Research and development expenditure credit

Finance (No. 2) Bill – in a Public Bill Committee am 11:30 am ar 11 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

New clause 4—Review of the impact of increasing Research and Development Expenditure Credit—

‘(1) Within one month of Royal Assent to this Act, the Chancellor of the Exchequer shall commission a review of the impact of increasing the Research and Development Expenditure Credit from 11% to 12%.

(2) The review shall consider—

(a) the effect of the 1% increase on companies’ research and development spending in the UK, and

(b) what effect the increase in Research and Development Expenditure Credit will have on changes to companies’ research and development spending in the UK as a result of leaving the EU.

(3) The Chancellor of the Exchequer shall lay the report of this review before the House of Commons within six months of this Act receiving Royal Assent.’

This new clause would require the Chancellor of the Exchequer to commission a review of the effect of the increase in Research and Development Expenditure Credit from 11% to 12% on companies’ research and development spending and what effect the increase will have on any changes to companies’ R&D spending as a result of the UK leaving the EU.

New clause 9—Review of change to level of research and development expenditure credit—

‘(1) No later than 31 March 2019, the Chancellor of the Exchequer must review the effects of the change to the level of research and development expenditure made by section 19(1).

(2) The review under this section must consider—

(a) the revenue effects of the change, and

(b) the effects on levels of research and development expenditure.

(3) The Chancellor of the Exchequer must lay before the House of Commons the report of the review under this section as soon as practicable after its completion.’

This new clause provides for a review of the change to the level of research and development expenditure credit.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clause 19 makes changes that support the Government’s ambition to drive up research and development investment across the economy to 2.4% of GDP by 2027. R and D tax credits are a key element of the Government’s support for innovation and growth. To support businesses further, the Government will increase the rate of R and D expenditure credit from 11% to 12%. Investment in R and D is vital for increasing productivity and promoting growth. R and D tax credits support businesses in investing, by allowing companies to claim an enhanced corporation tax deduction or a payable credit on their R and D costs.

Photo of Laura Pidcock Laura Pidcock Llafur, North West Durham

Will the Minister explain the severe imbalances in research and development across the country and how he will address them?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

As the hon. Lady knows, several announcements were made in the Budget about productivity, not least of which was the announcement about the national productivity investment fund; billions more pounds will be put in, raising its total investment level to around £30 billion. Initiatives such as the northern powerhouse and the infrastructure that will be put in place in the north and the midlands are evidence of our intent to make sure that productivity is levelled out across the country. We recognise that productivity is stronger in London, the south and the south-east, so particular attention is being placed on the midlands and the north of England.

There are two schemes for claiming R and D tax credits: the research and development expenditure credit—RDEC—scheme, and the small and medium-sized enterprise—SME—scheme. The SME scheme is more generous than the RDEC. The RDEC was introduced in 2013, featuring a new above-the-line credit. Businesses value it for several reasons, including because they can benefit from it whether or not they make a profit in the year in which they claim the credit. As R and D is often risky or pays back years after investment, this is a well targeted initiative. In 2015-16, the Government provided innovative businesses with more than £1.3 billion through the RDEC, which supported almost £16 billion of research and development.

In spring Budget 2017, it was announced that a review of the R and D environment had concluded that the UK’s R and D tax credits regime is an effective and internationally competitive element of the Government’s support for innovation. The changes made by clause 19 will provide around £170 million of additional support for innovative businesses every year from 2019-20. Increasing the rate of RDEC will make the UK even more competitive.

New clause 4 seeks to commission a review of the effect of this change on companies’ research and development spending, and of the effect of the increase on any changes to companies’ R and D spending as a result of the UK leaving the European Union. Since 2010, the amount of support that the Government have provided through R and D tax credits overall has more than doubled, reaching £2.9 billion in 2015-16.

