Clause 13

Finance (No. 2) Bill – in a Public Bill Committee at 11:15 am on 26th October 2010.

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

Photo of Kerry McCarthy Kerry McCarthy Shadow Minister (Treasury)

We support the clause, which extends research and development tax relief for corporation tax to situations in which a company does not hold intellectual property rights relating to such R and D.

The previous Labour Government recognised the importance of providing incentives to companies to encourage research and development, so we introduced a scheme for small and medium-sized enterprises in 2000. That provided an extra tax deduction of 75% on qualifying R and D expenditure that was incurred either in house or on a contracted-out basis. If the SME was loss-making, we provided that the relief could be exchanged for a payable credit from HMRC. There was a sister scheme for large companies that SMEs could claim under if they did not meet the criteria for eligibility under their own scheme.

The relief applies when an R and D project has the aim of achieving an advance in overall knowledge or capability in the field of science or technology through the resolution of scientific or technological uncertainty, rather than simply an advance in the company’s own knowledge or capability. It therefore concerns R and D that will benefit not only a particular company or organisation, but the scientific or technological sector as a whole and, indeed, the wider British economy. That was why we thought that it was important to introduce such reliefs and tax credits.

The relief also applies when a company intends to start up a business as a result of the R and D. It therefore also acts as an incubator for new companies, which is important if Britain wants to compete, to be innovative and to succeed in the global marketplace.

Until now, legislation has required the intellectual property that is created as a result of the R and D to which expenditure is attributable to be vested in the company in question. In other words, if a company or organisation wishes to claim relief under the SME scheme, it must own any intellectual property that might arise from the project. The then Labour Chancellor announced in his pre-Budget report on 9 December 2009 that the condition relating to intellectual property would be abolished from that date, meaning that that would take effect for accounting periods ending on or after 9 December 2009. This provision gives effect to that announcement, which the Labour Government instigated. It was part of the broader picture of how we  wanted to promote innovation and investment in R and D and a result of listening to what SMEs and start-ups said that they needed. As such, we wholeheartedly support the measure and the fact that it will be effective in relation to expenditure that has been incurred since the date on which the change was originally announced.

Will the Minister tell us what analysis has been made of the consequences of removing the condition relating to intellectual property? What additional benefits does he think that that will bring in helping SMEs with R and D and encouraging them to invest in more of that? Will it encourage greater take-up of R and D relief, as we believe that it will, and will that be kept under review? Are there other measures that could usefully have been considered and included in the Bill to help SMEs at this difficult time? Could we introduce measures to ensure that investment in R and D—investment in the future of not just a business itself, but the whole sector—does not fall victim to economic circumstances in which belts are being tightened? The clause is quite narrow, but we would appreciate it if the Minister would indicate the Government’s thinking about wider support, and tell us whether there is a reason why more measures were not introduced in the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Again, I welcome the hon. Lady’s broad support for the clause. The Budget confirmed the introduction of a measure that will make it easier for innovative small and medium-sized companies to claim research and development tax relief. R and D tax credits provide an enhanced deduction for qualifying expenditure. The system addresses the market failure reducing the levels of R and D activity undertaken by UK companies. Since their introduction, the schemes have incentivised more than £40 billion of R and D activity by more than 18,500 companies.

The clause removes the requirement that an SME must hold the intellectual property created as a result of the R and D. That means that SMEs undertaking R and D activity are able to claim without considering their IP ownership. In addition, those SMEs carrying out subsidised R and D that have been prevented from making R and D claims under the large company scheme by the IP condition are now able to claim the large company R and D relief. A number of companies undertaking R and D found that the IP condition effectively barred them from being able to claim the relief, which prevented them from making valuable investment in R and D.

The hon. Lady asked about the impact of this. Approximately 5,700 companies a year claim SME R and D relief, and the change will mean that such companies will be able to claim without distorting commercial arrangements in relation to IP. It will enable innovative companies to access R and D tax relief more easily.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

This is the first time I have spoken in the Committee under your chairmanship, Mr Chope.

I agree with the points made by the hon. Member for Bristol East and I am grateful to the Minister for his explanation. Research in the higher education sector is important, as we saw in Sheffield yesterday. I hope that the measure will increase the ability of the spin-out  companies that come out of the universities—they are small and medium-sized companies—to exploit that commercial property far more effectively, and perhaps go on to help to relieve some of the pressure on our higher education institutions.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend raises an important point about what we can do to develop relationships between companies and educational establishments. He highlights some of the announcements that the Government have made in that very area.

Turning to the question raised by the hon. Member for Bristol East about R and D tax credits, a consultation to be published later in the autumn will look at the tax treatment of R and D tax credits and intellectual property more generally, and this will form part of the Government’s aim to create the most competitive corporation tax system in the G20. The SME R and D tax credit scheme has been in place for 10 years. The consultation will provide an opportunity to take stock of the impact and effectiveness of the schemes. It will look at the options for re-focusing to ensure that they are effective and provide value for money while giving certainty and stability within the context of the five-year corporation tax road map. The Government certainly recognise the importance that companies place on the schemes, which is why we wish to consult fully to determine how we can provide the best support possible for an innovative and enterprising economy.

Photo of Alison McGovern Alison McGovern Labour, Wirral South

This is a vital subject for us all, but especially so for my constituency, where we have science-led manufacturing. I thank the Minister for his explanation of when we will address some of the wider questions that might have been considered as part of the Bill. He mentioned the R and D tax credit scheme, which has been a great success. Will he clarify whether the consultation will also cover the broader question of investment allowances? That is of great concern to businesses in my constituency, especially those that are trying to invest in the high-tech equipment that enables them to have a global advantage over companies that do similar research on chemical production and hardware manufacture for IT. We have a real global competitive edge on those sorts of things that we would like to protect.

Photo of David Gauke David Gauke The Exchequer Secretary 12:00 pm, 26th October 2010

I suspect, Mr Chope, that you do not want me to go too far down that route. The intention of the consultation later in the autumn is not to reopen capital allowance issues that were addressed in the previous Finance Bill. It is important that we provide some certainty in that area, but we will want to look at how we can use the tax system to build on what has already happened in R and D tax credits and ensure that we have a corporate tax system that encourages enterprise and innovation and is the best in the G20. We did believe, however, that we should proceed, in advance of the consultation, with the change to the IP condition that was announced last year, and we have heard that there is cross-party support for the clause.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.