Finance Bill

James Murray Excerpts

Committee of the whole House
Wednesday 10th January 2024 Commons Chamber

[Nigel Huddleston]

I agree that certainty for business is pivotal, but with both full expensing and R&D the Government, the Chancellor and others have been indicating the direction of travel for some time and therefore giving increased certainty. As I have said, it was mentioned a while ago that we intended to pursue the policy of full expensing when the economic circumstances allowed, and now they do. R&D, which I will come to in a minute, has been discussed for quite a long time and is the result of extensive co-operation with industry.

It is also the reality, though, that Government policy needs to change in response to the nature of a changing economy and to things such as digital, the cloud and so on. When it comes to other investments, we need to make sure that new and emerging policy areas are covered as well. We have seen today, as we saw in the autumn statement, a very clear direction of travel from the Conservative side of the Chamber, which is about incentivising businesses and cutting taxes. Permanent full expensing also simplifies the capital allowances regime overall, as companies can claim the full cost in year one, reducing the need to claim writing-down allowances year on year.

Turning to clause 2 and schedule 1, the Government have also announced the closure of the R&D tax relief review launched in 2021—the point I was just making to the hon. Member for Reading East (Matt Rodda)—alongside a set of changes to simplify and improve the system. Clause 2 makes changes to merge the current R&D expenditure credit and SME schemes for expenditure in accounting periods beginning on or after 1 April 2024, simplifying the system and providing greater support for UK companies to drive innovation.

The merged scheme will have an above-the-line mechanism similar to the R&D expenditure credit, with a rate of 20%. That will make the benefit more visible and easier for companies to factor into their investment decisions. Additionally, small and medium enterprise lossmakers will now be able to carry forward their losses rather than having to surrender them, which will give a total benefit of up to £45 per £100 of R&D expenditure.

There will also be a reduction in the rate at which the merged scheme credit is taxed for lossmakers, from 25% to 19%. That is worth around £120 million per annum to non-intensive lossmakers and will increase the up-front cash benefit for lossmakers. Subcontracting rules in the merged scheme will allow the company taking the decision to do R&D to claim relief on contracted-out R&D. That approach is based on the current SME scheme, which was identified as the best option in the consultation we delivered, and has been refined further following engagement with industry last summer.

Subsidy rules will also be removed, allowing SMEs to claim relief for work for which they receive a grant of a subsidy. This represents an increase in generosity for SMEs as well as being a major tax simplification.

The Government are also legislating for enhanced support for loss-making R&D-intensive SMEs. That was announced at spring Budget 2023 and will benefit 23,000 SMEs a year by providing further support to the most R&D-intensive SMEs while merging the current schemes. The Government are promoting the conditions for enterprise to succeed. Companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.

At the summer statement, the Government announced several improvements being made to that enhanced support. The R&D intensity threshold is being lowered to 30% from 40% from April 2024, meaning that around 5,000 more companies will benefit from the support. A one-year grace period is being introduced, providing greater certainty by ensuring that companies that dip under the 30% threshold will continue receiving relief for one year. The same subcontracting rules as the merged scheme will apply to this enhanced support, further helping to simplify the system with one set of rules that both SMEs and larger companies will follow.

Overall, R&D reliefs will support an estimated £55 billion of business R&D expenditure in 2028-29—a 25% increase from £44 billion in 2021-22. Expenditure on R&D reliefs is forecast to increase in every year of the scorecard period. We will also restrict nominations and assignments for R&D relief payment. That measure ensures that genuine businesses get the payment for their R&D claim directly, rather than receiving it through an agent, and is designed to benefit genuine claimants and reduce non-compliance.

Subject to limited exceptions, no R&D tax credit payments will be made to nominee bank accounts, and any R&D tax credit payments must be paid directly to the company that claims for the R&D, so claimants will now receive their payments directly, giving them more control. That will ensure that the person claiming the relief has better oversight of the claim and receives the money into their account quicker. Claimants will also be clearer on exactly how much money is being charged by their agents, rather than just receiving a net amount after fees have been deducted. That builds on previously announced measures and policy changes to help to ensure greater company control over R&D claims.

The Government are committed to making the UK the best place in the world to do business. Full expensing and R&D tax relief support businesses to grow and invest, which will boost productivity and economic growth. That remains the key way to raise everybody’s living standards and to fund high-quality public services throughout the UK. I commend clauses 1 and 2 and schedule 1 to the Committee.