Photo of Dan Carden Dan Carden Llafur, Liverpool, Walton

What research has been done on the potential loss of EU investment in scientific research funding? I understand that the review will be forthcoming, but this is a modest increase from 12% to 13%. Does the Minister think that gets anywhere near to plugging that hole?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Gentleman raises an important issue; inevitably, as we leave the European Union there will be economic consequences in both directions. He will be aware that a motion was recently passed in the House requesting various assessments. Those have been delivered to the Exiting the European Union Committee, so I point him in that direction. If he is implying that it will all be disaster once we exit the European Union—

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Gentleman is shaking his head; I am pleased, because there will be many opportunities as we go forward. Of course, one of the reasons why the question of impacts is difficult and challenging is that, at this stage, we do not know exactly where the negotiation will land, exactly what the treaty arrangements will be between us and the European Union after our exit, and what our customs arrangements and new trading arrangements with the rest of the world will be, and so on. We await those details.

Returning to the Bill, the amount of R and D expenditure supported through the tax credits doubled to £23 billion between 2010 and 2015-16. At the autumn Budget 2017, the Government announced a further £2.3 billion of additional direct R and D spending in 2021-22. That is on top of the record investment of £4.7 billion by the national productivity investment fund in R and D that was announced in the autumn statement 2016. Taken together, total Government support for R and D will increase by a third from 2015-16 to 2021-22. I am clear that the change in this Bill, along with the wider support that the Government are providing, will give valuable help to businesses investing in R and D in the period in which we will leave the EU. The change reaffirms our ambition to increase total UK investment in R and D to 2.4% of GDP.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Cities), Shadow SNP Spokesperson (Treasury)

The briefing from the Chartered Institution of Taxation points out that there may be merit in expanding R and D relief to product commercialisation, because we do lots of development in the UK but not necessarily all the commercialisation, and some of that benefit goes overseas. Will the Minister explore whether that might be possible?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 11:45, 11 Ionawr 2018

The hon. Lady makes an extremely important point about the development of innovation and new ideas, and about ensuring that they are capitalised on in our country, rather than perhaps being bought up to a certain stage and developed further elsewhere, as she suggests. The patient capital review under Sir Damon Buffini was very much focused on ensuring that those important schemes—venture capital trust schemes, enterprise investment schemes and so on—moved away from being what we might call capital preservation schemes, in which money does not go into high-flying businesses but which are simply ways of preserving capital while reaping the rewards of the tax benefits, into more innovative, higher-growth and more risky ventures, of which we need more in this country. In answer to her well made question, I point her towards that patient capital review and our work there, which we continue to do and to monitor, to address precisely the concerns she expresses about companies as they go from small to mid-cap and further on in their lifecycle.

New clause 9, however, seeks to commission a review of the revenue effects of the change and the effects on R and D expenditure. When the RDEC was last increased in 2015, innovative businesses benefited from an additional £200 million, and that supported an extra £1 billion in R and D expenditure. Furthermore, a recent valuation conducted by HMRC in 2015 found that for every £1 of tax forgone, between £1.53 and £2.35 of additional R and D is stimulated. That shows that R and D tax credits are effective at encouraging additional investment in R and D. I commend the clause to the Committee.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

It is a delight to be in Committee discussing a Finance Bill again, although we seem to be discussing one every week. I hope we can move to a single fiscal event, and that we will have a single fiscal event this year, and not an extra one or two, as we have previously.

On the change to research and development expenditure credit, I completely agree with the comments about the need to encourage our companies to create good research and to develop excellent and innovative products. That need can be clearly shown by the lack of productivity growth in the UK in relatively recent years by comparison with our international comparators. Part of that is because companies have not been able to create or bring forward changes, including in how they run themselves, in order to improve productivity; and part is because the Government have been good at increasing employment, but those jobs are low paid and have low productivity. Increasing research and development is therefore a very positive thing.

