Schedule 31 - Tax relief for expenditure on research and development

Finance Bill – in a Public Bill Committee at 7:30 pm on 20 May 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 7:30, 20 May 2003

I beg to move amendment No. 136, in

schedule 31, page 362, leave out lines 32 and 33 and insert -

'(3) Omit paragraph (a) (person spending less than 20% of total working time on relevant research and development).'.

In determining whether expenditure on salaries qualifies as R and D and is hence eligible for the enhanced tax credit, if a director or employee spends more than 80 per cent. of his total working time on relevant R and D, all the staffing costs related to him are treated as attributable to relevant R and D. That rule was a helpful simplification of the legislation to encourage research, and it avoided compliance costs by identifying minimal amounts of expenditure that would not qualify for tax relief. Equally, costs were ignored if the employee spent less than 20 per cent. of

his time on R and D. The ability to round 80 per cent. up to 100 per cent. and to ignore insubstantial amounts of time was a useful deregulatory simplification, and its removal from the schedule will increase compliance costs and, in a sense, make the relief less generous.

Amendment No. 136 would retain the 80 per cent. rule but repeal the rule that prevents time of less than 20 per cent. counting for relief. The 20 per cent. minimum, about which one might argue either way, is intended to protect the Revenue against small claims, but there is already a de minimis level in the legislation. If taxpayers want to take advantage of the incentive, they should be able to do so. The 80 per cent. rule was a simplification measure that ensured that taxpayers did not have to calculate small amounts of central management time incurred by an R and D director that would otherwise be disallowed. In short, are not the proposals in the Bill overly complicating a rough and ready formula that had actually worked very well?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I do not agree with the hon. Gentleman's amendment, and I shall ask my hon. Friends to oppose it if he presses it to a vote this evening. He mentioned a rough and ready formula, but he well knows that it is not unreasonable for the Government to continue to ensure that relief goes where it was intended to go.

Under the present laws, as the hon. Gentleman rightly says, staff expenditure of less than 20 per cent. does not count and the company is not able to get the credit. At one end, that has proved to be unfair to the companies that are excluded and denied the opportunity to grow and to dedicate more and more of their expenditure to R and D. At the other end, once companies spend 80 per cent., they simply say that it was 100 per cent. That was allowed to simplify the rules, and it goes to the nub of our earlier discussion.

Something may be easy to operate, but does it deliver the objective? We intended the rule as a simplification. However, with practical experience of the R and D tax credit and the consultation that took place during the past year, it became clear that some small companies in particular were missing out completely because they simply were not spending enough at that time. It is right to change that.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Does the Paymaster General believe that that particular aspect of the relief was abused by some businesses in which people spent only a proportion of their time on R and D but were illegitimately claiming the full allowance?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

They were not illegitimately claiming the allowance. We said that a company could round up to 100 per cent. once it got to 80 per cent.­it did not have to go beyond that. This is not a question of abuse but of what was allowed in the legislation, which was arrived at with the support of the Liberal Democrats after extensive consultation on where we should strike the balance between simplicity and fairness.

To draw in those companies spending less than 20 per cent., we had to consider how much more the relief would cost the Government, but the hon. Member for Arundel and South Downs wants both ends. He wants companies that spend up to 80 per cent. to be able to claim the 100 per cent., but he also wants changes at the lower end, which would be dropped much lower. Our view is that that cannot be delivered. I can understand that companies would still wish to retain the 80 per cent. rule, as that gives them tax credit beyond what they spend, but it is clear that the simplest and fairest approach is the one that we have adopted. Although the rules are slightly more complicated than they were originally, they are fairer to the majority of taxpayers. As the R and D tax credit develops, we shall continually monitor whether it delivers the intended outcomes.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I thank the Paymaster General for her response. I am simply proposing that the position stays as it is, ignoring the 20 per cent. and rounding the 80 per cent. up. I understand the issues. I do not want to go back down the track, as in the picture painted by the hon. Member for Yeovil, but there is a problem, particularly for small companies. In trying to make the system fair and effective, the more complex we make it the greater the possibility that it will not work and will not be used.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman and his party are always telling us that we should listen to business. Does he agree that the Government have listened to business, particularly small businesses, and this is what we are saying would help them? There is a conflict in his argument. One minute he is saying that we should listen and now he is saying that we should not.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I do not think I have said that we should listen to business, but I certainly believe it. The Paymaster General knows that that is not what the debate is about. Business will always push for whatever it can get and as much as it can get. I am well aware of the argument­I raised the point on the Floor of the House­that the R and D incentives in Canada and in some EU countries are still more generous than ours. There is also the argument about being competitive, and on and on we go. However, if we are not careful, we will end up with a lot of specific incentives that are used for tax avoidance and that we must draw tighter and tighter if they are to deliver. I am in the process of studying all the schemes that have been introduced since 1997 to see what they have delivered and whether they have met expenditure forecasts. The work so far supports the free market argument that many items have not worked out as they were supposed to.

In the interests of time, this is not an issue that I wish to put to the vote: the argument is debatable either way. However, if there is an overwhelming case for such incentives, we want them to be as simple as possible. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 31 agreed to.

Clause 168 ordered to stand part of the Bill.