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R and D Tax Credit

5. Dr. Vincent Cable (Twickenham): What consultations he has had with business representatives on the proposed research and development tax credit. [3326]

The Chancellor of the Exchequer (Mr. Gordon Brown): In 2001, we introduced tax credits for small firms' research and development. Consultation has now closed on extending a new tax credit to larger companies and we will make our views known in the pre-Budget report. Today we are also publishing a further consultation paper on the wider reform of corporation tax, including measures for intellectual property tax relief and capital gains relief for the sale of subsidiaries. The consultation period with corporations will last until the pre-Budget report.

Dr. Cable: Is the Chancellor aware of the strength of feeling among companies at the cutting edge of British technology that the Government's proposals as they stand—to give tax credits to new and incremental research and development—have two profound difficulties? The first is that they introduce a great deal of additional complexity into an already complex system. The second is that they introduce major distortions into business decisions by rewarding one type of research and development with tax credits and other forms not at all. Will the Chancellor say that he is still open to representations on reforming the proposals along those lines?

Mr. Brown: We are still open to representations. We have put forward a number of proposals to business so that we can increase the share of research and development undertaken in Britain. In Japan and America, it averages about 3 per cent. of national income. In Britain, it is about 1.8 per cent. We have to do more. The research and development tax credit for small firms costs us £150 million a year, but that system allows small firms to finance their research, even before they make profits. We are consulting companies about whether we should proceed with a similar system or with what we may call a relief for additional research. The hon. Gentleman should point out to the House that the proposal that he

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favours would cost several hundreds of millions of pounds more than the other proposal mooted in the document. In the Liberal Democrat manifesto, we counted 43 spending commitments that were not financed and that commitment was not in the manifesto, which brings it to 44. Somehow and sometime the Liberals will have to face up to the fact that they cannot keep promising money when they do not have it.

Mr. Peter Pike (Burnley): Does my right hon. Friend accept that it is crucial to assist with research and development to secure jobs in industry in towns such as Burnley if we are to tackle the sorts of problem that we faced in that town earlier this month?

Mr. Brown: I agree with my hon. Friend that manufacturing industry and the renewal of industry in areas such as his are crucial and part of the Government's policy. We have not only cut corporation tax and small business corporation tax—to 10p for smaller firms with profits up to £50,000—but introduced the research and development tax credit and made permanent capital allowances for manufacturing industry for small and medium-sized businesses. He will be interested to know that in the next few months, following our permission from the European Commission, we will be setting up regional venture capital funds from which businesses developing in the regions, including the north-west, can draw. That measure is in addition to the work that has to be done—I had a conversation with him yesterday about these matters—to improve the new deal and the facilities that it offers to people who are unemployed, particularly the long-term unemployed, in some of our poorest communities. We are determined that in this Parliament we will take the additional action that is necessary so that no young person and no long-term unemployed person will go without the offer of a job.

Pensioner Taxation

6. Mrs. Cheryl Gillan (Chesham and Amersham): If he will make a statement on the taxation of pensioners. [3327]

The Paymaster General (Dawn Primarolo): As a result of our policies on tax, seven out of 10 pensioners pay either no tax or pay at the 10p rate. Our personal tax and benefit changes mean that pensioner households will be £600 a year better off on average compared with 1997.

Mrs. Gillan: The hon. Lady's reply will be cold comfort for pensioners, as it does not reflect the reality. Will she admit that, under the Labour regime, pensioners have had more and more of their income taken in taxes? Will she also confirm that by 2003 more than half our pensioners will be subject to means-tested benefits for the minimum income guarantee and the pensioner credit? Is that Labour's way to ensure that pensioners, in the words of the Labour manifesto,

principally, it seems, through increased taxes?

Dawn Primarolo: I am glad that the hon. Lady is now concerned about pensioner poverty, bearing in mind the Conservative Government's record in office. The tax reforms and the introduction of the 10p rate, as well as the introduction of and rise in the winter fuel allowance

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and the introduction of the minimum income guarantee, which puts in place a minimum income for the poorest pensioners, are assisting the Government to ensure that the resources that we have go to those in greatest need—the very poorest pensioners. I am sure that if she looks in detail at the proposals for the pensioner tax credit, she will agree that rewarding those pensioners who have saved through the credit is another way to tackle that poverty.

