Mr.
Hoban: I am grateful to the Financial Secretary for his
response. I shall begin by dealing with the first aspect of the
amendments. I understand his point about the requirement to specify in
great detail the particular circumstances that would preclude losses
being utilised, and indeed being offset. He made a valid and important
point about that, which I
accept. On amendment
No. 8, the Financial Secretary distinguished between the specific
circumstances in the Marks & Spencer case and the decision of Mr.
Justice Park, and the general position that is reflected in the
schedule. I understand the Financial Secretary’s argument about
restricting the availability of the losses and setting out a theme that
runs through the proposals to which we have just
referred. I wonder
whether, in practice, the Financial Secretary has taken restriction to
a point at which it renders the possibility of claiming group relief
almost impossible. He is asking businesses, at the end of the financial
year, to make a decision about submitting a group relief claim for
overseas losses. Before a business has had chance to work through the
accounts, think about what the scale of the losses might be, implement
some judgments made in drawing up a set of accounts and determine the
loss, he is expecting it to decide whether it should submit a claim for
group relief for overseas losses. He is asking businesses to do
something
impractical. A
business might be continuing to trade, but it could be thinking about
closing down. The Financial Secretary is asking such a business to make
decisions at the end of the financial year—without proper
reflection, without the opportunity to draw up proper financial
statements and without knowing the quantum of losses—and before
it is able to determine whether the losses it has incurred in that year
can be relieved against past profits or profits that have emerged
during that year. For example, if a series of overseas subsidiaries are
operating the same territory, how will the UK parent business know that
their profits are greater than the loss incurred by that business that
year? The losses can be offset against the profits of overseas
subsidiaries in the same accounting period.
The Financial Secretary is
asking businesses to know far more than they are capable of knowing and
is applying the provision in such a restrictive fashion that it is
impossible for those businesses to make a claim for group losses. This
is an area on which the Government should reflect further. He is being
restrictive in asking businesses to make decisions that they are not in
a position to make at the end of a financial year. While I do not wish
to press the amendment nor amendments Nos. 5, 6, 7 and 9 to a Division,
I shall reflect on the issue. I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Amendment
proposed: No. 22, in page 156, line 22 [Vol I], after ‘the'
insert ‘relevant
proportion (see sub-paragraph (5)) of the'.—[John
Healey.]
The
Chairman: With this it will be convenient to discuss
Government amendment No. 23.
Mr.
Hoban: I would be grateful if the Minister discussed the
amendments. I have his letter to the shadow Chief Secretary about them,
and while I appreciate the need for the Committee to move on at pace,
it would be appropriate to explain their purpose. What does the
Financial Secretary want to achieve by changing the definition of
losses to be relieved and the comparison between UK measures of the EEA
losses and other
measures?
John
Healey: The amendments will make minor technical changes
to ensure that the amount of EEA losses that can be surrendered as
group relief to UK companies is in line with the policy objective of
preventing double relief for those losses. The previous version could
have been read in two ways. That was not drawn to our attention by
external sources, but it was something we spotted and decided to
clarify with the amendments. I could go into detail, but I hope that
the hon. Gentleman accepts that that is the reason for tabling
amendments and how they have arisen. They will simply clarify technical
changes. I hope that they are acceptable to the
Committee.
Mr.
Hoban: I do not want to appear to be an anorak or pedantic
about the changes, but the Government have sought to amend the Bill
here. Is the Financial Secretary confident that, when EEA losses are
restated using UK accounting rules and if those losses exceed original
EEA losses, the higher value will not be offset against UK taxable
profits?
Amendment
agreed
to. Amendment
made: No. 23, in page 156, line 32 Vol I], at end
insert ‘and “the
relevant proportion” means the proportion that the appropriate
part of the EEA amount bears to the EEA amount'.—[John
Healey.] Schedule
1, as amended, agreed
to.
Clause
28Relief
for research and development: subjects of clinical
trials Question
proposed, That the clause stand part ofthe
Bill.
