Clause
25
Companies
in difficulty: SME R&D relief and vaccine research
relief
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
I wish to ask some brief questions about the clause
and follow the precedent set under the previous clause and address them
equally to schedule 9. SMEs in difficulty will no longer be able to
apply for R and D relief and vaccine research relief. The
clause requires them to be going concerns. If a company is in
difficulty, but has a legitimate expectation of succeeding, why should
it not be able to claim R and D relief and vaccine research relief?
Directors are personally liable for trading while insolvent, so why is
that not sufficient to prevent companies from claiming if they are in
difficulty? Within VAT regulations, there is already a regime that
restricts what companies may do so that they are not insolvent or in
liquidation. Why should the test be that they are a going concern, as
opposed to not being insolvent or in
liquidation?
Does
the Minister consider that the clause will affect many companies?
Perhaps she can give an historical analysis of any companies that have
claimed R and D or VRR, when they were not a going concern. Having
asked for an analysis, however, we must appreciate that the economic
conditions might be somewhat bumpy, to use the words that the Governor
of the Bank of England used yesterday. In a downturn in the economy,
the provision might become increasingly important. The main point is
that the last accounts show that the company is a going concern. Does
the Minister anticipate that some companies may be seeking to make
applications for R and D relief or vaccine research relief slightly
earlier in the process than they would otherwise do in order to ensure
that they put the applications in before accounts are
published?
A point
made, perhaps not surprisingly, by the Institute of Chartered
Accountants in England and Wales is that the measure may create certain
pressures on auditors, who may be placed in a slightly more responsible
position than they were previously. Does the Minister think that that
an issue of any concern?
My main concern is: why is the
clause particular? Was there not an alternative formulation on the
basis of companies not being insolvent or in liquidation that would
have perhaps been clearer for companies and perhaps not distort
behaviour, as there may be a danger that this clause and schedule will
do?
Kitty
Ussher:
The hon. Gentleman gets to the point in his
questions and I am grateful to him for that. Perhaps I can explain why
these changes are being introduced, which will answer his questions.
During the notification of changes announced in the 2006 and 2007
Budgets, the EU introduced a new framework for state aid for research,
development and innovation. That has led to a longer notification
process than might otherwise have occurred and the Commission has
looked more at the fundamentals of the scheme and how they comply with
the framework.
One of the
requirements is that state aid should not be used to support firms that
are in need of rescuing or restructuring, which this measure meets.
Recent examples from elsewhere in Europe have seen illegal aids
challenged and withdrawn. Therefore, it is obviously in our interest to
make sure that we meet the requirements of the framework, which we are
now seeking to do.
Tax
relief is designed to encourage and support companies to invest in and
undertake R and D. If a company is no longer a going concern any tax
relief paid to it will be used to meet creditor liabilities rather than
being used to invest in and undertake R and D. That is effectively
British taxpayers’ money and should not happen. A company must
make a claim for R and D relief in its annual tax return and in doing
so must consider its eligibility, including the eligibility criteria
around a going concern, in line with the scheme rules. If that places
an extra burden on auditors, that is not necessarily a bad thing. I
welcome my relationship with the ICAEW. Auditors need to exercise their
duties with responsibility. We can keep talking about that perhaps.
I hope that that
answers the hon. Gentleman’s questions.
Question put and agreed
to.
Clause 25
ordered to stand part of the
Bill.
Schedule 9
agreed to.
Clause
26
Cap
on R&D
aid
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
Clause 26 places a cap of €7.5 million on
research and development aid on particular projects. I have a few
questions for the Minister, in order to understand the reasons behind
the clause and also to ask whether it will impose an additional
bureaucratic burden on firms. I will start with the second
point.
