Julia
Goldsworthy: In their own terms, the new clause and
schedule are rational and attempt to simplify the process by aligning
the claims processes and time limits for R and D tax reliefs with those
of enhanced deductions. However, I should like to follow the points
made by the hon. Member for Fareham by considering the impact of the
changes in tax credits on small businesses and the knock-on impact that
they may have on them again. If all claims need to be made in company
tax returns within 12 months of the filing date, what will be the
impact of these changes on small businesses? Given that that is already
a difficult administrative burden for them, reducing the time scale
will be an additional
difficulty. There
is still an issue with small businesses having to pay up front and
claiming back tax credits. I should like to quote one conclusion from
the report by the Manchester and Nottingham business schools,
commissioned by the Institute of Chartered Accountants in England and
Wales, which
says: “R&D
tax credits on offer in the UK are similar to some of the best schemes
offered around the world. The incentives are relatively more generous
to smaller firms. The application process, however, diminishes the
effectiveness of the policy and this is especially so for smaller firms
and firms with small R & D programmes. In some cases the costs of
preparing and administering claims prevents firms from taking advantage
of the
incentives.” Given
those conclusions, I wonder whether the Government really consider this
to be an efficient mechanism for supporting small businesses in
particular.
Rob
Marris: It is a pleasure to follow an entertaining speech
by the hon. Member for Fareham. I say to my hon. Friend the Financial
Secretary that I have some sympathy with new clause 5.
[Interruption.] Before the hon. Gentleman gets too
excited, I should say that the
new clause is perhaps a little premature for the reasons to which he and
my hon. Friend adverted in a previous
debate. The Red Book
says, on page 62, paragraph
3.80: “In
‘Supporting growth in innovation: next steps for the R&D tax
credit’, published in...2005, government announced that
HMRC would set up dedicated R&D units to handle all SME claims for
tax credits. It is envisaged that these units will be fully operational
across the country before the end of the year. At the same time, a
statement of practice will be published presenting the standard of
service and support that SMEs can expect from the new
units.” I understand
that, at the end of the calendar year 2006, the dedicated SME claims
units for R and D tax credits and statements of practice will be in
place. New clause 5
suggests a date of 1 March 2007 for the research to be done on the
costs of claiming R and D tax credits. Understandably, we have a
particular concern for SMEs. I am delighted that the Budget extended
the number of employees from 250 to 500 in respect of the beneficial
arrangements. However,1 March 2007 is a little bit early for
a procedure or new way of doing things—including new support and
so on—in respect of provisions that will be in place by the end
of 2006. However, if the Government have not already included such
provision in the Finance Bill next year, the hon. Gentleman might
consider tabling a new clause similar to new clause
5. I have sympathy
with the hon. Gentleman’s approach. To echo the comments that
have already been made, I say to my hon. Friend the Financial Secretary
that we have to be careful that we do not have a wonderful tax regime
that is too difficult for people to claim under and therefore does not
boost R and D in the United Kingdom in the way that all hon. Members
wish. Stewart
Hosie (Dundee, East) (SNP): I am
intrigued by new clause 5, and I hope that the hon. Member for Fareham
can offer some enlightenment. It suggests publishing a review, having
first consulted organisations with a special interest in claiming the
tax relief forR and D. Would he envisage that the
organisations consulted may not offer feedback in the published review
that would make the R and D tax credit system more effective and
efficient, but might suggest alternatives to it, at least in some small
way? I
have said previously to the Financial Secretarythat in
2004-05, the last year for which I have figures for R and D tax credits
and other R and D funding for Scotland and England, £670 million
was budgeted to be made available for the tax credits, but only
£290 million was actually taken up. In the same year—the
figures are useful and interesting in this regard—in addition to
the tax credit, a total of £710 million of Government funds were
available, of which some £37 million came through collaborative
research and development, knowledge transfer networks, knowledge
transfer partnerships, grants for research and development, and the
grant for investigating an innovative idea. The latter two apply only
to England. In the same year in Scotland, some £16
millionwere available through Smart Scotland, SPUR, SPURplus,
Score, SEEKIT, R & D Plus, and the small company innovation support
scheme, which also includes a certain element from the Highlands and
Islands Enterprise area.
Given that £670 million
of tax credits were budgeted for, of which only £290 million
were taken up, these small, more targeted schemes seemed to be quite
successful, and the take-up seemed quite high. Does the Financial
Secretary envisage that in the published review of the consultation, he
will look for feedback from companies to have the Government’s
research and development funding provided through such other
mechanisms, not merely through the R and D tax credit system, of which,
in certain years, only 50 per cent. of the budget has been taken
up?
John
Healey: There appears to be something of
myth around that, somehow, the R and D tax credit is costly to operate
from a company’s point of view, and too difficult to operate in
order for companies to claim. Frankly, if that were the case, I do not
think that£1.8 billion-worth would have been claimed
so far by companies, including £1 billion by small firms.