John
Healey: I rise to speak to the first of the two clauses
dealing with research and development tax credits simply to emphasise
the point, of which Labour Members are well aware, that the tax credits
are a key part of the Government’s strategy to increase business
research and development. In so doing, we will boost the levels of
science and innovation in the economy to help to secure long-term
prosperity.
Since the
scheme was introduced in 2000 for small and medium-sized enterprises,
the support claimed amounts to just under £1 billion for such
enterprises and almost £1.8 billion overall. Early evaluation of
the scheme suggests that companies claiming R and D tax credits
generally find the process quite easy and find that it is having a
positive impact on their R and D spending. However, we have constantly
looked at ways to improve
the package and to make it easier to apply for and more effective in its
application. The amendments and changes announced in the pre-Budget
report should improve the experience of companies claiming the credits.
The announcement was widely welcomed, as was the fact that HMRC will
set up dedicated units to specialise inR and D tax credit
claims. We also
announced that the range of qualifying costs for the scheme will be
expanded to include payments made to clinical trial volunteers. The
clause will enact that announcement. It follows the suggestion put to
us by the Association of the British Pharmaceutical Industry, which
argued that the cost of paying volunteers for clinical trials is a
legitimate R and D cost incurred by pharmaceutical and biotech
companies and others undertaking medical
research. The clause
also makes equivalent changes to vaccine research relief, which was
introduced in 2002 to provide extra incentive for R and D on drugs and
vaccines to treat or prevent
diseases. Mr.
Brooks Newmark (Braintree) (Con): At the end of last year,
the then Minister for Competitiveness, the hon. Member for Brent, North
(Barry Gardiner), said of the R and D tax
credit: “The
truth is that it hasn't been a success. A lot of it has to do with a
misunderstanding of what the R&D baselines were. We are trying to
iron that out.” While I
appreciate that clause 28 will take out a wrinkle by including payments
to clinical trial volunteers, does the Financial Secretary agree that
the Government have some more ironing to do? I ask that question in the
context of a comment by John Cridland, deputy director general of the
CBI, who
said: “Companies
are experiencing too much uncertainty and inconsistency in its
application. That has to change if the Government is to achieve its
target of R&D spending at 2.5 per cent of GDP by
2014.” I would be
interested to hear the Financial Secretary’s comments on
that. Jeremy
Wright (Rugby and Kenilworth) (Con): I welcome you to the
Chair, Mr.
Benton. Will the
Financial Secretary engage in some joined-up government? I welcome what
he said about the extension of relief for clinical trials, which is
clearly a necessary and important move, but he will know that there are
other reasons why it is difficult for companies, particularly smaller
ones, to conduct such trials. Many of those are related to the European
clinical trials directive. To see that the measure is enacted as
effectively as he and I want it to be, it is necessary for him to speak
to his colleagues in the Department of Health and to remove any
administrative obstacles to the conduct of clinical trials so that
advantage can be taken of the tax
relief. 12.30
pm
John
Healey: Obviously, it is the Treasury’s role to set
fiscal policy; the role of HMRC is to manage and administer that tax
policy. We do so within the broader regulatory framework, for which
other parts of the Government are responsible, but I shall draw the
comments of the hon. Member for Rugby and
Kenilworth (Jeremy Wright) to the attention of my hon. Friends in the
Department of Health.
I say to the
hon. Member for Braintree (Mr. Newmark) that, as I think I indicated in
my short opening remarks, at each stage of the introduction of the R
and D tax credit system—first for small firms, then larger
companies—we have made it clear that we want to build on the
emerging success. At each stage we have said that we shall look at
possible improvements, including in the administration, and have
welcomed the views of businesses, including that of the CBI, and their
suggestions for improving the administration of the credit and payable
allowance. That
was the intention behind the package of announcements in the pre-Budget
report and the setting up of specialist units in HMRC, and that is why
both were welcomed. The hon. Gentleman referred to the ironing out of
some of the wrinkles in the system—I am keen on ironing; clause
29 does a bit of ironing too. I hope thereforethat he will
support clause 28, and clause 29 when we get to
it. Question put
and agreed
to. Clause 28
ordered to stand part of the
Bill. Schedule
2 agreed
to. Clause 29
ordered to stand part of the
Bill.
