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Mr. Matthew Carrington (Fulham) : The hon. Gentleman makes a number of allegations about BES landlords. Can he produce evidence to show that BES landlords are behaving anything remotely like the way in which Rachman behaved?

Mr. Smith : The hon. Gentleman represents a constituency in which a number of private landlords already operate, so he ought to know the answer to that question better than most.

Mr. Carrington : I do.

Mr. Smith : The BES scheme offers an opportunity for bad landlordism in a way that no previous tax shelter opportunity did. The hon. Gentleman will be aware that, because of the five-year rule applying to BES investments, there is no point in a landlord seeking to regain possession of his property during the first year of the scheme's operation--and it is only in its first year of operation now. Only in the fifth year will such action have any point. I suspect that landlords who have established property under the BES will use all sorts of devices to get their tenants out. I also suspect that a good deal of that will be happening in the hon. Gentleman's constituency, and his constituents--who, we hope, will have voted in a different Member of Parliament by then--will doubtless reflect on his remarks.

4.45 pm

It has become obvious over the past year that a massive abuse has been in operation--even by the standards of the already "abusive" device of the private rented property scheme. Through the use of a close company structure with a total of nine shareholders, tax relief was becoming available not only on BES investment itself, but on the interest on the borrowing. Triple tax relief was available, especially to an investor putting his money into private rented property : relief on income tax on the investment, on income tax on the borrowing and on the tax on the capital gain after five years. An additional bonus available to the investor, indirectly rather than directly, was the small company rate of corporation tax, which, in the case of close companies, would be applicable rather than the large company rate. Some of the BES marketing plans attempted to link BES investment with pension fund investment to provide even more scope for relief. With such enormous scope for tax relief, it is not surprising that the BES, with the use of the close companies' device, was being marketed aggressively in the latter part of the last financial year, and in the run-up to the Budget in particular.


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Let us consider exactly what this scheme would mean. It is worth dwelling in some detail on an example that reveals the exact nature of the abuse. Let us suppose tha someone invests £40,000 of his income, at a top marginal tax rate of 40 per cent., in a BES property venture. On that investment he receives tax relief at the highest marginal rate, amounting to a total relief on the investment of £16, 000.

To invest his £40,000 the investor borrows the entire amount, using the close company device, incurring interest payments of £6,000 a year and receiving tax relief on the interest as well as on the investment. He receives £2,400 a year in tax relief, amounting over five years to a total of £12,000. In the course of five years, he has thus obtained £28,000 in tax relief. The total cost of the interest that he has paid out is £30,000. The net cost to the investor, who has not put one penny of his own money into his BES investment of £40,000, is £2,000.

The investor requires a return of 5 per cent. over five years on that investment to recoup its entire cost. Of course, a growth of only 1 per cent. in that investment is extremely unlikely. Let us be moderate in our projection and assume that the investment grows by 10 per cent. a year. At the end of five years that £40,000 investment is worth £64,420. That represents a capital gain of £24,420. The cost to the investor who has not put in a penny of his own money has been £2, 000 over five years and his tax-free capital gain after five years, on a conservative estimate, is £24,420. That profit will have been made almost entirely at the expense of the taxpayer, as it will have been made on the back of £30,000-worth of tax relief by using the device of the close companies system.

The people who were responsible for devising and marketing the operation have not been blind to its attractions for those who invest. Mr. Charles Fry, the chairman of Johnson Fry, which has been in the lead in marketing such operations in the past six months, in a press release on 10 January 1989 said :

"The opportunity to invest in our Companies, with their tax advantages, guarantees and no requirement to invest a penny of the client's own cash, must broaden the market tremendously. Indeed, there would seem to be no way in which a high rate taxpayer can make a case for not investing ; unless, of course, he believes that residential property will fall over the next five years." That is an extremely unlikely eventuality, the risk is extremely low and the use of the close company device has become money for old rope for an investor who takes advantage of it.