Alongside that, I do not think that I could have been clearer. Since
the system’s introduction—first for small firms; then for
large companies—we have been ready, and have proved that we
shall continue to look at its costs for business. We have been willing
to improve, and have improved, the process for applications and
administration where we can. We have also been ready and willing, and
continue to be so, to improve the guidance that is available to firms
if suggestions that seem sensible to us are
made.
Julia
Goldsworthy: Does that mean that the Financial Secretary
rejects the conclusions of thework commissioned by the
Institute of Chartered Accountants for England and Wales that found
that there were significant difficulties for smaller businesses in
accessing these
credits?
John
Healey: Is the hon. Lady aware of how many companies
constituted the study to which she refers? The answer is 10. I shall
come to that shortly.
The schedule before us is not a
big move; it is a modest move, and should help companies in the process
of claiming tax credit. Harmonising the rules for claiming across the
two elements of the R and D tax credit system ought to make it easier
for companies to understand the claims process, and improve the
incentive effect of the schemes.
New clause 5 urges us to
publish a review and a report by 2007. However, we have gone further
than that. We have already commissioned an independent survey of almost
1,000 R and D performing companies, looking at their experiences in
claiming tax credits, the results of which we published last year, In
contrast, the Manchester business school study was based on interviews
with just 10 R and D performing companies. Members of the Committee
could reasonably conclude that that was not the strongest piece of
evidence. Interestingly, the results from that very small study
contrast strongly with the results of the much wider first-stage
evaluation that the Government undertook. The results of the latter, in
contrast to the points made earlier, were very positive. It found that
three quarters of the companies that had claimed R and D tax credit
found the claims process
fairly or very easy. That does not suggest that the costs of claiming
are prohibitive, and experts generally agree with that view. Finally, a recent article in
Tax Journal surveying the R and D fiscal incentives in the UK
compared with the US, Canada, Japan, Austria and the Netherlands,
stated: “For
SMEs, the UK system is widely regarded as the most generous and the
simplest to
administer”.
Mr.
Hoban: I am grateful for the Minister’s response.
He is right to highlight the nature of the survey by the Institute of
Chartered Accountants, which acted almost as a focus group in the way
it carried out its work. Hon. Members on both sides of the Committee
are aware of focus groups and the role that they play in modern
politics. Perhaps the ICA should not be criticised for adopting the
techniques with which so many of us are
familiar. So that the
Committee is clear about the structure of the survey, 10 businesses
were involved in R and D and five people who were interviewed were
involved in manufacturing. Any manufacturing business today that does
not invest in R and D is likely to suffer from the competitive
challenge posed by India, China and eastern Europe. It is entirely
reasonable to discuss with businesses their experience of R and D. I do
not necessarily concur with the Financial Secretary that it is a myth
that it is costly to claim, as there are issues that affect the cost of
claims that the Government should think about and it is helpful to keep
the system under regular review.
I say to the hon. Member for
Wolverhampton, South-West that I wish the Standing Orders had allowed
us to discuss new clause 5 to capture his mood of co-operation and
harmony. I am pleased that he expressed support for a simpler tax
system and I am sure he will warmly welcome the outcome of the Tax
Reform Commission’s report on simplification later this year,
which will contain much for him to comment on positively.
The hon. Gentleman is perhaps
right to say that the date of the review should be moved backwards. I
hope that the system of dedicated units will be evaluated as they are
rolled out, rather than waiting until the full roll-out is completed
across the country. I will not be
setting the terms of the review as I do not expect to become Chancellor
of the Exchequer shortly, but I am sure that the Chancellor will take
note of the hon. Gentleman’s comments. The hon. Member for Dundee,
East (Stewart Hosie) made a valid point about the complexity of the
support on offer to businesses investing in R and D and taking up new
developments. A theme taken up by businesses in my constituency and
expressed to me is that there are several different means of support as
well as R and D tax credit and that it can be difficult to navigate
their way around
them. Question put
and agreed
to. Schedule 3
agreed
to.
Clause
30Temporary
increase in amount of first-year allowances for small
enterprises
Julia
Goldsworthy: I beg to move amendmentNo. 60, in
page 28, line 20 [Vol 1], leave out ‘12' and insert
‘24'.
The
Chairman: With this it will be convenient to discuss
amendment No. 61, in page 28, line 31 [Vol 1], leave out from
‘in' to end of line 32 and
insert ‘2006-08 or financial year
2006 and
2007.”.'.
Julia
Goldsworthy: These are probing amendments that consider
the rationale behind the proposed changes to the time scale that apply
to the increased amount of allowances for small enterprises. The clause
proposes a temporary change to the first-year allowance of one year,
which the amendment would extend to two years in order to try to
understand the rationale for increasing the allowance to one year.
Could the Financial Secretary explain how small businesses will be
capable of responding to these relatively small and rapid changes? If
the change proposed is introduced, the allowance will have changed from
year to year in four consecutive years. I have received many
representations from people who feel that the changes add to the
regulatory uncertainty and
the— It
being One o’clock, The
Chairman adjourned the Committee without
Question put, pursuant to the Standing
Order. Adjourned
till this day at half-past Four
o’clock.
| 