As was mentioned by the hon. Member for Liverpool, Walton, the UK leaving the EU comes with an awful lot of added negatives, particularly in the area of research and development. One is to do with universities and their research. A lot of our universities do absolutely excellent research that brings forward products. A number of universities have spin-off companies that have been innovated as a result of research, and they are brilliant places for such research to be developed. A lot of that could not have happened without the level of international collaboration that has been possible. A big concern is that there could be a backward step.

Another thing is that companies will find it more difficult to export to the EU. Although the Government are clear that we will have frictionless borders, a very small number of people believe that. There will instead be more barriers to exports, whether tariff or non-tariff, so companies will struggle to find the profitability and extra cash to put money into research and development that they do now. That is a big concern for the future. Frankly, increasing research and development expenditure credit by 1% will not cut it as the fix, to make that change that we need.

My hon. Friend the Member for Glasgow Central mentioned the issue of ensuring that research and development can be monetised by companies. It is not good enough simply to create an excellent product; that excellent product or innovation needs to be brought to market and exported. Companies in my area have struggled with taking that step. They have got to the stage where they have been able to innovate, but either their intellectual property has been bought or they have not managed to get encouragement from banks to increase their capital. I appreciate what the Minister says about the patient capital review, which is a welcome step because of the funding gap. Companies being able to convert their excellent research into a product that can be sold and exported is a really positive thing.

Companies around Aberdeen in my constituency are involved in the research and development of oil and gas initiatives, particularly in the super-mature basin that we have in the North sea. We are one of the first oil and gas basins to reach the super-mature stage. We have the ability to innovate, and to do research and development that creates products that can be exported around the world when other basins come to that mature stage. It is appreciated that there is a research and development credit, but the Government need to continue to work to support businesses in making the next leap, so that they can take advantage.

Photo of Dan Carden Dan Carden Llafur, Liverpool, Walton

Does the hon. Lady agree that membership of the European Union has fostered a culture of research and development? We have innovation cities and other such initiatives. A 1% increase from 12% to 13% is not enough. We need the Government to show how they will innovate and work with companies to rebalance the economy from south to north when it comes to research and development and other such issues.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

I agree with the hon. Gentleman. We have had many benefits from the EU, and just one of them is the level of innovation. As a result of the level of free movement that we have had, we have been able to get excellent people in to improve our research and development, and to collaborate with places overseas. Our universities, companies and hubs of expertise have been an incredible success story in recent years in terms of the research that they have been able to do. There is a brilliant hub around Edinburgh that is involved in robotics. It is hugely important to take those steps.

The Government need to ensure that they continue to foster that culture. Leaving the EU is a big problem, in terms of us not being able to bring those people here. The Government need to not only increase the research and development expenditure credit by 1%, but make changes so that the UK can be a nation that welcomes scientists and encourages them to come here and make a positive economic contribution, as they already do. We do not want to lose those people.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Cities), Shadow SNP Spokesperson (Treasury)

The point about not losing what we have is absolutely crucial. The Strathclyde Technology and Innovation Centre at the University of Strathclyde in my constituency has had £89 million, including money from the European regional development fund, to set up cutting-edge industries. Anything that loses that or puts it at risk will have a hugely detrimental effect on Glasgow and Scotland’s wider economy.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

I very much agree with my hon. Friend. A lot of these projects have been brought to fruition because of the benefits of EU money. The UK Government have not committed to filling the EU funding gap that there will be, particularly for universities and for the research and development of vital products that UK companies can sell on.

It is welcome that the Government are putting some focus on research and development expenditure. That is a positive thing. However, it is not in any way the end of the story. To simply stand still, the Government need to make significantly more commitments. We would appreciate the Westminster Government being much more positive about the innovation culture. They need to put their money where their mouth is and make sure they fund these things more appropriately.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Again, it is a pleasure to serve under your stewardship, Mr Owen. I want to speak first to the points made by the hon. Member for Aberdeen North and then go on to my substantive comments on our amendment. It is worth noting what the hon. Lady says about funding research. Bill Gates, who knows a thing or two about research and development, said:

“I believe in innovation and that the way you get innovation is you fund research and you learn the basic facts.”

