I welcomed on the Floor of the House the reduction of the minimum expenditure requirement in both schemes to £10,000. Also welcome is the inclusion of the costs of agency workers. The Institute of Chartered Accountants has suggested that in relation to agency workers there may be a need to amend schedule 20(16)(1)(b) of the Finance Act 2000 to include pay-as-you-earn and national insurance contributions for agency workers. I pass on its comments that it looks forward to further consultation.
Given that the proceedings on the Floor of the House did not get as far as considering the amendment in relation to North sea exploration, will the Economic Secretary explain the Government's thoughts on whether the provision might be extended to certain aspects of that exploration?
The hon. Gentleman is about to wax lyrical, but unfortunately the Division Bell is ringing. Clearly there is a Division in the Chamber. I will suspend the sitting for 15 minutes and I ask hon. Members to be back by 7.14 pm.
Sitting suspended for a Division in the House.
The clause is still relatively uncontroversial and seems to have been welcomed by many of the tax practitioners and others who comment on the Finance Bill each year. However, before we move on, I want to shed a little light on the clause and ask the Economic Secretary to respond on a number of points.
I particularly wanted to pick up on the clause because it relates to the other side of the debate. We have been considering Government efforts to close tax loopholes and reduce the leakage in taxes that results from legitimate and legal tax avoidance. With this clause, we have the flip side of that situation. We have a Government-sponsored tax loophole that is designed to promote a particular activity that the Government feel is beneficial.
Even the measures that update the research and development tax credit that used to exist are not insignificant in their effect, because they involve expenditure of some £20 million in the 2003–04 tax year, rising to £40 million and then £50 million in the years that follow. It is easy to wave such measures through Finance Bills; people tend not to speak against proposals that involve the Government giving away their money, or the public's money. However, those measures can come to grief in later years when the Government discover that in trying to establish tax reliefs to promote particular activities, they have ended up creating the type of tax avoidance that they have to return to later to close loopholes that they have opened. The Government's experiences in relation to the film tax relief show us why we should be relatively cautious about such measures.
Will the Economic Secretary tell us whether there has been a specific study by the Treasury of the measures that are being brought in under the clause and the associated schedule? Has there been a study of the effects and the potential for tax avoidance under the clause, particularly in respect of the items that are being introduced and that explain the rising costs£20 million, £40 million, £50 millionto the Government of the measures? Has there been an assessment by the Treasury of the scope for tax avoidance and are the Economic Secretary and his colleagues considering any measures to reduce the risks?
To return to the point made by the right hon. Member for Fylde, has there been an assessment of the economic benefits of the measures? We know roughly what the Treasury expects their cost to be over the next few years. It would be useful to have a little information about why, in percentage terms, the cost of the measure rises so rapidly over three years. Has
there been an assessment of the economic benefit of the expenditure from the public purse and of how much of the expenditure will essentially be deadweight cost relating to research and development that would have occurred anyway? How much new research and development do the Government expect to be initiated by the measures that they are bringing in?
There is also the complexity that results from such measures. That is probably the only point on which there has been general criticism of the clause from the various tax bodies. The tax law committee of the Law Society of Scotland criticises the clause for its complexity. It believes that the legislation remains too complex and that the changes being introduced merely add to that complexity for businesses.
Obviously, there is tension when making legislation more complex to avoid the risk of stimulating tax avoidance; we might come to that in the debate on schedule 31, so I will not go into it now. However, there is clearly tension between simplicitythe objective that the tax law committee does not feel that the Government have metand measures to ensure that opportunities for tax avoidance are not opened up. The Government's effort to control the scope for tax avoidance may then lead to complexity that requires companies, for example, to employ outside advisers to assess the ways in which they can exploit those loopholes. That must then have an effect on the benefit of the measures, because other costs arise from policing them and helping companies to understand them, which may diminish the value of reliefs such as the research and development tax credit and the new measures being introduced.
The final point that I want the Economic Secretary to touch on is whether he is contemplating a time limit on this relief in the same way as the Government have set time limits in other clauses that we have debated. We have, we hope, an assessment of the risks of tax avoidance activity and the potential benefit or costs of the measures; in addition, built into the process is an evaluation by the Treasury and Parliament to see whether these types of relief are working.
I want to touch on the three points that the hon. Member for Yeovil (Mr. Laws) has just madeassessment avoidance, dead weight costs and the benefit to companiesand then on issues relating to complexity, before turning to some of the points made by the hon. Member for Arundel and South Downs.
I have been a Minister in the Treasury for six years and I spent nearly three years as a shadow Treasury Minister. One thing that always strikes me is that when companies want an advantage, they want a relief; when they do not like something, they scream complexity. The hon. Member for Yeovil should look at the submissions made to all members of the Committee by the various lobby organisations and trade representative bodies when we were receiving the Budget submissions and apply the test. Would they make it more complex, if they were asking for money? Yes, because it would be a relief. Would they like some obscurity in the tax law to give them wriggle space, as
they would call it; we would call it possibilities for tax planning? The answer is yes. Would they like us to subsidise things that they were already doing? The answer would be yes. Every Government must look at those representations and make a judgment.