[James Murray (Ealing North) (Lab/Co-op)]

Let me start by briefly considering the context in which we are debating clauses 1 and 2. As we know, the Bill follows the Chancellor’s statement on 22 November last year, in which he claimed that he was delivering an “autumn statement for growth”. As the Committee may remember, the Office for Budget Responsibility confirmed on the same day that growth forecasts had been cut by more than half for the coming year, cut again for the year after that, and cut yet again for the year after that. Independent analysts confirmed that, even after all the changes the Government had announced, personal taxes would still rise. In fact, personal taxes are now set to rise by £1,200 per household by 2028-29, with the tax burden on track to be the highest since the second world war. Despite people across the country paying so much in tax, public services are collapsing, the NHS is on its knees, and more and more families are struggling to make ends meet.

That was the context in which we considered the Bill on Second Reading just before Christmas: 13 years of Conservative economic failure had left people across Britain worse off. The only thing to have changed since then is that we now face 14 years of Conservative economic failure. It may be a new year, but those in the governing party face the same cold truth: nothing they can say or do now can repair the damage that they have done to our economy.

People in businesses across Britain deserve so much better. As a foundation of better management of the economy, our country needs and deserves stability, certainty and a long-term plan. It is for that reason that, although we welcome the fact that clause 1 makes full expensing permanent, which we have long called for, it simply cannot make up for the years of uncertainty that businesses have faced. Businesses need stability and predictability to help them plan for growth, and their long-term planning has been held back because the Government have been chopping and changing business taxes and reliefs year after year, with no evidence of anything resembling a long-term strategy.

[Richard Fuller]

I was very pleased to hear the shadow Minister say that the Opposition welcome the full expensing. That helps, but maybe he can go further to clarify. In new clause 6, tabled in his name, the Opposition are calling for a review of all business taxes and reliefs, which would include full expensing. He will know, as will the hon. Member for Mid Bedfordshire (Alistair Strathern) who is sitting behind him, that there is a particular potential investment decision in our county. Will the shadow Minister make it explicit that the Labour party’s intention is to include in its manifesto for the next election a commitment to maintaining full expensing?

[James Murray]

As I have said, we have long been calling for full expensing, and we welcome the fact that it is being made permanent. I do not mean to sound jokey in my response—I am deadly serious when I say this—but if the hon. Gentleman wants to know what a Labour Government would do if we got into office, there is one way to see that eventuality come about: we could have a general election sooner rather than later, instead of dragging things on throughout the course of 2024.

Frankly, the country needs to move on from the current Government. Just look at their record on capital allowances since the last general election. The hon. Member for North East Bedfordshire (Richard Fuller) spoke about certainty and the need for stability, but let us look at the changes that have happened to capital allowances over the past four or five years. As I mentioned on Second Reading, back at the beginning of this Parliament, the annual investment had been raised to £1 million on a temporary basis. That temporary basis was extended by the Finance Act 2021, extended again by the Finance Act 2022, and then made permanent by the Finance (No. 2) Act 2023. Meanwhile, over the course of this Parliament, the super-deduction came and went entirely. Last year, full expensing for expenditure on plant or machinery was introduced but only on a temporary basis for three years.

Now, of course, Treasury Ministers are amending what their predecessors announced last year by making full expensing permanent. Although we welcome that policy, I wonder how long it will last. Frankly, I wonder how long any policy can be expected to last under this Government, when they are led—in the loosest possible sense of that word—by such a weak Prime Minister. If we accept clause 1 at face value, we welcome its principle of making full expensing permanent, as that is something that we have long called for. I will focus the rest of my questions on some of the specifics of the Government’s approach.

As ever, I am grateful to the excellent team at the Chartered Institute of Taxation for all their thoughts on the detail of what the Government have proposed in this clause and others. I know that one matter of interest to the chartered institute was the fact that, at the autumn statement, the Government said that they would publish a technical consultation on leased assets. I would be grateful if the Minister told us when that will be published.

Furthermore, both the Chartered Institute of Taxation and the Association of Taxation Technicians—to which I am also grateful for its thoughts on the detail of the Bill—have queried which companies and assets are eligible for full expensing. I would be grateful if the Minister clarified which assets are outside the scope of full expensing, and whether the Treasury will publish a detailed list of what does and does not count as plant and machinery. I would also be grateful if he told us how many firms will not be eligible for full expensing because they are partnerships. I know that many who take an interest in this matter would welcome clarity on that.