I understand
that there are different rules as far as the relief is concerned for
research and development for small and medium-sized enterprises and
larger companies. In calculating the cost of a particular project, as I
understand it, under clause 26 it will be necessary for an SME to
calculate the various reliefs and tax credits that it has received in
respect of that project, both under the
rules that apply to SMEs and those that apply to larger companies, to
ensure that the cap threshold is not exceeded. Is that a correct
interpretation of what clause 26 will require? Does the Minister think
that that is a burden that may create
difficulties? I
believe that the Treasury assessment is that this particular cap is
likely to affect only 25 companies. However, given that the definition
of SME is being extended—a point that I raised a moment
ago—is it possible that it may apply more widely than that? In
addition to the complexity, my other concern is with regard to clause
26(1), which states
that:
“A company
is only entitled to R&D relief in respect of expenditure
attributable to a research and development project”.
It goes on to
set out the limits. However, what constitutes a research and
development project? I do not think that there is any further
definition. If one can break up a project into different elements and
define it in that way, the cap will be ineffective. Is there a commonly
accepted definition of a project? If there is not, it is an ineffective
clause, given what it is intended to
do.
What
is the Government’s intention in this area and why are they
introducing the clause? I believe that it is to comply with EU state
aid rules. That may not be a surprise to you, Sir Nicholas. Could we
have some clarification as to precisely why the Government are
introducing the cap? If relief for research and development is a good
thing, why is it only a good thing up to a certain amount? I seek the
Minister‘s clarification on those
issues.
Kitty
Ussher:
In answer to the hon.
Gentleman’s final point, as with clause 25 and schedule 9,
clause 26 is concerned with ensuring that the SME R and D tax credit
and vaccine research relief continue to meet the requirements of the
European framework for state aid for research, development and
innovation. The clause introduces a cap on the amount of aid that
companies can claim under the SME R and D tax credit and VRR schemes in
respect of any one R and D project. That is because the EU’s
framework requires that aid of more than €7.5 million needs to
be notified to the Commission separately and the incentive effect of
the aid shown. The Government believe that that would place a
significant administrative burden on businesses and seriously reduce
their certainty. If the incentive could not be demonstrated, all the
aid would be disallowed, not just the aid over €7.5
million.
A cap, which
applies to each project, is administratively less burdensome and gives
more certainly to claimants where their project is not close to
reaching that level of aid. We do not think that the changes will
affect many of the 5,000 companies that claim each year for the
reliefs. An alternative to introducing the cap would have been to
require companies claiming more than €7.5 million in aid in
respect of a particular project to individually notify that aid and its
effect on their R and D expenditure to the European Commission. I am
sure that Opposition Members and, if I may dare add, perhaps even
yourself, Sir Nicholas, would not have approved of that. It would have
resulted in considerably less certainty and more administrative
complexity for claimants. That is why we are proposing to do it in this
way—precisely for the reasons that the hon. Gentleman
mentioned.
No single
claimant has yet come close to claiming €7.5 million. The
estimate of the number of companies
takes into account the extension to medium-sized companies. Companies
would need to make a calculation only if they came close to that
cap. 3.15
pm
We
have, of course, undertaken and published an impact assessment on that
measure. The hon. Gentleman the Member for South-West Hertfordshire
asked whether the measure was burdensome. I have explained that it is
the most efficient way to do this. The impact assessment published with
this year’s Budget estimated that the impact of the change would
be an additional total cost of £12,500 per year, for all the
companies affected. I am sure that the hon. Gentleman will realise that
that is a small amount per firm. I hope that that answers his
questions.
Mr.
Gauke:
The definition of
“project”?
Kitty
Ussher:
I will have to come back to the hon. Gentleman on
that.
Mr.
Gauke:
I do not know whether the Economic Secretary, with
time to think further on the matter, will be able to enlighten the
Committee a little more on the definition of “project”,
or indeed whether her guidance could be written more slowly and
therefore more legibly. My point is important, as that seems to be a
way in which the cap—I accept her points—might be
avoided.
Kitty
Ussher:
I shall ensure that my guidance is written slowly
and legibly and sent to the hon.
Gentleman.
Question
put and agreed
to.
Clause 26
ordered to stand part of the
Bill.
Schedule
10
agreed
to.
Clause
27
Vaccine
research relief: declaration about effect of
relief
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
Clause 27 requires claimants of vaccine research
relief to make a declaration about the effects of that relief. That
declaration would state that the relief resulted in more expenditure on
research and development. I simplify, but that is the
gist.