I wrote to the Chancellor on 3 March demanding that he took action to close the loophole in the Budget. The final paragraph of my letter stated :

"This cannot possibly have been your intention when introducing the scheme last year. Variations of this scheme are being marketed in a pre-Budget frenzy by--amongst others--Johnson Fry, Allied Dunbar and Centreway Development Capital. They are, not surprisingly, being snapped up. Frankly, this is a gravy-train for top-rate taxpayers and has nothing whatsoever to do with risk investment to close the equity gap which is what BES was supposed to be all about when it was launched. I very much hope that you will take action to end this abuse on 14 March."

Therefore, we were very pleased that the Chancellor took action on 14 March to end that abuse. Clause 44 of the Finance Bill does away with close company relief where it is being sought in connection with a BES investment. However, we do not believe that clause 44 goes far enough. That is why we have tabled amendment No. 4, which seeks to backdate the closing of the loophole.


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Some will doubtless argue that retrospective tax legislation is always wrong. We agree that in general terms it is to be avoided, but Governments of all political persuasions have used it in the past. Indeed, the Finance Bill contains one provision which might be deemed retrospective. The close company abuse of the business expansion scheme represents so much of an abuse that it is a special case because, first, it is not just one tranche but two of evasive relief. Secondly, quite clearly, when the Government introduced the private rented property scheme last year, they did not intend to enable close companies to be used in that way. Thirdly, the abuse has been especially focused on the assured tenancy operation ; to my knowledge it has not been focused on any other sector of the economy using BES provisions. Finally, it has enabled top-rate taxpayers to profiteer at the expense of the generality of ordinary taxpayers.

There is no logical, moral, social or financial justification for that loophole ; nor was there any last year. That is why we believe that the loophole should be closed not just now but from last year's Budget day, and I urge my hon. Friends and Conservative Members to support amendment No. 4.

The Financial Secretary to the Treasury (Mr. Norman Lamont) : The hon. Member for Islington, South and Finsbury (Mr. Smith) began by saying that the Opposition have long been sceptical of the business expansion scheme. I am not sure how long he meant. I well remember that the Leader of the Opposition welcomed the expansion of the business expansion scheme in 1986 and 1987. It was only in 1988, when we placed some restrictions on the business expansion scheme, that he began to criticise it. When we expanded the scheme he was in favour of it, but when we restricted it a little he became more critical. I do not think that that stands up to what the hon. Gentleman said. It is a pity that the Opposition cannot take a more positive view of the business expansion scheme, which has altered the venture capital business in Britain. It has encouraged more people to invest in the stock market and in unquoted companies and small businesses. One of its main functions has been to educate the investing community and the City institutions. More than £1 billion has been raised since the scheme started, and that is a welcome development.

The hon. Gentleman quoted a number of points from the Small Business Research Trust reports of last year and this year, but he did not quote from the Peat Marwick study into the scheme that we commissioned and which produced its findings in 1985. It is significant that Peat Marwick discovered a high degree of additionality. It discovered that 70 per cent. of the money invested in small businesses and small companies would never have been raised if the BES had not existed. The figures for individuals were even higher, showing that 94 per cent. of the amount invested by individuals under the BES would not otherwise have been invested in those companies.

Not only has the venture capital business with tax relief developed, but a venture capital business that is not dependent on tax relief has developed in Britain. The venture capital business in Britain is more advanced and bigger than that in other European countries, and is probably the biggest outside the United States.

Mr. Chris Smith : The Financial Secretary cannot get away with continually quoting the Peat Marwick report,


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which considered only the BES's first year of operation. The Small Business Research Trust report, which was published last year, on the first five years of the scheme's operation revealed that profound changes had been made in its nature and scope since the Peat Marwick report.

Mr. Lamont : The hon. Gentleman has anticipated that I am about to deal with the report of the Small Business Research Trust.

