Clause 20 - Relief for expenditure on R and D

Finance Bill – in a Public Bill Committee am 11:30 am ar 12 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley 11:30, 12 Mehefin 2012

I beg to move amendment 32, in clause 20, page 12, line 3, at end add—

‘(2) The Chancellor of the Exchequer shall review the extent to which intellectual property created as a result of research and development expenditure which falls within Part 13 of CTA 2009 is vested in companies whose income is not within the charge to corporation tax, and place a copy of the report in the House of Commons Library.’.

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

With this it will be convenient to discuss the following:

Clause stand part.

That schedule 3 be the Third schedule to the Bill.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I do not propose to take up much of the Committee’s time with amendment 32. We have just seen the Government’s carrot to encourage businesses to hold IP in the UK, and we all understand why it is important for our economy to be based on such knowledge and on the high-tech sector. Clause 20 and schedule 3 demonstrate the Government’s other angle of trying further to encourage businesses to enter into research and development, in the hope that we will end up with valuable IP that is owned in the UK and creates jobs in our businesses.

The purpose of amendment 32, on which I suspect I will not test the Committee’s view, is to ask whether there is a risk that R and D tax credits and incentives will effectively incentivise offshore entities to have their research done in the UK without the valuable IP that may result being owned in the UK and generating tax receipts. I am not sure from a public policy perspective that that is what we are trying to achieve. We want that valuable IP to be owned in the UK and to create jobs and tax revenues here, not in Switzerland or somewhere else.

Through amendment 32, I want to ask whether the Minister is aware that that might be a problem. I believe the rules allow an offshore company to contract with a UK company to have research done here, with the clear proviso that any fruits of that labour will be owned by the company that commissions the research, not the one that carries it out. That has been a constant theme throughout the R and D rules, certainly for large companies. Originally, for small and medium-sized companies, the company that claimed the credit had to own the resultant IP. I am not asking for that, but I am asking that the IP be effectively owned in the UK, or at least that the income that it generates is within the charge to UK tax.

In a time of fiscal constraint it is difficult for people to understand why we would want to incentivise offshore companies to have their R and D done in the UK but allow them to own the valuable assets that result, keep them offshore and not pay UK tax on them. If such companies own the assets offshore, I suppose there might still be an attraction to the research being done in the UK; we would get value from that because our science base is used and we get the income and the tax flows from having the work done in the UK. I am not totally convinced, however. If I were a big Swiss company spending millions on research, I would want that research to be done by the best scientists who had the best chance of producing a valuable product, which I could sell to make back the millions I have spent on that research. I suspect that I would choose the best researchers who were most likely to produce some valuable output. If that happens to be people in the UK, which I am sure it is in many cases, I am not sure that the existence of this tax credit will make a material difference to where I choose to have that work done. The other argument might be that if we do not do this, all our valuable scientists might emigrate to Zug or the Cayman Islands, effectively to get the people commissioning that work the tax credit there.

I suspect that if I were a very successful, highly desired scientist—which I am not—and I wanted to go to Zug, I could probably pay a third of the income tax I would pay in the UK. So if I move there for tax advantages, I might do it for my own advantage rather than my employer’s. If I have not done it for my own sake, I am not sure that this little 3% on the bottom end would make that difference. We now have the carrot in place for people to have their IP owned in the UK. It is clearly right that we do everything we can to encourage people to do that research, for our businesses to do that, and to get those new products and new and exciting things owned in the UK. But should we be incentivising them to do that work in the UK if that product is not owned here should they be successful in that research?

Photo of John Mann John Mann Llafur, Bassetlaw 11:45, 12 Mehefin 2012

I congratulate the hon. Member for Amber Valley on his boldness in tabling what may well be a probing amendment. He is the only Conservative Back Bencher who has had the courage and wisdom even to question something in the Bill so far. It is quite extraordinary how we do our politics, and that this is the way things tend to be done. The advice that I would give, having pursued many of my own amendments in previous Bill Committees, is that doggedness in pursuing the right argument through a range of different methods can often have positive results. It needs a lot of pressure on Ministers and a recognition that the role of Whips is not to tell us what to do but simply to advise us what the business might be over the next few weeks so that we can schedule our time more effectively. I look forward to the hon. Gentleman, as I was, being appointed to the Unopposed Bill Committee, which meets in strange places and strange ways to deal with things that no one else ever wants to discuss.