In clause 2, the Government propose changes to the system of tax credits for research and development. As with their approach to business taxation and capital allowances, the Government have failed to deliver any sense of stability when it comes to R&D tax credits, despite certainty and predictability being so crucial to businesses that are making investment decisions. That much is clear when looking at the list of changes that we have debated in Finance Bills over the course of the current Parliament alone: the Finance Act 2020 changed the rate of R&D expenditure credit; the Finance Act 2021 changed how much R&D tax relief small and medium-sized enterprises could claim; the Finance Act 2023 again changed the rates of R&D tax relief; the Finance (No. 2) Act 2023 changed further how the relief operates; and now, the Finance Bill before us changes the system of reliefs yet again. We accept, of course, that some change is necessary and important to enable legislation to function well, but that does not seem to be what we have seen. What we have seen is a Government incapable of providing stability, predictability, and the long-term plan that businesses need to invest and grow. It is clear that after 14 years in office, the Conservatives are incapable of providing that crucial foundation for our economic success.

[Matt Rodda]

My hon. Friend is making an excellent point, which comes to the nub of the argument: the Government are not capable of providing business with the certainty it needs. That is such a tragedy, because so many wonderful emerging industries in the UK which have incredible potential need that certainty, as indeed do other businesses.

[James Murray]

My hon. Friend is absolutely right. So many businesses in the UK that are keen to invest, grow, and make people across Britain better off are being held back by the lack of stability and certainty from this Government. I cannot help but notice that the Government recognise the symptoms of the problem—that a lack of stability and certainty is indeed a problem for economic growth—but they are simply unable to provide a response to that problem, and provide the long-term plan that Britain so desperately needs.

We know that so much chopping and changing without any clear long-term plan has had a cost for our economy, by undermining prospects for investment, innovation and growth. Indeed, the Institute of Chartered Accountants in England and Wales has shared with us the view of its members that there is a lack of confidence when claiming R&D tax relief within the UK, and their belief that

“this has arisen due to the various changes made to the rules in quick succession over the past few years.”

We also know, of course, that having so many changes one after the other has a direct impact on taxpayers as well as businesses, as the public finances bear the costs for all the impacts on His Majesty’s Revenue and Customs in terms of IT systems and staffing. Our analysis of HMRC policy papers suggests that the changes made and proposed within the current Parliament have had a cumulative impact on operational costs for HMRC of more than £60 million. That sum is likely to include a substantial waste of taxpayer money as a result of so many piecemeal changes rather than coherent and lasting reform.

In order to be clear and transparent on the costs of all the Government changes to R&D tax credits, we have tabled new clause 1. The new clause would require the Chancellor to publish a review setting out the total implementation costs of all changes to research and development reliefs in the current Parliament. I hope Ministers will accept that straightforward new clause, but if not, I look forward to Government Members who would be interested in such transparency joining us in supporting it. Furthermore, if Ministers are not prepared to vote for the new clause or accept it, I would be grateful if they could at least commit to writing to me with the figures that our new clause requests.

Turning to the substantive impacts of clause 2, we should be clear about what the clause does. In the autumn statement, the Chancellor said that the Government were

“creating a new, simplified R&D tax relief that combines the existing R&D expenditure credit and small and medium-sized enterprise schemes.”—[Official Report, 22 November 2023; Vol. 741, c. 325.]

We have heard similar words from the Minister in this debate. In reality, though, the Government’s plans still effectively maintain two separate schemes: although they seek to merge the two existing schemes, they continue to provide additional support for R&D-intensive SMEs through the existing SME scheme, rather than its forming part of the new merged scheme. Although we recognise that R&D-intensive SMEs may need extra support, the Chartered Institute of Taxation has pointed out that the Government’s plans are

“less a merger than the shifting of most SMEs into a revised scheme based on an ‘RDEC’ approach, with the SME scheme remaining for a smaller group of R&D intensive SMEs.”

The Association of Taxation Technicians has pointed out the impact this may have, saying that

“the introduction of new rules to define R&D intensive SMEs and the possibility of companies moving in and out of the two regimes as their expenditure profile changes will arguably result in an overall increase in the complexity of the R&D relief regime, rather than simplification.”

As I said, we recognise that R&D-intensive SMEs may need additional support, but I would be grateful if the Minister could explain why the Government have chosen to continue operating a separate scheme to provide that support, rather than delivering it as part of the new merged scheme.

Alongside understanding the Government’s intention regarding the design of the new regime, I would also like to question the Minister about the timescales for implementing the measures in clause 2. In the policy documents associated with the autumn statement, it was clear that the new regime would apply from April 2024 onward. In the Bill, however, schedule 1, which clause 2 introduces, makes clear that the changes will apply from an “appointed day”—a day to be appointed by the Treasury in regulations. I would be grateful if the Minister could confirm in his reply what that appointed day will be. Is it 1 April 2024, or will it be a later date?

