Clause 43 - Relief for expenditure on R&D by SMEs

Finance (No. 3) Bill – in a Public Bill Committee at 3:30 pm on 24th May 2011.

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Photo of David Hanson David Hanson Shadow Minister (Treasury) 3:30 pm, 24th May 2011

I beg to move amendment 99, in clause 43, page 27, line 18, leave out subsection (6).

The same principles apply to clause 43 as to clause 42. The Government have made some announcements and I would be grateful if the Minister would confirm that he still requires state aid approval for clause 43. In response to my questions on clause 42, he said that he could not give a date or a time and that he had no definitive end date for when state aid approval might be given. The same principles apply to clause 43, and it would be helpful if the Minister would say whether it might take three months, six months, nine months, 12 months—when does he expect state aid approval to be given? That is important in itself.

In a sense, this is a probing amendment. I want to get to the bottom of what the Government announced in the Budget. Unless I am mistaken—these things do happen—clause 43(6) was not mentioned during the Budget on 23 March, and that aspect of the relief for expenditure on R and D and SMEs was not included. The Chancellor covered over the measure:

“In section 1058 (amount of tax credit), in subsection (1)(a), for “14%” substitute “12.5%”.

That part of the package was not mentioned in the Budget.

First, I want some clarity from the Minister about when state aid will be approved. Secondly, I want him to stand up and say to me—if I am wrong, I will withdraw it—that clause 43(6) was not mentioned at the time of the Budget. I would be grateful if we could have that on record so that we know that the package has been amended slightly since the Budget.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, the amendment would leave out the provision in clause 43 that reduces the figure used to calculate a company’s payable credit under the small and medium-sized enterprise research and development tax credit scheme. Although the Bill reduces the figure that is used to make that calculation from 14% to 12.5%, the overall effect of the clause is to increase the value of the payable credit from 24.5% to 25%.

I appreciate that it is a probing amendment, but let me explain how the provision works. The amendment would further increase the payable credit so that it would be worth 28% of the original qualifying R and D expenditure. Although that might appear to the right hon. Gentleman to be more generous, the situation is not quite so straightforward.

As hon. Members will be aware, the SME R and D tax credit scheme is approved by the European Commission as a state aid. As such, it must comply with the Commission’s guidelines for state aid for R and D. The guidelines state that the aid intensity of aid given through the scheme must not exceed 25%. That is, the amount of aid given must not be worth more than 25% of the company’s original expenditure on R and D.

The amendment, which I appreciate is a probing amendment, would amount to aid intensity of 28% and would mean that the overall changes to the R and D tax credit scheme proposed by clause 43 would not be accepted by the Commission.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

The key point is whether the reduction from 14% to 12.5% for SMEs was announced in the Budget as part of the overall package. I accept what the Minister is saying, but my point is that the clause would disproportionately hit SMEs.

Photo of David Gauke David Gauke The Exchequer Secretary

It will not. I will have to give a slightly longer explanation of the calculation of the value of the payable credit, although I had hoped not to have to do so.

The Budget slightly increased the value of the payable credit. It was a technical change. Yes, it was not highlighted in the Budget document because it was a technical change that does not put SMEs in a worse-off position. I will run through it, because I hope the right hon. Gentleman will be satisfied if I explain it.

The payable credit is calculated as a percentage of the company’s total tax relief for R and D. In the Budget, the Government announced that the total relief for SMEs will be increased from 175% to 200% in 2011, and then to 225% in 2012.

The current rate at which the payable credit is calculated is 14% of the relief, which gives a cash value to the company of 24.5% of the original qualifying R and D expenditure: 14% times 175% equals 24.5%—I hope the Committee appreciates that I am showing my working. If the rate of relief increases from 175% to 200% without a reduction in the surrender rate, the cash value to the company will increase. To be precise, it will increase to be worth 28% of the original qualifying expenditure, as 14% times 200% takes us to 28%, which would exceed the permitted aid intensity limit set out in the Commission’s guidelines for providing state aid for R and D. That is why the Government propose to reduce the percentage figure used to calculate the amount of payable credit from 14% to 12.5%, meaning that the payable credit will be worth 25% of the original qualifying expenditure. That still represents an increase from the previous value of 24.5%, but importantly, the increase remains within the threshold set out in the Commission’s guidelines. I am afraid that the right hon. Gentleman tempted me into giving that explanation, but I hope that all becomes clear as a consequence.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 3:45 pm, 24th May 2011

I thank the Minister with responsibility for tax simplification for that explanation.

Photo of David Gauke David Gauke The Exchequer Secretary

It is all really very simple, but it is a good thing, not a bad thing. Although the clause appears less generous, the change will increase levels of support for small businesses while remaining within the permitted limits. I am sure that hon. Members will accept that the measure is important for stimulating innovation in the UK, as it will support more than 6,000 small firms to the tune of £100 million. I urge the right hon. Gentleman to withdraw his amendment.

On his additional point, yes, state aid approval is required. Again, we have notified the European Commission of the change, and we await its response, but I cannot be more precise at this point. We anticipate that state aid approval will be granted.

Photo of Pamela Nash Pamela Nash Labour, Airdrie and Shotts

On a point of clarification, will small and medium businesses carrying out research into HIV/AIDS vaccines be worse off as a result of the change?

Photo of David Gauke David Gauke The Exchequer Secretary

No, they will not. The interrelation with vaccine research relief is not being changed. Any reduction in the rates of VRR is being made to ensure that in combination with the increased levels of SME research and development relief, the aid given by the UK Government to a particular R and D project does not exceed the aid intensity thresholds set out by the European Commission under the framework for state aid for R and D. It is not necessary to reduce the rate of VRR payable credit as well.

When the rate of VRR relief was last changed in 2008, the European Commission did not require the rate of the payable credit to change as well. However,  the hon. Lady is right to raise that point. Businesses doing research in that area will not be left worse off by the changes that we are making in the clause. With those points, I hope that the amendment will be withdrawn and that the clause can stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 43 ordered to stand part of the Bill.

Clause 44 ordered to stand part of the Bill.

Schedule 9 agreed to.