I share the hon. Gentleman’s concerns, although I do not necessarily agree with some of the angles he views this from. The fundamental weakness in the way we have tried to develop innovation in this country, going  back over many Governments and probably two generations, is our attempt to compartmentalise it. That is the weakness of what the Government are doing here. There is one paragraph in the schedule which is helpful and which I fully support. But compartmentalising in the hope of getting something is a fundamental weakness with unforeseen consequences. The hon. Member for Amber Valley highlights a major one.

Back in the 1980s, we were ahead of the world in some of the creative industries, and we got nowhere. A good example was interactive video. I myself was involved on the periphery. I won the top world award for interactive video in 1988 as a project leader. Britain was in the lead in the technologies that were available then, but within a decade we had totally lost that lead. We lost out on everything—CDs, DVDs, 3D and the rest. But we lost out on the technological lead. Part of the problem was then that it was very old style. It was Government grants then. The problem with Government grants was not that they were not helpful but that they were project based. That was not good enough to create innovation. One could apply existing knowledge to a project base; that is part of the danger of compartmentalising. What I would like to see from Government and my own party is innovation around enterprise zones. For example, I would like to see Sheffield city region, of which my constituency is part, zoned as a whole. I do not want people shifting their business from one piece of land in the region to another, so that my area battles—we have particularly good pieces of land available—against the other side of Sheffield city region, almost the M1 versus the A1. Which bit of land should be incentivised?

Frankly, the good business entrepreneur with a good idea will pick the cheapest bit of land. It is a marginal impact, though I do not discount the fact that sometimes that can be important. Usually, it is not. Far more significant would be an overall cohesive policy that links to the research base of the universities, with a long-term plan that ties in those investors. The plan should say, “Here is the establishment in the universities; here is what we are prepared to give you. You come and dictate some of the way in which that goes forward, not just for next year but for the next decade and beyond.” That way, we can begin to create some of the world-leading and, therefore, innovative and patented developments.

In sports technologies, this country and Sheffield are ahead of the world. However, there is a knowledge gap in development of the next phase of marketable products. There is a requirement for innovation that also links to health products; for instance, how to apply the latest digital technology to health or sports performance. How can that be marketed as a saleable product? That time is clearly going to come; there will be a requirement for brilliance in innovation. We do not tie those things together in this country. Sheffield city region is a perfect example of where zoning could work; all work in that ambit would get the various Government incentives. One could, for example, see the city of Cambridge and its hinterland and other areas getting a specific advantage, giving us the concept that the university and its resources are there to back potential winners, similar to the way that Silicon valley was conceptualised around Stanford university.

That can involve a few risks, but on the back of that those companies get wedded into the area because of the creative atmosphere and environment. Why would  they move elsewhere if they are settled in an area? It is the source of intellectual stimulus. That is how Silicon valley managed to succeed. We have rather missed the point. I am clear that that has occurred across successive Governments. I am not simply criticising this Government, although I am criticising them to this extent: the irony of the last debate was that it was about who should take the most responsibility for a rather old-fashioned view of patenting. Should it be the previous Labour Government or the current coalition?

With this schedule we are in the same mindset: it is far too limited. That is why in a range of technologies—digital technology is another example—this country was, not in the lead but catching up, and then fell well behind. Others developed the technology. Take the microphones we have in this room: we were world leaders. Tannoy and Auditel were world leaders.