As April is less than three months away, if the appointed day does indeed fall within that month, is the Minister confident that that leaves enough time for proper consultation, and for any new systems and processes to be put in place by businesses, agents, software providers and HMRC? If, instead, the appointed day is later than April 2024, those affected need to know what is happening. I hope the Minister will be able to provide clarity on that question today; otherwise, sadly, this seems to be yet another example of continued uncertainty for businesses from this Government.

Finally, we know that the Government are concerned about the level of non-compliance with the R&D tax credit schemes. In their policy paper published in November about the merging of the current schemes, they wrote:

“Further action may be needed to reduce the unacceptably high levels of non-compliance in the R&D reliefs, and HMRC will be publishing a compliance action plan in due course.”

Tackling non-compliance is of course very important, so I would be grateful if the Minister could confirm in his reply when HMRC will be publishing the promised compliance action plan.

I am also very aware from meetings I have had with smaller businesses that they often face a great deal of confusion over the guidelines associated with R&D tax credits. Whereas larger businesses will typically have the resources and institutional capacity to navigate those rules, I am concerned that smaller businesses often do not, and may find themselves having to pay for expensive consultants to help them understand them.

HMRC could have a role to play in supporting small firms with clarity about the guidelines on R&D tax credits, as well as, of course, in its role in tackling genuine fraud. Indeed, the Startup Coalition—an organisation that advocates for policies to support innovative firms in the UK—has highlighted the need for HMRC to improve, and has called for improved

“transparency around adjudicating whether activity is R&D to provide certainty for firms.”

The ICAEW has made similar points, stressing the need for guidance and education and making clear that

“the new rules will significantly affect all sizes of companies including those smaller entities with limited professional tax resource.”

I therefore urge the Minister to make sure that any plan for improving compliance with the rules also focuses on making the rules easier to comply with wherever possible, and on working with small, innovative firms to help give them the certainty they need to thrive.

To conclude, Labour will not be opposing either of the clauses, but I urge Treasury Ministers to accept our new clause 1 and, when they reply, to respond to the specific points that I have raised. More widely, it is clear from their approach to capital allowances and R&D tax reliefs that the Conservatives are incapable of providing stability and a long-term approach. Their failure is letting down businesses across our country who stand ready to play their part in growing the economy and making people across Britain better off.

[Maggie Throup (Erewash) (Con)]

I am delighted to be able to speak in Committee on the Finance Bill, which I believe emphasises the Conservative principles of encouraging entrepreneurs, free enterprise and innovation. Many in this Chamber will know that I do not have a traditional finance background, but I did run my own business for 19 years, which I think qualifies me to identify when fiscal measures are really going to help business. That is what I see in the Bill, especially clauses 1 and 2, which I will speak to today.

First, I will take the opportunity to speak in favour of clause 1, which will support UK business by making full expensing permanent. In the spring Budget 2023, the Chancellor introduced major reforms to the system of capital allowance by replacing the super-deduction system with three years of full expensing. The new measure, which was initially put in place until 1 April 2026, allows companies to claim the full cost of their expenditure on plant or machinery against tax when the business investment is made. That measure was well received by businesses across the UK, as my hon. Friend the Minister has already stated; he quoted a number of large plcs, but the measure has also allowed a number of Erewash-based businesses to benefit and prosper.

Dales Fabrications Ltd previously claimed a super-deduction, the predecessor of full expensing, on a very significant piece of machinery. It sounds quite complicated to me, but it is a 4-metre press break with lots of bespoke options. The benefits of the super-deduction were of such significance that the business purchased additional and highly beneficial tooling concurrently with the machine. The now chairman of the business said to me:

“In reality, we would have inevitably deferred that additional tooling purchase without the super deduction, thus meaning we wouldn’t have had 100 per cent of the benefits of our new machinery from day one and would have been effectively denied access to some types of work that went beyond typical industry-standard sizes.”

The owner of another business, Millitec, said:

“Super deductions are really good and a real incentive for us to invest.”

The successor of the super-deduction, which means being able to expense fully the cost of plant and machinery on a permanent basis, as proposed in clause 1, will undoubtedly continue to be a huge incentive for businesses across the UK to invest in their futures and in UK plc. I know from speaking to my local businesses that they really welcome this, and see it as one way to be able to expand and grow their business. However, I have a question for my hon. Friend the Minister. The terminology of plant and machinery is very broad, so when he responds could he provide some clarity for my Erewash businesses about what is defined as plant and machinery, to help them understand what is in scope? For example, does it extend to IT equipment? I think that having a better understanding of the terminology will really help businesses of all sizes to take full advantage of what is on offer.