Mr. Denzil Davies (Llanelli) : The Financial Secretary said that without tax relief those investments would not have been made. Given that this is a tax-cutting Government and given their dedication to the market and popular capital, why was it necessary to have additional tax relief? Why did not entrepreneurs invest anyway? 5 pm

Mr. Lamont : For many years, institutions have been geared to stock market investment. Britain has been hampered by a lack of development institutions investing directly in unquoted companies. Although we have a highly developed capital market for large business, the fact that the capital market has not functioned quite so well for small and unquoted businesses has been recognised as a long-standing problem.

The hon. Member for Islington, South and Finsbury referred to a number of comments made by the Small Business Research Trust. It said that the BES had produced more investment in the south-east. That may be regrettable, but it is hardly surprising, because the report states that there are more entrepreneurs and industry in the south. A common feature of national tax allowances is that take-up is greatest in the south-east. The limit on the size of investment to £500,000 that we made last year may, in the long term, spread investment more widely. The assured tenancy is already spreading interest more widely. The hon. Gentleman is not in favour of the extension of the BES to assured tenancies, but--perhaps to a surprising degree--it is producing much interest in property investment not only in the south-east but in the north and Scotland. There have been many BES schemes for housing in the regions and Scotland.

The other point that the hon. Member for Islington, South and Finsbury made about the Small Business Research Trust report was the cost per job of the BES. The BES is not, and was never intended to be, a regional or employment aid. It is designed to encourage entrepreneurship and investment in small companies.

Last year, when we made changes to the assured tenancy and introduced the £500,000 cap, some people predicted that, taken together, the two measures would effectively mean the end of the BES as a source of equity finance for non-assured tenancy companies. It was thought that they would swamp the BES, but that has not happened. Preliminary figures show that over £50 million was raised by BES trading companies. Of course, a considerable amount of that has gone into assured tenancies--and we are pleased about that--but £50 million is a lot of money when one bears in mind that it has been invested in projects with an investment limit of £500,000.

Interestingly, the latest figures show that investment in projects of £500,000 and less has held up extraordinarily well and is higher than two years ago, which is an encouraging development. As my hon. Friends will recall,


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we made that change because we thought that the purpose of this tax relief should be to concentrate help on the smallest companies. To a considerable extent, the signs are that that is beginning to happen.

Mr. David Shaw (Dover) : Will my hon. Friend accept, from a practitioner who has started new compnies under the BES and been involved in companies that would not have started without it, that it has been a major success? It has helped many companies get going for the first time that would not otherwise have done so. It has helped many young people to get into business who would have been unable to do so because they did not have a track record.

Does my hon. Friend accept--he mentioned this during consideration of the Finance Bill in Committee last year--that the £500,000 limit needs to be kept under constant review so that it can be improved to enable more people to put more money into high-risk companies?

Mr. Lamont : We shall keep the £500,000 cap under review. We made many changes to the BES last year and therefore wanted it to settle down a bit. One of the criticisms that have been made of us, which is quite telling, is that we have made an awful lot of changes. There is something to be said for letting the scheme settle down. My hon. Friend rightly said that the £500,000 cap must be judged not only against the size of a business and inflation but against the costs of making a prospectus issue, which is the point that my hon. Friend had in mind.

We estimate that in 1988-89 about £400 million was raised for the scheme, a large part of which was invested in private renting, which has built up more rapidly than we forecast. It is too soon to know how much was raised privately for assured tenancies, but the signs are that many schemes were set up by small groups of individuals. The money will go to a wide variety of properties over a wide geographical spread. The precise number of dwellings provided depends on the price paid, but it could easily be in excess of 6,000. The first BES rented homes are available, so the benefits of the policy are already being felt.

The reason for such tax relief is similar to the answer to the question asked by the right hon. Member for Llanelli (Mr. Davies) about encouraging people to invest in small companies--to alter attitudes and investing habits. For decades, there has been a hostile climate to investment in privately rented property, which is why we introduced this relief. We are pleased that it has been dramatically successful.