Are the Government funding research and development sufficiently? The answer, quite simply, is no. Neil Armstrong said:

“Research…is creating new knowledge.”

When set against that, the amount of research and development that the Government are funding, or indeed encouraging, is not creating that much more new knowledge.

Following on from the comments of the hon. Member for Aberdeen North about new clause 4, I am deeply concerned about the level of the Government’s research and development expenditure, particularly once we have left the European Union. The important question is not whether we are in or out—we are moving out; we recognise that—but how we fill that gap.

There is a rightly held concern that as a result of Brexit, the UK risks losing its reputation as a scientific powerhouse. In November, the Chair of the Public Accounts Committee stated that we are “sorely lacking” in leadership from the Government to maintain Britain’s position as a leader in robotics and in research to tackle climate change. She was responding to a National Audit Office report that highlighted that between 2007 and 2013, the UK was a “net recipient” of EU research funding and received more than £7.9 billion. In 2015, the UK Government’s expenditure on research and development was £8.7 billion, so it is almost equal.

The Government will have to make up the funding shortfall once we leave the European Union if the UK is to keep its status as a world leader in research and development.

Photo of Laura Pidcock Laura Pidcock Llafur, North West Durham

Even within the European Union, the north-east has suffered grave inequalities when it comes to research and development jobs, of which there are 5,300 compared with 36,000 in the south-east. Does the hon. Gentleman agree that the Bill does nothing to get rid of that disparity? The worry is that outside the European Union, it will be further exacerbated.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

That is an important point. As I said, it is irrelevant—academic—where someone stands on Europe or whether they were in or out, because we are moving out of the European Union. There are all sorts of debates about the customs union, the single market and all the rest of it, but the bottom line is: what will the Government do to plug that gap? Will they give the commitment that they have given to other industries, such as agriculture, to plug that gap?

Photo of Dan Carden Dan Carden Llafur, Liverpool, Walton

One of the reasons that there is scepticism on this side of the Committee Room is because European money has been funnelled towards cities such as Liverpool. We have seen great investment from Europe, whereas this Government have cut council budgets in Liverpool and across the north by more than 70%. Does my hon. Friend share my scepticism?

We are tending towards a general debate about the European Union rather than a specific debate about the Bill. Please keep to the amendments and new clauses under discussion.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I appreciate that reminder, Mr Owen. My hon. Friend the Member for Liverpool, Walton makes a good point that goes to the heart of our wish to have a review of how the Government’s proposal will affect research and development. That is absolutely crucial.

Research and development expenditure credit is used to encourage companies to invest in technology and research in the UK. Will the Bill do enough for that? The 1% increase announced in the autumn Budget will not be enough. Historically, the Government’s investment in research and development as a proportion of GDP has been woeful. The UK spends less on research and development than many comparable nations do, which is why we need a review of the implications of the Government’s proposal.

Our expenditure on R and D last year was 1.7% of GDP, while the EU average was 2%. That is a significant difference. Denmark, Austria and Sweden spend more than 3%, and Finland and Germany are not far behind. The CBI argues that the Government should commit to spending at least 3% of GDP on research and development, particularly as a way—these are the CBI’s words, not mine—of “Brexit-proofing” our economy. In a report last year, it highlighted key areas in which the UK should invest, including gene editing, space tourism, self-driving vehicles, robotic limbs, floating farms and travel methods that will enable people, for example, to fly from London to Sydney in four hours. There is a genuine fear that we will be left behind if we do not invest in cutting-edge research and in the first-rate scientific researchers that our universities produce. Will clause 19 actually help with that? On the basis of evidence and history, no, it will not. That is why, as I will keep reminding Members, we want a review.