Mr. John McFall (Dumbarton): I thank the Government on behalf of the poorer pensioners in my constituency for taking their incomes up from £67 for single pensioners to £92. Does my hon. Friend agree that the scandal has been that those on small occupational pensions have been paying too much tax, and that the new pensioner credit is not coming in soon enough to help such individuals? What plans do the Government have to conduct an information campaign so that those hard- working individuals can receive their just reward and the tax rebate that they deserve?

Dawn Primarolo: As my hon. Friend knows, the minimum income guarantee will be raised again next year, guaranteeing an income to those poorest pensioners. He is right that we need extensive publicity to ensure that those pensioners who will be entitled to the pensioner tax credit can receive it. The Government continue to review their tax policy on those few pensioners who pay tax so that, where possible, they can be removed from the tax system and any rebates to which they are entitled can be paid as quickly and easily as possible.

Richard Ottaway (Croydon, South): The biggest concern of any pensioner is the stability of their pension provider. Does the Minister recognise the concern and trauma of millions of Equitable Life policy holders and the failure of the regulatory authorities to protect their interests? In December 1998, the Treasury encouraged the Equitable to continue with its flawed strategy. Today, the Chancellor of the Exchequer declines to accept responsibility for that disastrous advice. This month, we discover that the Financial Services Authority did not even know that the Equitable was reviewing its financial position. Is it not time that the regulator started regulating and the Chancellor recognised that the buck stops with him?

Dawn Primarolo: It would be ridiculous on such an important issue for me to stand at the Dispatch Box and give answers that were not based on information and fact. As the hon. Gentleman knows full well, the FSA is preparing a report on the events leading up to the closure of Equitable Life to new business. When we see the report and have the facts before us will be the time to have the discussion.

Pension Funds

7. Mr. Eric Illsley (Barnsley, Central): What proposals he has to relax the Inland Revenue rules regarding the amounts of money which individuals can withdraw annually from pension funds. [3328]

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The Economic Secretary to the Treasury (Ruth Kelly): The Government seek to help people to provide for their financial security and comfort in old age. Pensions should provide a secure income throughout retirement, guarding against the risk of savings running out. The Government keep the rules under review and remain open to suggestions of workable and affordable alternative methods for delivering a secure income in retirement.

Mr. Illsley: I welcome my hon. Friend's commitment that pension funds should be able to provide an income throughout retirement, but is she aware that, due to the lack of availability of gilts in this country, the fall in the value of some pension funds and the interaction of the Inland Revenue rules, the income for some pensioners who run their pensions in that way is falling year on year? Will she consider the impact of the Inland Revenue rules, which I understand were examined as recently as 1999, to see whether any adjustment can be made to prevent that fall in income?

Ruth Kelly: I presume that my hon. Friend refers to the current state of play on annuities. Annuities are specifically designed to fund a guaranteed income stream in retirement. Certain proposals have been made for their reform. The problem is that the proposals that we have received so far have severe drawbacks. They do nothing to help pensioners who have very small savings, and it is not clear that they would not be costly. However, I remain open to suggestions about how the regime could be reformed. If any hon. Members know of any proposals that are workable and affordable, of course I will listen to what they have to say.

Mr. John Greenway (Ryedale): The hon. Lady will know that my right hon. Friend the Member for Skipton and Ripon (Mr. Curry) has tabled a Bill on this matter. Second Reading is not until January, so I hope that the six months available can be used constructively to look again at the proposals of Dr. Oonagh McDonald on the draw-down of annuity by the age of 75. Many constituents of hon. Members on both sides of the House believe that that rule needs to be changed and is leading to gross injustice.

Ruth Kelly: I certainly understand the concerns that the hon. Gentleman has raised although I repeat that, at the moment, annuities are the only way of providing a secure income flow in retirement. Of course, we have to consider other proposals, and in the next six months, I hope that people will make serious proposals for reform. The hon. Gentleman proposed that we consider Dr. McDonald's suggestions, which are interesting but have cost implications. If annuities and savings funds became more flexible, it is of course possible that people would start to use them not only as savings vehicles for their future pension but also as inheritance vehicles. There is that risk, in which case the cost implications could be severe. However, as I said, I am interested in hearing sensible, efficient and workable proposals. If I can be shown that they are not costly, of course the Treasury will take them extremely seriously.

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