One development that has not been so welcome, which leads me to the proposed change, is that a substantial proportion of the money raised this year was invested in public offers that made use of close controlled companies. Under existing law, an individual can obtain tax relief on the interest paid on loans taken out by shares in a close company. Interest relief is important to help close companies, which are often small family concerns, raise money for growth. Previously, the relief was available even if shares qualified for tax relief under the BES. The combination of tax relief on the investment and the interest is excessive. The schemes that were being marketed were not small family businesses for which interest relief was justified but artificial arrangements. A degree of ingenuity was used to create the schemes, but they were


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artificial. I agree with the hon. Member for Islington, South and Finsbury that this relief is excessive, which is why we have decided to end it.

Amendment No. 4 goes further and removes interest relief for shares acquired on or after 15 March. The hon. Gentleman will not be surprised to hear that I do not think that that could be justified. I may object to the success of tax relief, but there is no doubt that the people who framed the schemes acted within the law. The development of and rush of money into this device occurred in the last couple of months of the financial year. It was good of the hon. Gentleman to write to us on 3 March, but it was only about a week later that we chose to act. The provision would have been retrospective if we had brought it in before the end of the financial year. I do not think that that could have been justified. The hon. Gentleman has said that there are cases in which retrospection can be justified. Those cases are rare and in tax matters, the only circumstance in which retrospection can be justified is where it remedies a technical defect so that the law is altered retrospectively to what everyone thought it was. Occasionally, there have been such alterations in tax law. However, one cannot penalise individuals who have made investments and commercial decisions on the basis of existing law. It is up to Parliament to ensure that the law is right and that is why we propose to alter the relief, which is excessive--as the Opposition say.

Mr. Chris Smith : The Financial Secretary made an interesting point when he said that retrospection appeared to be sensible only when it was a matter of altering the law to be what everyone thought it was. He has already admitted that it was only through the ingenuity of certain individuals and financial houses that the close companies route was discovered last year. It was only in the last couple of months before the Budget that there was a sudden marketing of that route as an option. Are those not precisely the circumstances that the Financial Secretary has said would justify retrospective legislation?

Mr. Lamont : No. The people who used the scheme were quite clear about the law and felt that they were using the law in a legitimate way--as they were. But the tax relief available was excessive. That was a new phenomenon. The hon. Gentleman said that he had spotted it, although he did not write to us until 3 March. It was very much a rush of money in the last two or three months before the Budget. I should point out that the tax loss was about £5 million a year, but I do not think that the principle can be compromised by the amount of money, because the principle itself is important. That is why I cannot accept the Opposition amendment, although we favour the ending of this excessive relief.

Mr. A. J. Beith (Berwick-upon-Tweed) : I share the Minister's view in one particular. I do not think that it would be right to accept a retrospective amendment. I agree with hon. Members of both parties who have spoken so far that--

Mr. John Battle (Leeds, West) : A typical Liberal.

Mr. Beith : It is typically Liberal. I do not know why it should be thought funny or undesirable that all members of the Committee should agree. Many people outside the House would find their lives easier if all hon. Members


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could agree on more matters. On matters of tax law, people would find their lives simpler if we could reach a reasonable degree of agreement.

It is agreed generally that the ability to take advantage of close company tax relief and the business expansion scheme tax relief at the same time provides an unacceptable degree of tax relief. It is not odd that we all agree on that. However, the difference between us on retrospection is important. As a typical Liberal, I believe in the rule of law, that people should be able to know what the law is and that they should not be penalised if they abided by the law as it was at the time. I know that that is not the view of the Labour party and that if there were a Labour Government, they might wish to legislate retrospectively on a variety of matters. Clearly, the Labour party believes that retrospection is undesirable, but I take a stronger stand against it.