There is of course the added factor of international science collaboration, particularly our continued collaboration with EU countries on research and development once we leave the EU. International collaboration has become increasingly important in science. In fact, its importance to the development of our industries is axiomatic. The requirement for multidisciplinary approaches and the combination of intellectual and physical resources means that more than half of the UK’s research output is the result of international collaboration. Will the Government’s proposals help that collaboration to continue once we are outside the EU—or, indeed, if we are still in the EU? No. They just do not go far enough.

Some 60% of the UK’s internationally co-authored papers are authored with EU partners. Although the United States is the most frequent partner for UK-based researchers, seven of the top 10 strongest collaborators are EU countries. We must ask ourselves how the proposals in the Bill will help that to continue. I am genuinely not convinced that they will.

No one is criticising the Government for putting some inducement in their proposals, but is that inducement enough? No, it is not. Although increasing the research and development expenditure credit will encourage companies to use the cutting-edge research that is formulated in UK universities to create jobs for the future, the quality and quantity of that research will dry up if grants are cut. That is another factor that the Bill does nothing about.

The UK has long been a hub for worldwide talent in the scientific community, which produces research that allows companies to invest in cutting-edge research and development projects. Will the Bill do anything significant to help that continue? No. We cannot escape the fact that the UK’s scientific community is dependent on international talent, both European and non-European. For example, 28% of academic staff in UK universities are non-UK nationals—16% are from the European Union and 12% are non-EU citizens—half of PhD students in the UK are non-UK nationals, and 30% of UK Nobel prize winners are non-British. That talent pool will be at risk if the Government do not get their skates on and provide further support for research and development.

The Government must do more to encourage and incentivise the best scientists in the world to continue to work in the UK and collaborate with UK universities and research facilities, otherwise there will be a brain drain, which will have a direct impact on the number of companies that choose to invest in research and development projects in the UK. Again, is there anything in the substance of the Minister’s proposals that will help with that? No. That is why we want a review. We need to look at this area in more detail. I imagine it will be a far bigger factor than whether the Government increase the research and development expenditure credit by one percentage point. The question of the workforce—the scientists who will undertake the research and eventually work on the projects—is very important, because without them, the UK will be a far less attractive place to invest.

Photo of Dan Carden Dan Carden Llafur, Liverpool, Walton 12:00, 11 Ionawr 2018

This relief means a hell of a lot, especially to some larger companies, which sometimes make hundreds of millions of pounds from it. We have seen artificial schemes designed to secure the tax relief whereby it has not been appropriately used. Would not a review also help to sort out that problem?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

It would, and I will come to that in my final comments in relation to the speech by the hon. Member for Aberdeen North. There is a wider point, which the hon. Lady has highlighted perfectly. How much difference will raising the expenditure credit by one percentage point make to companies investing in the UK? That is the question, and we need to know the answers to it, hence the proposal for a review. I sound like a stuck record, but this issue is very important. It is only right that the Minister should come back to the House at a later stage and provide it with that information.

Photo of Laura Pidcock Laura Pidcock Llafur, North West Durham

Does my hon. Friend think that the Government have calculated the one percentage point figure on the basis that we are exiting the European Union and on formal calculations about what the net consequence of removal from the EU will be, or is this just an arbitrary figure?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

The honest answer is that I do not know. If I can be the postperson for that question, I will pass it on to the Minister and perhaps he will answer it. I am sure that he will be able to do so, if not today, certainly in due course.

On new clause 9, the research and development expenditure credit gives corporation tax relief to companies that undertake research and development, as the Minister said, as well as to small and medium-sized enterprises subcontracted to undertake work of that nature. The current rate of relief for those companies is, as everyone knows, 11% of their qualifying expenditure, through either reduced liabilities or cash payments. As the Minister set out, clause 19 increases that to 12% of qualifying expenditure.

On Second Reading and today, the Minister has talked about the contribution that research and development makes to our nation’s productivity. It is worth our while to reflect on the Government’s record when it comes to productivity, because that goes to the heart of the matter. If we are to raise productivity, how do we know that it is linked somehow with research and development, or vice versa? If the figure is being moved from 11% to 12%, how do we establish the interaction, the causal links and the correlations? How do we do that? We do not do it, which is why we need a review.