Schedule
3Claims
for relief for research and
development Question
proposed, That this schedule be the Third schedule to the
Bill.
The
Chairman: With this it will be convenient to discuss new
clause 5— Cost of claims for R &
D— ‘The Chancellor of
the Exchequer will publish a review in relation to the cost of making
claims for relief for research and development before 1st March 2007
and will consult with organisations which have a special interest in
claims for relief for research and
development.'.
Mr.
Hoban: I should like to pick up on some
of the Financial Secretary’s comments and those of some of my
hon. Friends. Schedule 3 refers to the harmonisation of the timing of
claims rules for R and D tax credits. In other contexts, harmonisation
might not be welcomed, but it is in this
one. I shall talk
about the claiming of tax credits. New clause 5 calls upon the
Chancellor to “publish a
review in relation to the cost of making claims...before 1st March
2007” and
to “consult with
organisations which have a special
interest” in that
particular area. The
Government and the Financial Secretary are proud of the introduction of
tax relief for R and D expenditure, but the fact that it is available
does not necessarily mean that it is accessible to all businesses. The
Treasury needs to think about the cost of claiming those credits and
how it might be made easier, and about who is currently excluded by the
complexity of the
system. The
Institute of Chartered Accountants commissioned independent research
into the R and D tax credit, and the claiming of it. In the context of
the debate on the
schedule and the new clause, it is worth reflecting on that research.
The report highlighted some of the challenges faced by businesses
without the resources to make claims, and the impact on those
businesses. A large
business with a well-funded R and D programme will find it relatively
straightforward to make a claim, because it will have the systems and
procedures in place, and the technical expertise to claim efficiently
and effectively. The institute’s research indicated, however,
that that did not necessarily lead to an increase in R and D
expenditure, because the business had already maximised its programme.
That is, the business would already have made the decision on how much
to spend, and the decision would not be particularly affected by the
nature of the offered
incentives. Medium-sized
businesses, on the other hand, did actually benefit from the tax
credits. They tend to be have better resources and to be better able to
go through the process of making claims. The view was that the tax
credit has been very helpful for them and has enabled businesses to
grow without having to seek further venture capital funding. Businesses
that have taken advantage of the tax credit have commented to me that
it has aided their cash flow, and that they have not had to raise
funding from outside sources.
The area of greater concern is
that of smaller companies, and the Government need to think about that.
The report quoted the example of a small business run by two
scientists, which did not have adequate human resources to complete the
returns, and so did not submit a claim. It therefore missed out on the
incentives brought by the R and D tax credit.
As to the cost of preparing the
returns, the indications were that it could cost approximately
£12,000 to employ a chartered accountant to fill out the returns
fully and to provide all the necessary support and administrative
back-up. That is quite a significant sum. The taxpayer would need to
consider the cash-flow benefit that it would receive from submitting
the return and obtaining the tax relief, and whether it would be worth
spending £12,000 of the small resources available to most small
companies in order to make the
claim. Alternatively,
the company could decide that it needed only to be briefed by a
chartered accountant, in which case it could submit a claim itself. It
was estimated that such a briefing would cost approximately
£3,000, but the HMRC would come back and question the claim. I
am not disputing the need for HMRC to ensure that claims are valid, but
there is a cost in time and resources, including financial
resources. In
preparing for the debate I looked at the guidance that is available to
small businesses on the HMRC website, because one might ask why one
should spend £3,000 on a chartered accountant if one can go to
the HMRC website to find the information. In saying that I am probably
doing a great disservice to fellow accountants who are still
practising, but on looking at the website I was struck by why it would
be difficult to complete a return without professional assistance.
