect. Our discussions with the industry lead us to suggest that if we are serious about trying to be effective, targeted grants would be more helpful. We have added 14 pages of complex fiscal legislation to something that, when we consider the expected cost, looks too much to us like tokenism rather than a serious attempt to help. In our judgment, the route taken is not necessarily the most effective.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The right hon. Member for Fylde (Mr. Jack) has characteristically made a serious and significant point, but it is not the point that the hon. Member for Arundel and South Downs raised. The

right hon. Gentleman is not complaining about the inflexibility of the measure, but rightly probes what it might offer to meet the wider health challenges that he outlines. The WHO has been intimately involved in the development of the proposal. Representatives of that body sit with those of the industry and of the developing world on a committee chaired by my right hon. Friend the Secretary of State for International Development, and it fully supports the measure.

The points made by the right hon. Gentleman were right. The WHO recognises 21 groups of infectious diseases, of which the three biggest killers in the developing world are TB, malaria and HIV/AIDS. That is why we have focused on them--they account for about 6 million deaths a year.

The hon. Gentleman made a point about grants. The focused relief has to be seen as part of a wider package of measures to alleviate the burden of disease in the developing world. As part of those measures, we have pledged $200 million to the global fund established to provide developing countries with the resources to purchase drugs and medicines for AIDS, TB and malaria, among other problems.

Extension of the relief to other diseases at the moment might dilute the incentive for companies to concentrate additional resources on research and development into the key diseases. We could not extend it to research into all the infectious diseases that afflict poorer people in the developing countries without substantially reducing the 50 per cent. rate at which the relief is given.

The right hon. Gentleman was right to point out the scope within the legislation to extend the powers by regulation. That is because the HIV virus mutates rapidly in response to changing conditions, as right hon. and hon. Members on both sides of the Committee will know. Therefore, we have included a provision to allow us to add further strains to the list of those eligible for research relief as new forms of the virus develop and are identified by medical science.

The wider question of whether there might be scope for such relief in relation to animal diseases that pose a threat to public health globally or to the economy in the developing world is interesting. Using relief in that way will doubtless be monitored carefully to see what scope it has for use in other areas of public and development policy—subject always to there being a market failure, because that is what it is designed to address. The right hon. Gentleman makes an interesting point, and it is worthy of consideration.

I have spent quite some time with the industry both in Committee and bilaterally discussing the question of grants, but I have not heard the call being made for extensive grants in the terms described by the right hon. Gentleman, not least because the industry recognises the substantial contribution that we are making to the global fund. The industry also recognises that grants and development aid have to be directed to creating the infrastructure through which those goods might be marketed and distributed in the developing world. Without that, all of this would be a waste of space.

I hope that the Committee will feel able to give the clause, and its schedules, a fair wind.

Question put and agreed to.

Clause 53 ordered to stand part of the Bill.