This clause is similar to the previous one; it relates to provisions introduced in the Finance Act 2013 for loss relief rules in respect of corporation tax. That Act introduced three new sections—29, 32 and 33—to the Corporation Tax Act 2010, which sought to close down various loopholes in the loss relief rules because, as Her Majesty’s Revenue and Customs’ technical note at the time made clear, HMRC had seen a marked increase in companies entering into arrangements to circumvent these rules.
The tax information and impact note accompanying clause 37 states:
“The anti- loss-buying rules had a more significant adverse impact on RDAs than intended. The rules catch situations where a company does preliminary capital work in the furtherance of research and development, but does not reach the point of trading, and then is sold on to trading groups. Before the rules introduced by FA 2013 the trading groups could claim the Research and Development Allowances under Part 6 Capital Allowances Act 2001 (CAA 2001).
Although these rules contain an avoidance motive test their introduction has caused uncertainty and risks undermining capital investment in research and development.”
The impact note goes on to suggest that representations were made by business following the introduction of the loss-buying rules in the Finance Act 2013.
The clause amends the definition of deductible amounts in section 730B of the Corporation Tax Act 2010 to exclude an expenditure of a trade to the extent that it arises from research and development allowances. Although the tax information and impact note suggests that the Exchequer impact of the changes will be negligible, it describes the predicted benefits to those companies that presumably have been inadvertently caught by the rules introduced in the Finance Act 2013, stating:
“For companies involved in pre-trading activity who make capital expenditure on research and development this will preserve the value of their investment on the sale or partial sale of the company.
For those who rely on the preliminary capital research and development work of unconnected companies this will enable them to benefit from the expenditure made on their behalf.”
The concern was raised that the changes were necessary because there had been significant uncertainty among taxpayers as to whether the rules restricted RDAs on a transfer of a company in circumstances where that company had undertaken preliminary research and development work but did not reach the point of trading.
In light of such concerns, will the Minister provide more detail on what representations on research and development the Government received from interested parties and businesses? Will she also describe the extent to which the Government believe the anti-avoidance loss-buying rules impacted on research and development? Have the Government made any assessment of the impact on jobs and economic growth—in general and in the R and D sector in particular—following what were clearly inadvertent effects? Indeed, will she confirm whether the Government were made aware of the potential adverse impacts on research and development before the changes were implemented last year?
I thank the hon. Lady for those questions, which I will come to. The clause makes changes to ensure that tax allowances for certain capital expenditure on research and development are not denied by the Finance Act 2013 anti- loss-buying rules, reflecting the Government’s continuing commitment to making the UK a home for innovation and discovery through investment in R and D. Hon. Members may recall that in the previous Finance Act we extended the loss-buying rules to curb the sale of tax losses. The rules concentrated on expenditure made but not yet recognised for tax.
As the hon. Lady mentioned, there has been concern within industry that that change could have an unintended adverse impact on start-up R and D companies. Such companies tend to be capital-intensive and involved in activities that may not lead to the point of trading. Previously that was mitigated by the knowledge that large, existing trading concerns could benefit from the unclaimed R and D tax allowances, but changes to the anti-loss-buying rules could mean that the buyer would not benefit from certain key expenditure of the start-up. That would reduce the value of the new companies and thereby increase the risk for investors.
Although the rules in the Finance Act 2013 contained an avoidance motive test, the Government are keen to remove any uncertainty that could undermine capital investment in research and development. The changes made by the clause will allow a company with unclaimed research and development allowances to claim tax relief for the company’s capital investment after it has been acquired by new owners. The measures have effect for changes of ownership on or after 1 April 2014.
Research and development allowances give relief for certain capital expenditure on R and D projects, and would create a trading loss if the company failed to return a profit. The changes will mainly affect small, capital-intensive start-up companies involved in research and development, but other companies in similar circumstances could also benefit. As the hon. Lady has highlighted, and as is made clear in the tax information and impact note, the cost of the change is negligible, reflecting our confidence that there is no weakening of the intended scope of the loss-buying rules, but as she said, and as I have said before, the changes are intended to remove uncertainty about the impact of the rules.
The hon. Lady asked about the impact on jobs and growth in research and development. The basis of the queries that industry raised with the Government was that it was unclear whether the rules would apply. I have set out why the Government think that the uncertainty should be removed, so that there is no doubt.
Industry bodies representing the oil and gas sector, among others, made representations. They had concerns about the impact of rules on small exploration companies. We have probably already debated in other Committees the Government’s support for the oil and gas sector, and concerns have also been raised with us about exploration, and the need for Government to support exploration in the oil, gas and other sectors. I have mentioned the intention of benefiting small, capital-intensive companies.
I cannot give the hon. Lady a definitive analysis of the impact on jobs and growth in research and development, because the point is to remove uncertainty about what might happen, and not about things that have happened—an impact that can be measured. It depends on individual cases.
To clarify the question, it related more to the last 12 months since the uncertainty was legislated for—unintentionally, of course—and the lost research and development growth and jobs, and whether there was any impact assessment of that in the past 12 months. That was obviously to get an understanding of the future projections that I assume the Treasury has made.
As it is a question of what has happened in the past 12 months, it is difficult to say, as the hon. Lady will understand. Many representations are made; people say that things will affect jobs and growth, without being able to give the number of jobs. Oil and gas exploration in particular are important to the Government and the economy. We are removing an uncertainty that industry has highlighted. It is worth doing that, so that there will be no doubt that the rules will be available to small companies that have not yet made a profit. The clause will remove uncertainty for investors and an unnecessary risk for R and D start-ups by ensuring that tax relief for the investment in R and D is not lost just because a company is taken over.