There is a series of user steps that companies need to take to
determine whether they qualify, and there is a web page entitled
“Is it worth reading any further?” which has a flow chart
with more than a dozen boxes.
If I were hard pressed for time I think I might question whether it was
worth reading further. Nevertheless,
I continued, and I came across theR and D tax credit claim
template for SMEs, which has a number of different lines for completion
relating to, for instance, consumable items, consumable stores,
computer software, staffing costs, externally provided workers,
payments to staff providers, issues about connected persons, underlying
relevant expenditure, subcontracted activities and payments to
subcontractors. That is a lot for a small business to consider and I
can understand their having difficulty with it. However, there are
pages of helpful guidance to underpin it. I have one here headed
“CIRD82400—R&D tax relief: categories of qualified
expenditure: consumable items: meaning of consumed or
transformed.” That sounds fairly hopeful. The first sentence
begins: “It is
not possible to offer a simple
definition”— that
supports my case that we need more chartered accountants to help by
providing us with advice. However, it continues—
“because of the variety of
possible circumstances.”
It goes on to say that it is specified in
statute that “the term
‘consumable or transformable materials’ includes water,
fuel and power...Apart from these specific items, we then have to
deal with the generality of the
wording.” I am reminded
of the comments of the Financial Secretary during the last debate in
which we discussed the importance of using general wording so that we
do not need specific items. However, specific items might be helpful
for somebody completing an R and D tax relief claim. The form says
that “A good
example of a consumable item would be a laboratory chemical used in the
R&D process which is used up...or converted to an unusable
product.” I am sure that
scientists will be able to work their way through that. I quote this
not for cheap laughs but to demonstrate the complexity that businesses
face in trying to deal with some of the issues. Another page of
guidance, “CIRD82500—R&D tax relief: categories of
qualifying expenditure: software”, sounds as though it could be
fairly straightforward. It rightly mentions that software, directly
employed, can be used. However, it goes on to talk about the
apportionment of software that a business might already
have: “Where
software is only partly employed in direct R&D an appropriate
apportionment of the expenditure should be
made.” So
I suppose that if a business bought a licence to use Microsoft Office,
and used Excel spreadsheets for the purpose of tracking the expenditure
for R and D tax credits but also for some of the calculations that are
required for research, it could apportion the cost of that software to
the R and D tax credit. It rightly says that a pragmatic approach
should be adopted. I make these comments to illustrate the scale of the
challenge that is faced by businesses trying to claim these
reliefs.
The other
aspect is not the complexity and the record keeping that is required,
but the degree of uncertainty about the likelihood of success of a
claim. Companies with a stable and recurring path of expenditure find
it relatively easy to claim tax credits. However, evidence collected
for the ICA report suggests that that is not a universal experience;
there can be issues about what
constitutes R and D expenditure according to HMRC. Often,
people’s decisions to invest in R and D are irreversible. Once
the die is cast, that is it: they are going forward. Particularly in
the case of a smaller business, the extent to which the likelihood of
success of a claim is under question might have an impact on its
willingness to make that irreversible decision. In that context, the Financial
Secretary was right to highlight the importance of setting up dedicated
teams to tackle R and D tax credits. A concern that was highlighted by
a number of respondents to the survey was that although some tax
offices are very experienced—I should imagine that the one that
serves Silicon Fen in Cambridgeshire would be very adept at dealing
with such claims—there could be problems for somebody whose tax
office did not have that experience. The dedicated teams that the
Minister mentioned will help to tackle that.
I hope that in ironing out the
wrinkles, to use the metaphor introduced earlier by my hon. Friend the
Member for Braintree, the Financial Secretary will reconsider the cost
of making claims, and think about what further steps can be taken to
simplify claims, to provide better guidance to taxpayers who might want
to take advantage of the relief, and to ensure that tax relief is not
just available but accessible to smaller
businesses.
12.45
pm
| 