When it came to the shift to digital, we did not put in the investment, because all we did was offer around small grants. That was a fundamental weakness in the British approach. Having said that, I will commend one small aspect, as I understand it, of what the Government have done in the Bill. They have removed the de minimis opportunity for the micro-business. I used the example of digital technology. My family’s company was the first importer of digital microphones into this country. A number of adaptations could have been done that might have beaten the patent test for the big multinationals that had developed the technology, and that would have allowed us to experiment and create some bespoke technology. One needed to experiment. Even if the micro-business understands what is going on, it cannot suddenly say, “Here’s £10,000 for research and development this year, and another £10,000 for next year.” That is what is required to pay the rates bills and other bills to keep the business afloat.

Once a company is big and successful, it has more ability to speculate, but often the micro-business will hit on the crest of the wave of where the technology is going. That was the example in Silicon valley, where the ultra micro-business suddenly realised that there was a way forward. It was not a case of blue-sky thinking— “I’m going to invent something that no one’s ever thought of”—but a case of seeing what was there and adapting the technology. That is how real innovations take place. That is real entrepreneurship. We in this country are not creating the space to allow that to happen so, for the sake of the nation and our manufacturing and innovation, it would be a good idea for the Government to be honest in reporting back the successes and the failures and how they work.

What the Government are doing for the real entrepreneurs and innovators is far too limited. They are using the same mindset as the previous Labour Government, which used the same mindset as the Major Government. We could go back to the ‘70s. We could almost say that this is Wilsonian in its style. In my view, that is a weakness that we have to break. We are looking at too many bits and pieces rather than taking a bigger, calculated gamble. I would like to see the Government come forward—it may not happen in an amendment to the Bill—with greater boldness. Therefore, I commend the hon. Member for Amber Valley, who, after the boundary changes, may or may not be my neighbour if  Bolsover goes in with him. However, in a spirit of generosity, one should work with potential neighbours—if we are both successful. I commend him on his boldness, and I encourage others to come forward with their own amendments, because the Government, strangely, do not have and never have all the answers. There will be some, even on the Back Benches of the Houses of Parliament, who have good ideas to put forward. I congratulate the hon. Gentleman.

Photo of Grahame Morris Grahame Morris Llafur, Easington

It is a pleasure to serve under your chairmanship once again, Mr Bone. I want to echo the sentiments of my hon. Friend the Member for Bassetlaw and compliment the hon. Member for Amber Valley on having the strength of character to put forward a probing amendment. It raises interesting questions. After all, our role in Committee is to scrutinise the Government’s proposals, so I would like to pose a series of questions to the Minister, not least to seek clarification on how we are to define research and development. My hon. Friend mentioned particular niche industries. Clearly, Labour members of the Committee agree that one of the keys to success is investment in research and development, which is a vital part of our UK economy and ensures international competitiveness.

Will the Minister explain what R and D covers, because there seems to be a broad definition? I can fully understand how important it is to come up with a system that will support research and development. It is important for business, but it is also important that it is simple for HMRC to administer this particular proposal.

Will the Minister confirm whether the measure is part of the plan to boost growth? When will the changes come into effect? Are they to be implemented on 1 April 2013? I understand from reading the Government’s consultation document that the Chancellor announced in the Autumn statement last year that the Government intended to introduce an above-the-line research and development credit in 2013 to encourage research and development by larger companies. I also understand that the proposal is to encourage research and development from small and medium-sized enterprises.

I fully accept and agree with the proposal in the consultation document, which indicates that the UK Government

“is committed to putting research, development and innovation at the heart of its growth agenda and ensuring that the UK provides an internationally competitive environment for all companies to innovate.”

However, I would be interested to know which particular companies the Government feel are likely to benefit most from the tax relief. According to the Office for National Statistics, in the UK economy £26 billion a year is spent on research and development and only 12% of that is from Government, non-profit or research councils. Allowing relief for that seems to be a common-sense approach that the Opposition would support. It is also a good idea to allow small businesses to benefit more from research and development relief, so scrapping the £10,000 limit is welcome.