I
would be grateful if the Economic Secretary confirmed the purpose of
the clause. Again, I think that the answer is, to comply with EU state
aid obligations. This point applies equally to clause 26. Will the
Government provide some reassurance that the UK will not be at a
competitive disadvantage, and that other member states either do not
have the research and development regime that we have or are required
to have in place the same restrictions and requirements that appear in
clauses 26 and
27?
There
is a curious requirement in the UK that a declaration must be made that
research and development has increased as a result of the reliefs
provided. I do not know whether there are any precedents, and whether
recipients of tax reliefs in other areas are required to make a
declaration. If there are, I would be grateful if the Economic
Secretary informed the Committee. How such a declaration would be
enforced and assessed raises one or two questions. Will recipients of
tax relief for research and development have to produce evidence to
support their declaration? What sort of evidence would be expected?
Will Her Majesty’s Revenue and Customs police the declarations?
Will HMRC seek to review whether the declarations are correct? If it
does, how will it make that assessment, and what will happen if it
comes to a view that is different from that of the recipient? Or will
it be the case that as long as the recipient says the words that are
required, that is the end of the matter and there will be no further
investigation? Is the declaration intended to cause an increase in the
amount claimed for vaccine research relief, or will it increase the
amount of vaccine research carried out? In view of the declaration,
will companies change their behaviour and do more research, so that we
see greater spending? I am not aware of other parts of
the tax system in which recipients of relief make a statement of this
sort. Do the Government consider this a precedent that could be used in
other areas? Will future Finance Bills contain divisions whereby
companies make such statements? It is not entirely clear what the
purpose of such a declaration is other than, once again, satisfying the
EU state aid rules, and I would be grateful if the Minister provided
some clarification.
Kitty
Ussher:
Perhaps I can help the hon. Gentleman by setting
out a little context. Vaccine research relief is a closely targeted
scheme providing extra incentives, on top of R and D tax
credits, for research and development into vaccines and medicine for
the prevention and treatment of TB, malaria, HIV and certain types of
AIDS, which occur predominantly in the developing world. Such a
specialised scheme will, by its nature, have a small take-up. Because
it is a new scheme, and given the time lags inherent in the tax system
and the small number of large companies that make claims, there
is insufficient evidence—we
have only anecdotal evidence—to demonstrate the incentive effect
of the scheme as a whole. We cannot demonstrate the necessary incentive
effect to the European Commission at this point, because we are at an
early stage.
That is
why we have introduced this self-declaration system, which applies only
to large companies. We presume that the additional administrative
burden is miniscule, and we do not think that it will have an incentive
effect for or against incurring the actual spend in the first place. We
anticipate that in due course there will be sufficient time-series data
to make our own evaluation, and it may be possible to return to the
Committee and say that the measure is no longer required. For the
moment, we feel that it is the simplest way to ensure that we do not
end up in complicated proceedings against the European
Commission.
That
answers the point about whether this puts us at a competitive
disadvantage—absolutely not. Every country is subject to the
same framework. To give some context, the Spanish Government recently
lost a case at the European Court of Justice because their R and D tax
credit system was in breach of European rules. We think that by doing
this simple thing, we can ensure that we are not in that situation with
vaccine research relief. On the contrary, by having a European state
aid-approved system like VRR, our companies will be at a comparative
advantage, and that is obviously in the interests of all.
Question put and agreed
to.
Clause 27
ordered to stand part of the Bill.
The
Chairman:
May I express the hope that all members of the
Committee will have a fulfilling and restful weekend, that the weather
improves for the test match and that you begin next week refreshed? The
Committee is adjourned until 10.30 am next Tuesday, when I will not be
in the Chair as I shall be in Taiwan. My fellow Chairmen will be
standing in for me very well as they always do.
Further consideration
adjourned.—[Mr.
Blizzard.]
Adjourned
accordingly at twenty-four minutes past Three o’clock till
Tuesday 20 May at half-past Ten
o’clock.
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