As you know, Mr Owen, productivity has flatlined, and it has remained lower than its peak under the last Labour Government for the full eight years of the current Government and the coalition. The Office for National Statistics has found that since this Government took office, they have presided over the worst period of productivity growth since the Napoleonic wars. I think that was the last time we came out of Europe—well, perhaps not the last time, but one of the times. [Laughter.] That was a dodgy link, I have to say.

At present, UK productivity lags behind that of most of the G7 nations, notably the United States, France, Germany and Italy. What the Germans produce in four days, Britain achieves in five. We have heard that so many times, and the question that arises is: does the Government’s proposal do anything to enhance productivity? We do not know. Do the Government have any proposals for us to suggest how they might do that via a review? No, they do not. That is why we want a review.

This is not a mere technicality; it has serious consequences. As the Nobel prize-winning American economist Paul Krugman once said,

“Productivity isn’t everything, but in the long run it is almost everything.”

More than many other indicators, our productivity has a huge impact on both our future economic growth and the living standards of millions of British workers, who rely on productivity gains to improve their pay and conditions. We know that investment in research and development can, and does, enhance productivity. The question is: do the proposals do that? We do not know. Why do we not know? Because the Government—I suspect—will not agree to our review today. We will persist on that. As far as I can see, we do not have any information from the Government on the correlation.

Sadly, we are heading in the wrong direction. The Office for Budget Responsibility predicts that the Government’s plans will leave us with a 17-year period of wage stagnation. The Institute for Fiscal Studies agrees, arguing that we face two decades of lost pay growth. Will the Government’s proposals do anything significant to deal with that? We do not know, but we do not think so.

Time and again, the Chancellor has watered down the Government’s promise of increases in the wage floor. That will not help, either. We know that the most sustainable way to ensure a return to wage growth is to boost productivity, as well as ensuring that there is a strong framework of other worker representation to make sure that gains are shared evenly across any enterprise. That is also important. Research and development not only helps companies to grow, helps profits and helps income tax and tax generation, but helps workers and wage growth. Are the Government doing anything in the proposals to assist with that? No.

The Prime Minister recognised the importance of economic democracy and worker representation all the way back when she became Prime Minister. It is also important that workers can see what research and development investment there is, and what the Government’s proposals on it will do to help. It is difficult to establish what gains there will be under the proposals, and that is why we need to check and challenge the Government time after time on this one.

Of course, while research and development investment is not going into businesses, companies can rely on large pools of pretty cheap and expendable labour. That is important. In the past, the Minister has referred to us having quite high levels of employment, but we come back to the issue that the levels of employment per se—

Order. We are straying a little bit and having a general discussion on the economy rather than on research and development expenditure credit under new clause 9.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I appreciate that, Mr Owen. The point I am trying to make is this: in relation to the increase from 11% to 12%, what will the Government’s proposals do that will help any of these elements of the economy? We must set it in this context. What is the purpose of the increase from 11% to 12% if not to increase economic growth? We are trying to establish what the link is, and we cannot find it at this stage, hence the need for a review of the proposals. We fear that, unless we have significant increases in research and development, we will not get out of the difficult economic circumstances we face.

There is the further issue of regional research and development, which my hon. Friends have alluded to. A recent report from Sheffield Hallam University shows vast regional disparities in research and development funding. Today, we are asking the Government to produce a review that would also cover those regional disparities, because that is crucial. None of the Bill’s proposals come in isolation. We acknowledge that the report from Sheffield Hallam included universities and charity sector organisations, which, of course, are exempt from the research and development expenditure credit. It is nevertheless pertinent to highlight that in relation to regional disparity and overall Government research and development expenditure. The university also demonstrated that the Government expenditure on research and development is spent in the south-east, which employs 36,500 people in research and development, compared with the west midlands, which employs only 3,100. We propose including that in any review of the impact of the increase from 11% to 12%.