There are, however, some problems. There is a real worry that if the chief beneficiaries are likely to be large multinationals, the measure could be seen as a tax cut for such organisations. It is important to ascertain the  details of the relief proposed in the clause. My concern is that the definition of what constitutes research and development is too loosely applied. For example, we would normally assume that oil and gas exploration is fairly speculative, but could it be counted as research and development? One would assume that it constituted a profit-seeking endeavour. It is not an attempt to refine a process or to improve sustainability or efficiency, which are what we would normally assume to be research and development objectives.

At present, the ONS and the Government use a very loose OECD definition of what constitutes research and development. Has the Minister considered tightening up that definition? It currently allows for manipulation by accountants by the shifting of incurred costs through normal processes or the day-to-day functioning of business into the research and development category. I would welcome any clarification that the Minister is willing to give.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education) 12:00, 12 Mehefin 2012

I join my hon. Friend in commending the hon. Member for Amber Valley for tabling this probing amendment and for raising some of the important issues that the Government need to consider in terms of their research and development investment strategy.

I want to talk briefly about clause 20 and schedule 3 and tax relief for expenditure on research and development. My hon. Friend the Member for Easington raised some queries about the clause, but it does make some important changes to the existing relief and it is vital that those changes are measured against the level of impact that they have on decisions made by businesses to invest in research and development—particularly here in the UK. The hon. Member for Amber Valley made a point about the importance of measuring that value to the UK economy. It boils down to how many jobs will be created in the UK by the relief that is afforded. I am interested to hear from the Minister what consideration has been given to the queries raised by the hon. Member for Amber Valley. How will the Government ensure that the investment is properly targeted on the UK economy and on how such investment will benefit it?

Paragraph 2(5) of schedule 3 will cut the rate at which losses can be surrendered for the payable tax credit from 12.5% to 11%, which follows a reduction from 14% to 12.5% in the Finance Act 2011. The explanatory notes state that that is required

“to keep the value of the relief within the 25 per cent. threshold set out in EU State aid rules.”

Will the Minister elaborate further and explain its significance in more detail? Does it mean that some businesses will be worse off and, if so, what estimate does he make of the overall impact of the reduction? Does it mean that some businesses will not be helped as much as was implied in the 2011 Budget? Will he clarify the impact on loss-making businesses?

Some of the changes set out in the schedule are certainly welcome. The Institute of Chartered Accountants in England and Wales has stated that scrapping the minimum spend of £10,000 will help more small businesses to take advantage of the relief. We know how important it is to provide support for small businesses and how little the Budget offered them, so the change is particularly welcome in that context. I would be grateful if the  Minister provided us with more details. How many additional businesses does he estimate will be able to benefit from the relief, following the abolition of the minimum expenditure rule?

As I mentioned earlier, in his autumn statement, the Chancellor announced that the Government intended to introduce an above-the-line R and D tax credit in next year’s Finance Bill, which will encourage R and D activity by larger companies. My hon. Friend the Member for Bassetlaw made a passionate case for attracting businesses to invest in research and development in this country. The above-the-line R and D tax credit is certainly a welcome step in that direction, because it will put the clear financial benefits of such investment into the hands of decision makers, which will make it easier for companies to conclude that investment in research and development in the UK would be positive and viable. We welcome the commitment that small and medium-sized enterprise R and D incentives will not be reduced by that change. Will the Minister comment, if he can, on the interaction between the two reliefs?

My final point relates to how research and development fits into the broader context of manufacturing and the overall investment process. Under clause 19, we talked about the patent box, which will provide companies with a clear incentive to invest in research that leads to patents and to the benefits from the new tax reliefs. We have also discussed the R and D tax reliefs that will arise from such research and development. However, one concern is that those reliefs will be paid for by the removal of the manufacturing investment allowances. In some respects for some businesses, that will rip out the core of how they turn research and development projects—the patents that they eventually acquire—into working, viable manufacturing businesses.

