Research and development expenditure credit

Finance Bill – in a Public Bill Committee at 2:00 pm on 9th June 2020.

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

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

It is a delight to see you in the Chair this afternoon, Ms McDonagh.

Clause 27 increases the rate of relief for businesses investing in research in development and supports the Government’s ambition to drive up R&D investment across the economy to 2.4% of GDP. R&D tax credits are a key element of that support for innovation and growth. To assist businesses further, the Government will increase the rate of the R&D expenditure credit from 12% to 13%. In the interests of disclosure, I should mention that my wife, Kate Bingham, is the chair of the vaccines taskforce and is engaged in the R&D sector.

Investment in R&D is vital for increasing productivity and promoting growth. There are two schemes for claiming R&D task credits: the research and development expenditure credit—RDEC—and the small and medium-sized enterprise scheme. Businesses can benefit from R&D tax relief regardless of whether they make a profit in that year. As R&D is often risky or pays back years after the investment, this is a well-targeted and much-valued incentive. In 2016-17, the Government provided over £2.2 billion to businesses through RDEC, supporting almost £25 billion-worth of R&D activity.

The changes made by clause 27 will provide an additional £1 billion of support over the next five years. Increasing the RDEC rate will make the UK even more competitive for R&D investment and drive growth across all the UK’s regions. I believe that the changes made by the Bill will give innovative businesses additional support and encourage further investment in R&D. I commend the clause to the Committee.

Photo of Wes Streeting Wes Streeting Shadow Exchequer Secretary (Treasury)

Welcome back to the Chair, Ms McDonagh.

The Financial Secretary has outlined the impact that clause 27 will have on the generosity of RDEC by increasing it from 12% to 13%. The Opposition certainly have no qualms about that; it is estimated to benefit approximately 7,000 businesses, which is to be welcomed, and the incentives that he outlined are laudable. If I may, however, I will raise a couple of concerns.

The Financial Secretary mentioned the RDEC provision and the SME R&D scheme. As other stakeholders have said, it is disappointing that while the RDEC rate of credit is being increased from 12% to 13%, we are not seeing an increase in the generosity of the SME R&D scheme. Will the Minister address that in his reply? I think it is a big missed opportunity: SMEs are an important part of our economy, and their R&D potential should not be overlooked. That is why there is a provision specifically for them, after all, so it is disappointing that they seem to have been overlooked.

While we are debating clause 27, I will make a few points about research and innovation more generally. The UK is a global centre of excellence in R&I, but we should be even more ambitious, and the Treasury ought to be driving ambition in that respect. The latest figures from the Library put the UK’s research and development spending at 1.7% of GDP—behind the USA, France and Germany. While I absolutely acknowledge that the Government intend to be more ambitious and increase the percentage of GDP spend on R&D, I do not think that there is any room for complacency, so it is disappointing that they have overlooked the SME dimension.

We have to ensure that any uplift in innovation investment also ensures value for money, and that we are more ruthless about returns for the taxpayer and our economy. It is the research that costs money and the development that brings in the financial and, crucially, industrial payback.

As I said only on Monday to a group of university leaders, we have world-class universities in this country. I am very proud of the UK’s higher education sector and the contribution it makes. I hope that the plight of our universities is well understood by the Treasury and that, as the Chancellor is considering what more needs to be done to support different sectors of our economy through the crisis, he will look very carefully at what is happening in our higher education sector. It is the result not just of luck but of strong leadership from our universities that we have a world-class higher education sector in the UK, and we want it to go on being world-class. That applies not only to the teaching and the reputation of universities as a destination for students and academics, but to the world-class research output of our universities.

We still need to do much more as a country to bridge the so-called valley of death—to take academic ideas on to commercial success. It is a constant source of frustration to me, and I think more broadly, that our universities are places of outstanding research and innovation that is then capitalised on elsewhere. We end up paying double: we pay for the research up front and then we pay to buy back the benefits of that research, which has often been applied and commercialised by others.

Industrial researchers know that the cost of scale-up and commercialisation is an order of magnitude more than the cost of fundamental research, and they allocate their resources accordingly. The public sector in the UK has that ratio almost entirely reversed, spending 10 times more on research than on scale-up and development. While I absolutely celebrate and champion the research base of our universities and the importance of research and scientific discovery, and the arts and humanities as public goods in and of themselves, it is disappointing that the UK taxpayer often find themselves a benevolent funder of research for the world, hamstrung by a funding regime that has insufficient capacity to absorb and commercialise UK-funded research in the UK. I believe there is an opportunity for the Government to think about what more they can do to ensure that future growth in the science and innovation budget is targeted on development as well as research, ensuring that research carried out in the UK is commercialised in the UK, and that the economic benefits are captured in the UK.

We can also do much more around our research and technology organisations, which are an under-utilised and undervalued part of our science and innovation base. Funding development rather than research, using RTOs, would also support the Government’s objectives, which I believe are shared cross-party, of levelling up and investing in those parts of the UK that too often in the past have felt overlooked or left behind. By ensuring that funding is targeted at development as well as research, we can ensure that a greater proportion of funding goes towards some of our industrial heartlands, particularly in the north of England, where many RTOs are located, rather than continuing to concentrate funding in the so-called golden triangle of universities in the south of England.

I hope that the Financial Secretary will take those points on board, and that when he has the opportunity to do so, with the Treasury, he will focus R&D investment appropriately. It would be particularly helpful if, this afternoon, he enabled us to understand why the Government have overlooked the importance of SMEs when thinking about our research and development tax incentives.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

I thank the hon. Gentleman for his thoughtful comments and questions. Let me discuss the SME scheme first. It is worth reminding the Committee that the SME scheme is extremely generous as it stands. It has a 230%—2.3 times—corporation tax deduction on R&D spend and a 14.5% payable credit where losses are made; some £2.2 billion of support was claimed through the SME scheme in 2016-17. It is also true that some SMEs claim RDEC, and will therefore benefit from the increase of the expenditure credit we are discussing. In 2016-17, just under 3,500 small and medium-sized enterprises claimed a little over £200 million in support through RDEC.

I understand why the hon. Gentleman says we need more ambition, but it is important to realise that the increase now under way represents the largest increase in support for R&D for 40 years across all Governments, Labour, Conservative and coalition. It is an enormous investment that increases public investment in science, innovation and technology to £22 billion by 2024-5, so there is no absence of ambition from the present plans. Of course, it is always important to balance that ambition against cost-effectiveness and value for money.

The hon. Gentleman mentioned the situation of universities in the context of covid-19. I understand that point: I used to teach at University College London and at Birkbeck, and have been associated with several universities in my life. It is also true that an enormous body of work remains to be done within universities, which may in turn be stimulated by the present situation to address the third point he made, which is the importance of the “D” in R&D—improving commercialisation and development. That is often the part of the picture that is missing, and it is hard for Government to create the development side on their own; we need active, vigorous, energetic partners. When one looks at other countries that have been highly effective at the development side of R&D, one finds in many cases that it has been not just corporate-led, but led and supported by universities as well. The hon. Gentleman’s points are therefore well made.

I remind the Committee that the ambition of this measure has been recognised by the Confederation of British Industry, which noted that these were

“powerful incentives to get businesses investing”.

It has also been specifically supported by the Association of the British Pharmaceutical Industry, which has recognised that despite the difficult circumstances in which the Budget was delivered, there is a commitment to this sector and this kind of investment. With that in mind, I recommend that the clause stand part of the Bill.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.