Finance Bill

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Dawn Primarolo: I want to touch on the three points that the hon. Member for Yeovil (Mr. Laws) has just made­assessment avoidance, dead weight costs and the benefit to companies­and then on issues relating to complexity, before turning to some of the points made by the hon. Member for Arundel and South Downs.

I have been a Minister in the Treasury for six years and I spent nearly three years as a shadow Treasury Minister. One thing that always strikes me is that when companies want an advantage, they want a relief; when they do not like something, they scream complexity. The hon. Member for Yeovil should look at the submissions made to all members of the Committee by the various lobby organisations and trade representative bodies when we were receiving the Budget submissions and apply the test. Would they make it more complex, if they were asking for money? Yes, because it would be a relief. Would they like some obscurity in the tax law to give them wriggle space, as

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they would call it; we would call it possibilities for tax planning? The answer is yes. Would they like us to subsidise things that they were already doing? The answer would be yes. Every Government must look at those representations and make a judgment.

Indeed, our consideration of anti-avoidance mechanisms in the Committee revolves around whether we should permit an activity, whether our proposals are too complex or whether we should leave the tax system alone because companies quite like it the way it is.

Mr. Laws: Does the Paymaster General agree that it is not only businesses that often see these things from two different angles? Governments do so, too. When Governments do not like certain forms of tax avoidance activity, they describe them as the exploitation of tax loopholes; when they like to create loopholes, they call them such things as the research and development tax credit, or the films tax.

Dawn Primarolo: No, the hon. Gentleman has got it entirely wrong. In the period that I have been in the Treasury, I have made numerous comments on that issue in Committees and elsewhere, inside and outside the House. I do not call a measure anti-avoidance if it is not, nor does my hon. Friend the Economic Secretary.

Mr. Laws: Will the Paymaster General give way?

Dawn Primarolo: Just one moment, please. I can answer one set of questions at a time. The judgments that we make as Ministers ensure we act properly on the advice that we receive from our civil servants. Those civil servants­I am not supposed to refer to them directly­have very rigorous tests. The problem is that, inevitably, there has to be some trust; that is the right approach to making law. We have to trust that businesses will operate legislation according to the purposes for which it was designed in good faith.

Mr. Laws rose­

Dawn Primarolo: If they do not, the Government are fully entitled to act. I will give way to the hon. Gentleman again, but I realise that I am going a little wide of the clause. What the hon. Gentleman raises goes to the heart of the balancing of decisions that Governments make about fair taxation, choices and intervening where there is market failure, without allowing tax issues to distort commercial activity, which would allow that activity to be tax driven. It is a difficult balance, but it is one that Governments make.

Mr. Laws: Does the Paymaster General agree with me that looking in retrospect at film tax relief, for example, it would not have been sensible when that measure was debated to rely simply on trust that people would not exploit and abuse the relief in a serious way, leading the Government to return to the House to put anti-avoidance legislation in place?

The Chairman: Order. I think that the hon. Gentleman has made a point, but the clause is not about film tax. The Paymaster General has ranged broadly to respond to some of the points made, but I do not wish to interfere in the debate.

Dawn Primarolo: Suffice it to say, I absolutely do not agree with the hon. Gentleman's last point. We

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have not reached the point of ''1984'' where we are all-knowing, all-seeing, all-doing and all-permitting. All Governments have found themselves in this position, and if the hon. Gentleman ever finds himself anywhere near Government, he will find out that such decisions are difficult, and occasionally Governments make mistakes.

Adam Price: Will the Paymaster General give way?

Dawn Primarolo: If it is specifically about the clause. Although I am fascinated by a debate on general tax policy­it might lead to some consistency­you might pull me up, Sir Nicholas, were I to continue with it.

Adam Price: Has a specific assessment been undertaken by the Treasury in relation to the proposal of the relative benefits of a grant aid system as opposed to a tax relief system?

Dawn Primarolo: The question of whether there is a grant or tax relief would also be considered very carefully by the Treasury. The demand for a research and development tax credit came from business. There was a long period of consultation with business, Government and all interested parties. The specific point that needed to be addressed was the importance of investment in research and development in relation to productivity levels in the future of the UK economy.