Today, we have received the shocking news that manufacturing output has actually fallen. The Office for National Statistics figures—April’s figures came out today—show a 0.7% drop in manufacturing output in April, which is a huge concern and needs to be considered in light of the patent box support and the R and D tax credits that are being provided, but, by the same token, also in light of the manufacturing investment allowance, which was taken away in the last Budget and which we will be seeing the effects of from this year. The Government need to look at their proposals in the round, because, while the individual measures are welcome, when they are looked at in totality, many businesses, particularly small ones, are left without the incentive to invest in manufacturing capability.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

Does my hon. Friend agree that it is particularly concerning that the ONS has commented that the manufacturing data has been

“dragged lower by falls in pharmaceutical products and preparations, as well as in other manufacturing and repair”?

Those are exactly the kind of areas that we need to ensure that we support.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I absolutely agree. One of the points that has been made about the patent box—the pharmaceutical industry has particularly welcomed the patent box—is that it will not benefit the companies that manufacture pharmaceutical products here. It will encourage research and development, but we need to  ensure that the incentives are there for companies to invest in their manufacturing capability. The pharmaceutical industry is one that I feel particularly keenly about, because Sanofi Aventis is based in my constituency and recently announced that it would close its manufacturing centre there. These are the types of businesses that need the incentive to invest and enable Britain to start making and building more things, and to move into growth, and these are the kinds of things that are being removed with this Budget. While giving with one hand, with R and D tax credits and the patent box, the Government are at risk of stifling the investment that is required to transform that process into actual manufacturing capability. The ONS figures released today are deeply concerning, and I hope that the Government take on board the major concerns that are being expressed, in the Committee and outside, about our manufacturing capabilities.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 20 makes changes to improve and simplify a number of the rules governing tax relief for expenditure on research and development, particularly for SMEs. These changes will improve the competitiveness of the UK tax system by increasing the incentive for companies to carry out R and D in the UK. That will boost productivity and growth, with targeted support for young and innovative businesses as they grow. In November 2010, we opened a consultation with business on ways to enhance further the R and D tax relief schemes for large businesses and for SMEs. Larger businesses favour changing the way in which R and D relief is given and want to move to an above-the-line credit. That will increase the profile of UK R and D activities, particularly in multinational groups, by changing the relief from a deduction against profits to a credit that directly reduces R and D costs in company accounts.

As my right hon. Friend the Chancellor announced in the Budget, we will be introducing this change in Finance Bill 2013, following consultation on its design. Smaller companies, however, were far more concerned with improving the current scheme. They wanted more relief, and the removal of some of the barriers to benefiting from the scheme. The clause addresses those concerns.

The changes that the clause makes will increase the rate at which tax relief is given to over 7,000 companies that claim under the small company R and D scheme, from 200% of qualifying expenditure to 225%. As that rate of relief increases, state aid considerations require us to reduce the proportion of that relief that can be paid to loss-making companies in the SME scheme, so the payable tax credit rate for loss makers who wish to surrender some of their tax losses reduces from 12.5% to 11 %. It is worth pointing out that no business will be worse off from the change in rates, which is balanced by the reduction in the corporation tax rate, which is beneficial. I hope that that provides some reassurance to the Committee.

Clause 20 also widens access to the R and D scheme. Government assistance is particularly important for the smallest companies that are just starting out on the road to growth and creating employment. We have recognised that by abolishing the £10,000 minimum  expenditure for R and D tax credit claims. Smaller growing companies are also more likely to subcontract elements of their R and D activities to third parties if their own employee base is too small to manage all of a project. We are therefore removing the cap on the amount of relief that they can obtain by way of a payable tax credit when they make a loss. Previously, that could not exceed the amount that a company paid in PAYE tax and national insurance contributions for its employees.

In a related area, we have also widened the scope of the relief so that it is available for all expenditure on externally provided research workers, rather than just those supplied directly by a single intermediary.

Perhaps I could speak about the going concern test. We have made a change to ensure that taxpayer support is not wasted on failing companies by clarifying the condition requiring a company to be a going concern at the time it makes a claim. In future, a loss-making company that is in liquidation or administration will not be eligible to claim R and D relief by way of a payable tax credit.