Photo of Laura Pidcock Laura Pidcock Llafur, North West Durham 12:15, 11 Ionawr 2018

That disparity in investment does not make sense, because economic growth, employment rates and average earnings are all worse than average in the north-east. I do not see any mechanism to redress that disparity; I wonder whether my hon. Friend does.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

Again, I do not think there is anything in the Government’s proposals that helps to address that disparity. We do not know. That is part of our reason for making our proposal, and I suspect it is also the reason behind the proposal made by the hon. Member for Aberdeen North: to try to tease out those particular issues and get information from a review that would help us to determine that. It is important to make the point that we are restricted by the amendment to law proposals and can only ask for reviews. It is a concern that we are not able to push this more. That is why, to some extent—with your consent, Mr Owen—we are slightly widening the debate. We need to widen it out to be able to focus, in a bizarre sort of way, on the specifics of the Government’s proposals and how they might enable research and development, and the 11% to 12% increase, to help.

In talking about regions and trying to make those important comparisons, the question is what the 11% to 12% increase will do for those regions. The Cambridge area has twice the research and development jobs of the entire north-west, for example, where my Bootle constituency is. Even when we exclude Cambridge University, as this credit does, the Cambridge area has twice as many such jobs as the midlands, more than Scotland and Wales combined, and only 2,000 fewer than the north of England. One has to ask the question, “What do the Government’s proposals do to help that?” We cannot see what they are doing to help it, hence the need for a review. I persist with the issue of the review, hence the new clause. We can push on and increase the 11% to 12%, but what is the evidence that it will be not only evenly spread across the country, but rebalanced? I do not see that at all in the proposals, which is why we must look at them in more detail.

To take another example, we talk about the northern powerhouse, but eight years on the economy is still not rebalanced and there is nothing in the proposals to help with that. In that regard, it is difficult not to comment on Lord O’Neill’s resignation over that particular matter, because he did not see the Government in any way pushing the issue of research and development in some of the regions. Take, for example, the fact that only two of the 20 most expensive infrastructure projects being financed by the Government are in the north-east, the north-west or Yorkshire and the Humber. We could look at all the other cities in the broader sense—I will not go there—but the point is that research and development expenditure does not seem be going to the areas that perhaps need it most to help their economy.

I have asked the Minister, as have other hon. Members, whether the Government plan to redress that imbalance in regional research and development expenditure. If the extended credit being debated today might contribute to rebalancing, will he tell us the percentage change in regional distribution that that might account for, rather than generalisations? We need details. Some regions right across the country are calling out to know what this will do specifically for the regions. We have heard a lot from the Government about rebalancing, but that has not yet been translated into action.

That is why we tabled the new clause: to enable us to review the change and better to understand both the revenue effects of the proposal and its effects on research and development expenditure more generally. Should the new clause succeed—we will press it to a vote—we hope it will encourage the Government to reflect on the scale of the productivity challenge and the action required to address it properly. We hope that, if the Government agree to the review, it will also give us some insight into the revenue forgone in specific parts of the country.

I hope that hon. Members consider supporting the new clause for the reasons I have set out. If they will not support it, I exhort them to push the Government to give us more detail about how this is going to impact on all the regions and nations of the United Kingdom. There will be a consistent and persistent belief that we are not a one-nation country and that not everybody is in it together. An awful lot of people are out there on their own, and the Government must give us information through a review to show in solid terms how this increase from 11% to 12% is going to help those communities.

I call the Minister to respond within the parameters of the three proposals under discussion.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Thank you for calling me to speak, Mr Owen. You have been very generous in your interpretation of the scope of the debate.

I am going to be equally generous with the Minister.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I am sure you will be entirely obliging. This has been a wide-ranging debate, covering just about everything. We have had an absence of the biblical references and classical quotations that normally enliven our discussions at this time of the day.