Indeed, our consideration of anti-avoidance mechanisms in the Committee revolves around whether we should permit an activity, whether our proposals are too complex or whether we should leave the tax system alone because companies quite like it the way it is.
Does the Paymaster General agree that it is not only businesses that often see these things from two different angles? Governments do so, too. When Governments do not like certain forms of tax avoidance activity, they describe them as the exploitation of tax loopholes; when they like to create loopholes, they call them such things as the research and development tax credit, or the films tax.
No, the hon. Gentleman has got it entirely wrong. In the period that I have been in the Treasury, I have made numerous comments on that issue in Committees and elsewhere, inside and outside the House. I do not call a measure anti-avoidance if it is not, nor does my hon. Friend the Economic Secretary.
Just one moment, please. I can answer one set of questions at a time. The judgments that we make as Ministers ensure we act properly on the advice that we receive from our civil servants. Those civil servantsI am not supposed to refer to them directlyhave very rigorous tests. The problem is that, inevitably, there has to be some trust; that is the right approach to making law. We have to trust that businesses will operate legislation according to the purposes for which it was designed in good faith.
Mr. Laws rose
If they do not, the Government are fully entitled to act. I will give way to the hon. Gentleman again, but I realise that I am going a little wide of the clause. What the hon. Gentleman raises goes to the heart of the balancing of decisions that Governments make about fair taxation, choices and intervening where there is market failure, without allowing tax issues to distort commercial activity, which would allow that activity to be tax driven. It is a difficult balance, but it is one that Governments make.
Does the Paymaster General agree with me that looking in retrospect at film tax relief, for example, it would not have been sensible when that measure was debated to rely simply on trust that people would not exploit and abuse the relief in a serious way, leading the Government to return to the House to put anti-avoidance legislation in place?
Suffice it to say, I absolutely do not agree with the hon. Gentleman's last point. We
have not reached the point of ''1984'' where we are all-knowing, all-seeing, all-doing and all-permitting. All Governments have found themselves in this position, and if the hon. Gentleman ever finds himself anywhere near Government, he will find out that such decisions are difficult, and occasionally Governments make mistakes.
Has a specific assessment been undertaken by the Treasury in relation to the proposal of the relative benefits of a grant aid system as opposed to a tax relief system?
The question of whether there is a grant or tax relief would also be considered very carefully by the Treasury. The demand for a research and development tax credit came from business. There was a long period of consultation with business, Government and all interested parties. The specific point that needed to be addressed was the importance of investment in research and development in relation to productivity levels in the future of the UK economy.
On the point made by the hon. Member for Yeovil, of course there would be a certain amount of deadweight cost in such a relief, because some companies were already undertaking research and development, but the purpose of the provision is to create more research and development and to bring investment in it up to the levels it has reached in the United States. On that basis, the operations so far, in terms of the companies taking up the research and development tax credit, have demonstrated that it is working well. It is clearly taking time to build up because companies need to take decisions and plan for what they know is going to be in the system to support them. Something like 3,000 small and medium-sized companies are now applying for tax credits, to the value of some £150 million. We definitely and desperately need to invest in that sector and see it grow.
One reason why we revisited this issue for small and medium-sized companiesthe purpose of the clausewas my concern that some of those businesses that perhaps have a small expenditure on research and development at the moment have been excluded from the provisions. Although the sum involved might seem small in terms of the greater scheme, it is an important sum to those companies.
The arrangements in the clause are designed to ensure that those micro-companies currently doing a small amount of work on research and development are not excluded. They were excluded from the previous scheme in the interests of simplicity, but in the interests of fairness and to encourage investment in the economy, they should not be excluded. That brings
us back to the trade between simplicity on the one hand and fairness and the original aims on the other.
The hon. Member for Arundel and South Downs raised two specific points. The first was on paying the PAYE and national insurance liability of agency workers. As he well knows, companies are allowed to claim those payments as qualifying expenditure when they are made to intermediaries such as agencies for the provision of staff. However, such staff are not employees of the company, which will therefore not be paying any national insurance or PAYE for them, so why should we reimburse them? The potential to exploit avoidance is what the hon. Member for Yeovil might be thinking about. The position is perfectly reasonable and straightforward. That is not a cost on the company so is not deductible.
The hon. Member for Arundel and South Downs asked a question about the North sea. As he knows, the definition excludes oil exploration and appraisal. However, although it is nothing to do with this clause, the hon. Gentleman might have noticed in the Budget announcement that the Government are setting up a consultation group specifically to examine exploration and cost, particularly for small and medium-sized companies working in oil fields that are reaching the end of their lives. During the next six months, we will want that group to consider whether there are cost-effective ways of assisting that extra exploration.
I have not ventured into the amendments because I understood that we are discussing only the clause at this stage. I hope that my comments have given the Committee an idea of the Government's intentions. We are trying to ensure that at every point the tax credit can get to those who need it most, such as struggling companies that are absolutely at the beginning of research and development and need that encouragement and assistance from the Government.