Finally, one minor technical change has been made to the draft legislation issued for consultation last December to ensure that the provision on externally provided workers is clear.

Before turning to the amendment, I will pick up some of the points raised by hon. Members. The hon. Member for Easington raised the definition of R and D in the context of R and D relief. The current definition for tax purposes is set out in the 2004 guidelines issued by the Department for Business, Innovation and Skills. It includes those aspects of design intrinsic to R and D, including product development activities, when that involves making advances in science or technology to overcome the scientific or technological uncertainty.

Which companies will benefit? Most of the changes in these measures will benefit small and medium enterprises rather than large companies, and will focus on R and D. The hon. Gentleman asked about oil and gas exploration, and that is not excluded in the definition of R and D for these purposes. He also asked about the date of introduction. The changes that we are debating today will be introduced from April 2012. The above-the-line R and D credit for larger businesses, on which we are currently consulting, will be introduced in next year’s Finance Bill, in effect from April 2013. We all look forward to the opportunity to debate those measures next year.

Turning to amendment 32, tabled by my hon. Friend the Member for Amber Valley, I understand that he is worried that the taxpayer is supporting the development of intellectual property which ends up in the hands of companies outside our jurisdiction. He may prefer us to support only those companies whose R and D activities are aimed at creating intellectual property that will remain in the UK. Any change of that nature would deny R and D tax credits to companies undertaking R and D for a client that will own any IP created, but whose income is not subject to corporation tax. I certainly sympathise with my hon. Friend’s concerns, but I believe that any move in that direction would be ineffective, and would result in the denial of relief to claimants that we all want to continue to support. In particular, such a change would certainly be detrimental to the UK’s thriving contract research sector. Such companies conduct  R and D as the central activity of their business, and are significant contributors to the UK’s invisible exports of services such as pharmaceuticals and defence. They work for clients who are generally unrelated parties and will often not take ownership of any intellectual property created in the course of their work. Such a change would be more likely to reduce both inward investment into the UK and our invisible exports in R and D services, through a reduction in the level of R and D carried on here by and for multinational enterprises.

Any move to restrict who can claim tax credits based on where the ultimate client is situated may not be compliant with the UK’s obligations under the EU treaty. Doing so would seem to treat work carried out for a domestic client more favourably than for a client based in another member state, potentially inhibiting cross-border trade in R and D services within the European Union.

Photo of John Mann John Mann Llafur, Bassetlaw 12:15, 12 Mehefin 2012

I am listening carefully. May I just confirm that we are not able to do what we might choose in respect of our R and D tax policy because of EU law? Which piece of EU law did a previous Government agree that restricts our ability to determine what we do today?

Photo of David Gauke David Gauke The Exchequer Secretary

Were we to modify our R and D tax credit regime in such a way as to discriminate against companies that hold patents and intellectual property in another part of the European Union, that would potentially inhibit cross-border trade in R and D services and could breach our single market obligations. That is where the amendment could bite. We in the Government do not think that we should make such a restriction, but if we did we would run into difficulties with some of the fundamental freedoms in providing cross-border services.

Photo of John Mann John Mann Llafur, Bassetlaw

The Minister seems to suggest that the relevant legislation is the Single European Act, signed by Mrs Thatcher in 1986, but I want to clarify that. It has long been a principle that we in this country should be free to set our own taxation without the European Union interfering. The Minister is giving a clear example of the EU dictating to the Committee, Parliament and the Government that we cannot set a tax that we want to set because a previous Conservative Government signed a European Act. The public need to be clear and we Committee members need to be clear, for the record, that that is what the Minister is saying.

Photo of David Gauke David Gauke The Exchequer Secretary

That fundamental freedom is contained in the EU treaty—essentially, the constitution that was not a constitution. I recall members of my party voting against that EU treaty and the Act that brought it in. My memory fails to recall whether I saw the hon. Member for Bassetlaw in the Lobby with us. I am sure that he will tell me if he was not.