The contents of clause 1 shows that the Government are on the side of business. Ahead of the autumn statement last year, 200 businesses—including AstraZeneca, which was so instrumental in the covid vaccine roll- out, and Toyota, a major employer of many of my constituents—wrote a joint letter to my right hon. Friend the Chancellor asking for the 1 April 2026 expiry date to be removed, so making full expensing permanent. Today, by supporting clause 1 and making full expensing permanent, we are backing businesses and helping them to succeed. It also shows that the Government are listening to businesses and making sure they are putting in place measures that will really help them grow their business.

Clause 1 will provide businesses with the biggest tax cut in modern history, worth over £10 billion a year, making the UK capital allowances regime one of the most generous in the world. Since the introduction of temporary full expensing in April 2023, the UK has become an appealing place to invest. The UK has had the second highest investment growth in the G7 and three times that of the US. Making full expensing permanent can only perpetuate that growth. Will my hon. Friend say when he winds up whether plans are in place to extend full expensing to plant and machinery that is either leased or hired? Those two options are often the only affordable ones for businesses with big ambition, but limited capital.

Let me turn to clause 2 and schedule 1. The Bill will simplify research and development rules by merging the small and medium-sized enterprises and the R&D expenditure credit schemes. Whether it is trialling and distributing the successful covid vaccines, which helped us defeat covid-19, or testing and developing new innovations that will enable us to meet our net zero targets, R&D businesses play a vital role in growing our economy. At the spring Budget 2023, my right hon. Friend the Chancellor announced enhanced support for R&D-intensive SMEs worth around £500 million per year, a consultation on the potential merged R&D tax relief scheme and support for those loss-making R&D businesses. As a result, the measures in this Bill show the Government’s unwavering support for R&D businesses.

Specifically, clause 2 and schedule 1 will help reduce bureaucracy and ensure that taxpayers’ money is spent as effectively as possible by simplifying the R&D tax system. That will stop many businesses having to navigate the complex transition between the two existing schemes. It is anticipated that the reduction of the intensity threshold in the R&D-intensive businesses scheme from 40% to 30% from April this year will allow around 5,000 extra SMEs to qualify for an enhanced rate of relief. A one-year grace period will also be introduced, providing certainty for companies dipping under the 30% threshold that they will continue to receive relief for one year. This is a vital measure for so many R&D-focused businesses, which inherently have peaks and troughs of activity. Taken together, these changes will provide £280 million-worth of additional relief per year by 2028-29 to help drive innovation in the UK.

--- Later in debate ---

[The First Deputy Chairman of Ways and Means (Dame Rosie Winterton)]

I call the shadow Minister.

[James Murray]

I rise to speak to the new clauses in my name and that my hon. Friend the Member for Hampstead and Kilburn (Tulip Siddiq).

Clause 21 and schedule 12 relate to the implementation of pillar 2 of the OECD/G20 inclusive framework on base erosion and profit shifting. Labour supports this clause and schedule as they are intended to modify the existing multinational and domestic top-up taxes introduced in the Finance (No. 2) Act 2023, to make sure these new taxes work as intended. We have long supported the global deal on the taxation of large multinationals, as we want to see it working as effectively as possible.

We know that the OECD guidance on implementing the deal is coming out in tranches, so it is important that UK legislation is updated to reflect that. We recognise that, as with any global deal of this scale, its details are complicated and its implementation will take time, yet we have been clear throughout its development that we support the principle of a global agreement as a crucial step in making the tax system fairer, thereby helping to make sure that British businesses that pay their fair share of taxes are not undermined.

Indeed, nearly three years ago, in April 2021, I first set out in the Commons our support for a global deal to make that tax system fairer, to make sure that a level playing field is there for British businesses and to stop the international race to the bottom on tax for large multinationals. The Treasury Ministers at the time appeared at first lukewarm in backing plans emerging from the United States for a global deal. Eventually, however, the then Chancellor, now the Prime Minister, began to support the deal in public. We were glad that the current Prime Minister seemed to have come round, but I am not sure all his Back Benchers have. For instance, I wonder whether the hon. Member for North East Bedfordshire (Richard Fuller) would agree with the Prime Minister when he said:

“We now have a clear path to a fairer tax system, where large global players pay their fair share wherever they do business.”

We agree with the Prime Minister on that point, but I just wonder whether everyone on the Conservative Benches does. I am reading some of their faces and I think the answer is clear. Could it be that the Prime Minister lacks support from prominent Back Benchers within his own party on a policy he is now championing? Surely not. But Treasury Ministers should rest assured that if their Back Benchers pull any tricks on clause 21, they will have our support for it to pass.