We all agree about the essential role that productivity plays, and, in turn, the essential role that R and D plays in driving productivity. Paul Krugman is entirely right that, in the long run, productivity is almost everything, because if we do not get a rise in productivity we do not get a rise in real wages, living standards and all the things that Governments ensure happen. It is not just our country that has had a productivity challenge since the crash in 2008. The productivity rates of most of our competitor countries are all well down on where they were prior to that point. We certainly have a particular challenge in the United Kingdom, which is why we are doing so much in the productivity space. R and D tax credits are but one element of that. We have now set an R and D target: as I said earlier, 2.4% of GDP will be R and D expense by 2027.

It is useful to note that much was made of how this Government are performing relative to the past, as if in the past we were doing incredibly well with R and D. The reality is that over the past 30 years there has never been a single year in which R and D expenditure as a proportion of GDP has exceeded 2%. That is a simple fact. That goes for this Government, the coalition Government and the Labour Governments who preceded them, so in a sense we are all in the same boat.

I do not accept that we are not doing enough in this area. R and D tax credits are but one example. The amount going in since 2012-13 has doubled to £2.9 billion. In 2016, we announced direct R and D expenditure of £2.3 billion by 2020 to 22. We have had major announcements on infrastructure and roads and rail. As I said in my opening remarks, in the previous Budget we expanded the national productivity investment fund to £31 billion.

On the specific issue that the hon. Member for Aberdeen North—and others, by way of intervention—raised, we totally accept that support for our universities is absolutely critical. That is why we are doing things on the immigration side. We are seeking to get the balance right to attract the right kind of talent. Equally, we are underwriting the Horizon 2020 programme, such that any Horizon 2020 projects agreed by the European Union prior to our departure will be underwritten by the UK Government, irrespective of whether that money is being spent at the time that we exit.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

The hon. Lady knows that we are reviewing that specific point in the context of the negotiations. Those are decisions, among others, that we will have to take in future. My point is about that critical flagship programme, Horizon 2020. The hon. Member for Bootle suggested that we have not treated universities in the way that we have the agricultural sector, to which guarantees have been provided, but this is a clear example in the universities sector of where we are doing precisely that.

I will not dwell on those matters; I am aware that they are more directly related to R and D tax credits, but the patient capital review is a commitment that we put a lot of money, effort and research and development into. The intellectual property issue was mentioned in the debate. There is the patent box, which provides a lower rate of taxation for those businesses that develop intellectual property, so that we make sure that that is developed and exploited in this country.

The hon. Member for Aberdeen North quite rightly mentioned the North sea, which is absolutely critical to her part of the United Kingdom. There are measures in the Bill that we will come to shortly that further ease tax pressures in that sector, and certainly there were measures in the last Finance Bill, when she and I both served on the Committee.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

I know that the Minister is aware that the Public Accounts Committee reported that the cost of R and D tax relief increased from around £100 million in 2001 to more than £1 billion in 2011 and 2012, while the actual amount of business expenditure on research and development stayed more or less the same. We have seen large increases in the costs as a result, potentially—I am not saying there was, but potentially—as a result of some abuse. The question I want to try to tease out is, how do the Government know that the increase in research and development reliefs will achieve the desired result, without having a proper review?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

In my opening remarks—I will not re-rehearse them—I talked about the evidence of the amount of money going into R and D and the return per pound. There is a relationship between the amount that goes into R and D tax credits and the amount of R and D spend that is occurring, but the one does not solely cause the other. Many externalities impinge upon why companies may or may not invest in research and development, the most obvious being the general state of the economy and business confidence. That should not take away from the fact that it is demonstrably the case and will continue to be the case that if we provide attractive taxation reliefs aimed at encouraging companies to invest in research and development, we will see a displacement of activity towards those activities, which is what we so strongly want to see in our country.

I shall leave it there and say that we have had an extremely wide-ranging and interesting debate. I hope that we can move on to put the question.

Question put and agreed to.

Clause 19 accordingly ordered to stand part of the Bill.

Clause 20