§ Mr. Onslow
asked the Chancellor of the Exchequer why he has rejected the recommendations of the independent review board on the arrangements for remunerating Government contracts relating to private venture research and development expenditure; and if he will make a statement.
§ Mr. Peter Rees
[pursuant to his reply, 12 April 1984, c. 349]: I assume my hon. Friend is referring to the report on the fourth general review of the profit formula for non-competitive government contracts prepared by the review board for government contracts, which was the subject of a reply on 29 March at column 249–50.
Two recommendations in the report relating to the private venture research and development are unacceptable to the Government.
One recommendation could have led to substantial additional claims by contractors for over heads attributed to Government non-competitive contracts, as a result of classifying as applied research work which has hitherto been defined as product development. As explained in the report, product development is recovered by a direct charge to the product concerned rather than a charge to the total output (including Government non-competitive contracts) of the product group. Where the Government buy such a product the price includes a fair share of the contractor's development cost. The Government saw no case for increasing the amount of private venture product development expenditure recovered in overheads on Government non-competitive contracts.
The other recommendation on PVR&D was the change proposed to the existing arrangements which would have allowed the acceptance of abortive product development expenditure as overheads, even where the Government receive no benefit from the expenditure.
Apart from minor points of clarification, the only other recommendations which the Government were unable to accept related to the treatment of intangible fixed assets. It has not been government practice to allow the costs of depreciation on intangible assets, such as trademarks and patents, in overheads attributable to Government noncompetitive contracts. Nor do the Government consider that there is a case for extending the existing convention and thereby increasing the amount allowed for patents and trademarks in capital employed for the purposes of calculating the profit paid on non-competitive contracts.
Acceptance of the various recommendations described above would have considerably eroded the savings resulting from the reduced target profit rate.