Photo of John Mann John Mann Llafur, Bassetlaw

Unfortunately, when the Single European Act was voted through by the Conservative Government, I was not present because I had not yet been elected. I shall ask the Minister my question again, because I am not getting clarity. He used the word “freedoms”. Does he think it might be wise to strike that from the record, because he is saying that there is a lack of freedom for the Committee to determine our taxation policy on R and D for businesses, owing to what the European  Union dictates? For the record, we need to be clear that that is what the Government are proposing and what the Minister is recommending to us with the clause.

Photo of David Gauke David Gauke The Exchequer Secretary

The expression “fundamental freedoms”, if I remember correctly, comes from the EU treaty voted through by the previous Parliament, when both the hon. Gentleman and I were Members of this place. We have heard him make many speeches during our debates about how Whips are present to provide advice, but I seem to recall that in the previous Parliament he followed the advice of his party’s Whips and voted in favour of that EU treaty.

Photo of John Mann John Mann Llafur, Bassetlaw

To my knowledge, I have not voted in favour of anything that restricts the right of Parliament to set taxation law. When I have asked questions, the ability to set our own taxation has always been stated to be a principle. The Minister is unable or unwilling to confirm precisely which Act we are talking about; if it is the Single European Act, we are going back some considerable time. If that is the Act that we need to amend to give the House, and the British people through us, the right to set our own taxation policy, we need to be clear. The issue is not a minor one—it may be minor in the context of one clause in the Bill, but it is not minor in terms of the responsibilities of the Bill Committee to Parliament. Parliament will want to know if its rights to set taxation law is being impinged upon by the European Union. If so, it will want to know not vague references but precisely which bit of European legislation restricts our right as a Committee when we report to Parliament to set taxation law as it relates to R and D and support for business. I am not hearing an answer.

Photo of David Gauke David Gauke The Exchequer Secretary

I shall make another attempt. In the previous Parliament, the various EU treaties and the powers under them were consolidated into a single EU treaty that was then enacted. So there is a fundamental freedom to provide services, and member states have the ability to set taxes, of course, but where there is a clash with the fundamental freedom set out in the treaty on the functioning of the EU then we face restrictions. I, for one, am not going to deny that: there are constraints on what we can do with R and D tax credits. State aid requirements, for example, mean that we do not have complete flexibility as to what the rates are—the 11% rate, rather than the 12.5% rate, is as high as we can go within those requirements. Also, there are potential constraints in the particular policy being probed by my hon. Friend the Member for Amber Valley. I do not wish to conceal that in any way from the Committee.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I presume that the Minister is not saying that there are no circumstances in which the UK Government can restrict reliefs to entities and individuals that are within the charge to UK tax. That must have been a fundamental defence by the UK for various reliefs on asset transfers, loss transfers and things like that. I assume that he is making his points narrowly about the proposal that I made on the scope of the services freedom, rather than as a general change in UK tax policy.

Photo of David Gauke David Gauke The Exchequer Secretary

I am not making any particular change of policy. The rate of payable credit available to loss-makers has to be reduced to 11%, however, to ensure compliance  with EU law. That is the highest value permissible under aid intensity levels set out in European Commission guidelines. That is the point that I am making.

This is a vital and growing area for the UK economy. We need to be certain that the taxpayer gets best value for what we invest in the incentive and, indeed, that is one of the themes in the rest of schedule 3. The changes brought about by the clause and schedule will encourage more small businesses to engage in research and development. Limiting the application of the clause to IP retained in UK companies would reduce its impact and the incentives that it provides to business. Growth through support for innovation and the development of new high-technology businesses are central themes in the Bill. They are vital to the future of our economy, and the changes help to ensure that the UK is open for business.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley 12:30, 12 Mehefin 2012

It has been an interesting debate on an important topic. I was keen to press the Minister to set out his views on whether we should effectively be giving incentives for assets that do not end up in the UK, and I still have concerns. If the amount becomes significant, then it ought to be considered. However, I have no intention of testing the Committee’s view, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 20 ordered to stand part of the Bill.

Schedule 3 agreed to.