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Clause 31 applies to loss-making SMEs conducting research and development activities. SMEs are deliberately targeted for this kind of initiative. Risks and market failures are most pronounced for SMEs, which are still worthy of support given that they are in the main small, innovative companies with very high growth potential. Clause 31 amends Part 13 of the Corporation Tax Act 2009 to increase the rate of payable tax credit for small and medium-sized companies. The rate of payable tax credit is increased from 11% to 14.5% of the surrenderable loss. The SME research and development relief currently gives an additional deduction from profits at a rate of 125% of the qualifying expenditure. That is combined with the normal deduction for such expenditure to give a total deduction of 225%. A loss-making SME is able to obtain a payable R and D tax credit at a rate of 11% of the lower of its trading loss for the period and 225% of the qualifying R and D expenditure incurred. This gives a maximum payment of 24.75% of the original expenditure. The rate of payable credit as a result of this clause is to be increased to 14.5%, giving a maximum payment of 32.625% of the original expenditure.
The UK Government provide some significant tax incentives for companies undertaking research and development work. The aim is to encourage investment in R and D and make the UK an attractive place for overseas companies to undertake research and development. The R and D tax credits regime was introduced by the previous Labour Government. It was an important initiative to put right the decreasing amount of R and D taking place in this country, which had been the trend since the early 1990s. As a result of our historic interest in the area and of the changes that we made when in government, we support the clause and the increase from 11% to 14.5% therein.
I have some questions for the Minister. Given the increase from 11%, I was interested in the rationale for staying at 14.5%. Exchequer impacts are important, but is there another formula-based reason for deciding on that figure? The numbers for the Exchequer impact go only to 2015-16. The measure is expected to cost £5 million in 2014-15 and £50 million in 2015-16. I wondered why there were no additional costings beyond that point, given that the change is not temporary, and will become a feature of the R and D tax reliefs regime.
What is the Government’s view on benchmarking the effectiveness of the R and D tax credits regime and on that policy area in relation to Government policy on universities and science more generally? As the Minister is aware, there is a lot of debate in the science and innovation policy community on the effectiveness of the different ways in which R and D tax reliefs might be constructed. Although we support how things are done in our legislative framework, many questions have been asked by academics, and it would be interesting to know what the Government think, in particular about the so-called dead-weight cost—how do we decide what R and D would have occurred anyway, even without the relief being a feature of the taxation system? That is important to the reliefs being structured so as to ensure that more research and development takes place in this country. That is the broad thrust of our approach to the measure.
There are issues in relation to whether we are keeping up with competitor countries, not only those that carry out similar levels of research and development at the moment, in particular the US, Germany and France, but the emerging economies, especially China, which are putting vast sums of money into research and development at the public-funded, Government level—in universities—and in terms of what they are encouraging foreign multinationals to do in their country. How do the Government see that developing? Do they envisage further changes to the R and D taxation regime to keep up with the challenges posed by the emerging economies?
Finally, I was not clear on the position of EU state aid in relation to the change. My understanding is that the amount of payable credit for loss-making small and medium-sized enterprises has been capped at 25% of the qualifying expenditure. The increase to 14.5% will take things beyond that cap of 25%, because we are now looking at 32.63p of payable credit. What conversations have been had about the state aid regulations and with Europe more generally to ensure that we do not fall foul of those rules?
It is a pleasure to serve under your chairmanship this afternoon, Mr Streeter.
I thank the hon. Member for Birmingham, Ladywood for her comments on the clause, which increases the rate of the credit payable to loss-making small and medium-sized companies investing in research and development from 11% to 14.5%. As we have heard, that provides additional support to innovative small firms undertaking research and development, thus incentivising increased levels of R and D investment by UK companies.
The measure has been welcomed by industry, with the EEF describing it as
“a welcome and important one for SMEs relying on their development of new products and services to generate growth and jobs.”
The Scottish Chambers of Commerce further notes that the measure targets
“a key need for businesses”.
As we have heard, research and development tax relief for small and medium-sized companies was introduced in 2000. It has been a valuable and useful relief. This Government have made a number of changes that have increased the generosity of the research and development tax relief offered to small businesses in the UK. At Budget 2011, the Government increased the rate of the R and D super-deduction for small and medium-sized enterprises from 175% to 200%, and then again to 225% at Budget 2012. The Government also made changes to simplify the scheme, removed barriers to early stage companies and start-ups claiming the credit, and provided greater certainty on the costs qualifying for relief.In 2011-12, the relief provided £420 million to 9,920 companies, with claims up 20% from the previous year.
I turn now to the changes made by the clause to increase the value of R and D tax relief, providing particular support for early stage companies and start-ups, which face the greatest risks and barriers to R and D investment. This will help to deliver the Government’s commitment to making the UK the best place in Europe to start, finance and grow a business.
Small businesses are the lifeblood of our economy. Research by the Federation of Small Businesses shows that for every 10 unemployed people who find jobs in the private sector, nine of them do so through a start-up or small business. R and D tax credits support businesses across a range of industries located right across the UK.
We all know the significance of research and development, and we welcome any support or assistance that encourages small businesses to move into this field, because it not only assists them in the markets that they are operating in now but in those they will explore, develop and dominate in future. With that in mind, I met representatives from the Federation of Small Businesses only last week. They told me that the FSB is still worried about the lack of lending from banks to enable businesses to move in that direction. Would the Minister say something about that?
I thank the hon. Gentleman very much indeed for his intervention. I might not say anything about that, but only because the clause that we are discussing is very much related to R and D. However, I would generally agree with him, and the Government are very aware of the fact that lending to small businesses is still very much an area of concern. It is an issue that, as he said, is raised with hon. Members from all parties; it is certainly raised with Ministers when we visit businesses large and small, but particularly smaller ones. My hon. Friend the Economic Secretary covered it in Treasury questions last week. It is an issue that we are keeping under review. However, today we are talking about the importance of R and D tax credits to small and innovative start-up companies, whose importance to the economy the hon. Gentleman has highlighted.
The increase in the payable credit to 14.5% means that a company investing £100,000 in R and D will be able to claim a cash payment of £32,600, which is nearly £8,000 more than under the current rate. During the next five years, this increase will mean an extra £430 million in tax relief, which will support more than £1 billion worth of investment.
Before I conclude, let me address the questions put to me by the hon. Member for Birmingham, Ladywood. She asked about the rationale for the increase from 11% to 14.5%, but towards the end of her question she almost went on to answer the question because she raised the issue of state aid. I think it would be helpful if I said that we are able to offer a 25% effective rate of relief above the baseline of 8% that was already there, so we are taking the effective rate of relief to 33%. That corresponds to a payable credit of 14.5%, with a headline rate of 225%. That is because 25% is the maximum that we are able to offer under EU state aid rules. We are confident that the change is still within state aid rules on aid intensity and within our current clearance from the European Commission. The Commission is aware of this change, and we have already talked about the impact that it will have on innovative small businesses that want to invest and grow.
The hon. Lady asked about the Exchequer impact, and why the impact was only measured until 2015-16 in the information note. That is because the Office for Budget Responsibility forecast only goes up to the spending review of 2015-16, and we expect the next spending review to evaluate the impact on the Exchequer for future years. She also asked about competition from emerging economies. She will know that this Government, like all Governments, keep all tax policies under review, and reviewing other economies and other regimes is part of that ongoing review. However, as I have already set out, the Government have recently taken a number of steps to support innovative investment in the UK, and the R and D tax credit is very much part of that.
In conclusion, clause 31 gives additional support to firms working to innovate, grow and deliver the industries of the future. I commend the clause to the Committee.