On the point made by the hon. Member for Yeovil, of course there would be a certain amount of deadweight cost in such a relief, because some companies were already undertaking research and development, but the purpose of the provision is to create more research and development and to bring investment in it up to the levels it has reached in the United States. On that basis, the operations so far, in terms of the companies taking up the research and development tax credit, have demonstrated that it is working well. It is clearly taking time to build up because companies need to take decisions and plan for what they know is going to be in the system to support them. Something like 3,000 small and medium-sized companies are now applying for tax credits, to the value of some £150 million. We definitely and desperately need to invest in that sector and see it grow.

One reason why we revisited this issue for small and medium-sized companies­the purpose of the clause­was my concern that some of those businesses that perhaps have a small expenditure on research and development at the moment have been excluded from the provisions. Although the sum involved might seem small in terms of the greater scheme, it is an important sum to those companies.

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The arrangements in the clause are designed to ensure that those micro-companies currently doing a small amount of work on research and development are not excluded. They were excluded from the previous scheme in the interests of simplicity, but in the interests of fairness and to encourage investment in the economy, they should not be excluded. That brings

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us back to the trade between simplicity on the one hand and fairness and the original aims on the other.

The hon. Member for Arundel and South Downs raised two specific points. The first was on paying the PAYE and national insurance liability of agency workers. As he well knows, companies are allowed to claim those payments as qualifying expenditure when they are made to intermediaries such as agencies for the provision of staff. However, such staff are not employees of the company, which will therefore not be paying any national insurance or PAYE for them, so why should we reimburse them? The potential to exploit avoidance is what the hon. Member for Yeovil might be thinking about. The position is perfectly reasonable and straightforward. That is not a cost on the company so is not deductible.

The hon. Member for Arundel and South Downs asked a question about the North sea. As he knows, the definition excludes oil exploration and appraisal. However, although it is nothing to do with this clause, the hon. Gentleman might have noticed in the Budget announcement that the Government are setting up a consultation group specifically to examine exploration and cost, particularly for small and medium-sized companies working in oil fields that are reaching the end of their lives. During the next six months, we will want that group to consider whether there are cost-effective ways of assisting that extra exploration.

I have not ventured into the amendments because I understood that we are discussing only the clause at this stage. I hope that my comments have given the Committee an idea of the Government's intentions. We are trying to ensure that at every point the tax credit can get to those who need it most, such as struggling companies that are absolutely at the beginning of research and development and need that encouragement and assistance from the Government.

The Chairman: Order. We are discussing only clause 167 stand part at the moment. We shall come on to schedules with amendments a little later.

Question put and agreed to.

Clause 167 ordered to stand part of the Bill.

Schedule 31

Tax relief for expenditure on research and development

Mr. Flight: I beg to move amendment No. 136, in

schedule 31, page 362, leave out lines 32 and 33 and insert -

'(3) Omit paragraph (a) (person spending less than 20% of total working time on relevant research and development).'.

In determining whether expenditure on salaries qualifies as R and D and is hence eligible for the enhanced tax credit, if a director or employee spends more than 80 per cent. of his total working time on relevant R and D, all the staffing costs related to him are treated as attributable to relevant R and D. That rule was a helpful simplification of the legislation to encourage research, and it avoided compliance costs by identifying minimal amounts of expenditure that would not qualify for tax relief. Equally, costs were ignored if the employee spent less than 20 per cent. of

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his time on R and D. The ability to round 80 per cent. up to 100 per cent. and to ignore insubstantial amounts of time was a useful deregulatory simplification, and its removal from the schedule will increase compliance costs and, in a sense, make the relief less generous.

Amendment No. 136 would retain the 80 per cent. rule but repeal the rule that prevents time of less than 20 per cent. counting for relief. The 20 per cent. minimum, about which one might argue either way, is intended to protect the Revenue against small claims, but there is already a de minimis level in the legislation. If taxpayers want to take advantage of the incentive, they should be able to do so. The 80 per cent. rule was a simplification measure that ensured that taxpayers did not have to calculate small amounts of central management time incurred by an R and D director that would otherwise be disallowed. In short, are not the proposals in the Bill overly complicating a rough and ready formula that had actually worked very well?

 

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Prepared 20 May 2003