Finance Bill

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Mr. Flight: The thinking behind the amendments was, first and self-evidently, that if an SME was nearly up to the limit, rather than getting caught with the problems caused by having one set of rules one year and another set the next, it might be more simple for them to go straight to the large company rules. The Minister has allayed that fear to some extent by saying that there will be a year's grace.

Another thought behind the amendments was that, as we were advised, some of the conditions attaching to the more generous SME reliefs are pretty onerous and demanding, and that that might act as a disincentive to SMEs to take them up. The Minister has not said anything specific about consultation with SMEs, but one of the attractions of the large company reliefs is that they are drafted in a simple and straightforward fashion, whereas existing reliefs for SMEs are quite complex. If an SME was not sure whether it would meet the requirements of the more generous provisions, but was sure that it would certainly meet the wider requirements, it might want to take them up.

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The amendments are in essence probing amendments. As the Minister accepts, there is more work to be done in this area. However, I would like to hear a little more from her on whether the conditions attaching to existing SME reliefs are demanding and have therefore resulted in their underuse.

Dawn Primarolo: We have received no representations that the rules are too complex—quite the reverse. The SME tax credit is more generous and has a lighter touch than the large company tax credit. It should precisely recognise the slightly different circumstances of SMEs. I cannot understand the hon. Gentleman's logic. He says that the provision is too complex, so it should be made less complex by adding highly complex rules under which a company could give away all the extra benefits—Lord knows why it would want to—and pretend that it is a large company. A large company would be given less than a small or medium-sized company. Small and medium-sized companies that become large companies are protected in the transition, which is appropriate, given the planning.

6.15 pm

The hon. Gentleman needs to understand that SME tax credit for R and D was provided for in the Finance Act 2000. There has not been a stampede to the Treasury's door from SMEs saying that they want the scheme for large companies instead, because it is less generous.

Mr. Flight: The Paymaster General has not answered the key question that lay behind the input that we perceived, which is about how much take-up there has been from provisions of the 2000 Act. We have been advised that many SMEs have found the arrangements too complex to bother with. The crude thinking was that, on the basis of the large company schemes being much simpler although not as good, it would be better for SMEs to take them up. Have the 2000 Act provisions been taken up?

Dawn Primarolo: My understanding is that they have, but I do not have the figures on take-up to hand. The hon. Gentleman will understand that investments in R and D require a long planning period before the tax credit comes in.

I find it incredible that the hon. Gentleman is asking me to believe that plenty of criticism has poured to him so that he can make his point in Committee, but not to the Government, who could have amended the legislation and ensured that there was no problem. The subject has not been reported to us as a problem by SMEs.

We have invested a great deal of time and taxpayers' money in the R and D credit. The policy is important to the Government, and I can assure the hon. Gentleman that if it was not working as well as it should and required amendment, we would take those considerations on board and do our best to amend it. The Inland Revenue is full of talented and able people, but mind readers they are not. Given that no one has pointed out why the scheme should be changed, it is

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difficult for me to engage with the hon. Gentleman in a theoretical discussion on a complexity about which no one is complaining.

Indeed, the reverse is true: the scheme has been widely welcomed and is being used. People have had nearly two years to comment on it, and complaints are not coming through. If they do, I shall ensure that they are looked at, because I want the policy to be a success.

Mr. Flight: I am very glad to hear the Paymaster General's comments. She will find that the take-up has been extremely disappointing, and that there is something in the issue of complexity. However, I do not want to bang on about the matter. If my claim is substantiated, I am glad to hear that the Government will want to consider simplification. The amendments simply sought to offer a short cut to simplification, but the matter has had a valuable airing. They were probing amendments, and one or two interesting facts have come out of the discussion. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 54, in page 189, line 24, at end insert—

    '3A. A company's ''qualifying R and D expenditure'' shall not include any amount in respect of which, under the law of any territory outside the United Kingdom, the company is entitled to a deduction for the purposes of any foreign tax which exceeds the amount of such expenditure.'.

I had understood, when the main reliefs were announced, that they would relate only to R and D undertaken in the UK and there was an issue about the relative attractions of Canada and other such places. I was interested to hear the Paymaster General say that that was how the measures had been cast. As far as our adviser and I can see, clause 52 contains no restriction that any expenditure benefiting from enhanced tax relief should be incurred in the UK. Conceptually at least, the relief could be used to allow foreign groups to obtain additional tax relief for R and D expenditure routed through UK companies. The UK Exchequer could suffer without any additional R and D being carried out here.

The Paymaster General referred to the scope of the relief to R and D carried out in the UK being limited by European Union law. The amendment seeks both to limit the scope of any potential abuse by ensuring that no relief is given where another territory is giving a super-deduction for the same expenditure under its tax laws and to make it clear that double dipping is prohibited.

Dawn Primarolo: I thank the hon. Member for Arundel and South Downs for his assistance in scrutinising the legislation to ensure both that companies do not use it in a way in which it is not supposed to be used and that expenditure is directed precisely to enrich the research and development capability in the UK.

The hon. Gentleman specifically raised the problem of tax incentives in other countries and how foreign multinationals that are not based here would operate. We raised that issue in last year's consultation. If a company is able to claim a tax incentive in another

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country, why should we give another credit in the UK? However, we decided that such a restriction was not justified, and the problem that he has identified would not exist. Our new credit focuses on direct R and D costs—staff costs and consumable stores—of a company within the charge to UK tax, and the bulk of such costs would not be eligible for any foreign tax incentive. We are not giving credit, in general, for the costs of subcontracted work, including work subcontracted to a foreign business. That is another crucial difference between the tax credit for small and medium-sized companies, which would probably not have the ability to subcontract work to a foreign business, and the tax credit for large companies. Very little expenditure will actually qualify for an incentive in more than one country.

If we were to introduce a restriction, it could cause some multinational groups to locate outside the UK research and development activity that might otherwise have been conducted here, which is not the result that we want. The amendment is unnecessary in any case, because foreign R and D relief would almost certainly be cancelled through the operation of double taxation relief. Foreign tax relief will reduce the amount of double tax credit given against UK tax, allowing the UK Exchequer to benefit from foreign R and D credit. A company's overall tax liability will be reduced only by the UK tax credit, and not by a foreign tax credit as well. To go further than that and deny the UK tax credit would just be punitive and unnecessary.

Others have scrutinised that point, and the detailed views that we received in the consultation argued against such a restriction, which would inadvertently work against R and D. As well as large companies, a number of well-respected representative bodies, including the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society, criticised the idea. For those reasons, and after careful consideration of the design, the Government are satisfied that we can prevent such a restriction. However, if it turned out that something untoward was going on, and there was what we politely call ''tax leakage'', we would deal with it. We are trying to strike a balance throughout the Bill between protecting the Exchequer and recognising the commercial reality of the how companies operate.

Mr. Iain Luke (Dundee, East): The hon. Member for Arundel and South Downs made a valid point. I know from being involved in the all-party group on tyres, and from comments from the Chartered Institute of Taxation, that the tyre industry is wholly owned by companies outwith the UK, which is unfortunate given the UK's pioneering role. Given the complications of decisions on tax credits, the only thing that will save the industry is R and D credit. It will allow the industry to invest in high-quality techniques, which would beat off competition from the far east. The hon. Gentleman's points were pertinent. Will the Paymaster General bear in mind the tax credit issues that relate to the tyre industry?

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