Let us consider the Secretary of State for the Environment. If we were to accept the proposition that we should all be happy that the law was changed if it turned out not to be what the Government thought it was, the Secretary of State for the Environment would be here day after day because he is always getting the law wrong--as he has this week. He would constantly wish to indemnify himself by retrospective legislation. The Financial Secretary went too far when he said that it seemed reasonable to have retrospective legislation when it was a question of what people thought the law was at the time. The law is what it says. It may be that no one noticed that the close company provisions could be tied up with the business expansion scheme, but that was within the law. If the Inland Revenue had looked it up in its books, it would have been found to be the law. The final judgment would be for the courts, but the Revenue would have had to accept that that was the law and that it simply had not noticed what it was. The proposition for retrospective legislation to bring the law back to what people thought it was is dangerous and I hope that the Financial Secretary will revise his form of words in future speeches. I cannot support the Labour amendment, although I share the objection to the abuse.

5.15 pm

Mr. Norman Lamont : I must make myself clear. The form of words I used was that the only examples I could think of where retrospection had been used in recent years in tax law were of the kind I described. I would, of course, in no way advocate retrospection that had an adverse effect on individuals.

Mr. Beith : There is an interesting example of retrospection going through the House at present, which is the Police Officers (Central Services) Bill, which contains retrospective provisions deeming the law some years ago to have been what it is now and which have been included because they are thought to be to the benefit of individuals. Retrospection is dangerous territory and we are right to keep out of it until there are overwhelming reasons for it, which are rare.

I do not share the Labour party's general hostility to the principles behind the business expansion scheme. There are many things wrong with it, but it is highly desirable that we should encourage more direct investment in industry and business, that we should widen the range


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of shareholders and that we should widen the sources from which venture capital can come to help small businesses in particular. The scheme has had a number of serious shortcomings, although none of them seems to add up to a reason not to persist in trying to bring its advantages to those for whom it was originally intended. I hope that the Government will accept that there are a number of loopholes apart from the one with which they have dealt. One has been mentioned already, which is the unsatisfactory aspect of the use of the business expansion scheme for assured tenancies. It would be open to a company whose main business activity was to acquire rented property and rent it out under the business expansion scheme to put up the rents after five years to such a grotesque extent that no tenant would wish to remain. By that means, the company could acquire properties quickly and dispose of them, thus defeating the Government's objective for the scheme to be a means of attracting venture capital into privately rented housing.

Again, I have a different approach from some Labour Members. It is desirable to attract more capital to rented housing because there is a great shortage of it. There are several ways in which we could deal with that shortage. More public housing could be provided--I object to the Government's great restriction on the provision of publicly rented housing- -but the private sector has a part to play. The rules of the business expansion scheme provide insufficient protection and that is why I tabled amendment No. 6, whose purpose is to ensure that the business expansion scheme relief will not go to landlords whose assured tenancy provisions include an opportunity for a rent review at the end of five years, taking rents above the market level. I hope that the Financial Secretary will look more carefully at that aspect of the business expansion scheme.

It would also be desirable for the Financial Secretary and his colleagues to look at other ways of making the scheme attractive to non-property companies. Although there is merit in expanding the rented housing sector, it is so much more attractive an investment, because it combines the reliefs with the tangible assets of property, that the purpose of the scheme--to bring venture capital to risk areas of manufacturing industry-- is likely to be wholly defeated. The capacity of the business expansion scheme to attract new capital will be largely used up in the area where the risks are least and the potential gains are greatest. The Minister should recognise that and do something about it.

We suggest that the rate of tax relief on schemes involving property should not be as high as that on the rest of the business expansion scheme. At the moment, the scheme is heavily tilted towards property investment.

As was spelt out clearly in an article in the Financial Times, the scheme is still not working to the benefit of the regions in which there is a serious need for venture capital for new businesses--particularly areas such as the north of England. It is noticeable that, even with a £500,000 limit, the south-east has almost 50 per cent. of the qualifying investments, and some of the capital for those investments comes from the very regions where it is most needed.

One of the failings of our economy is that we still do not seem to be able to relate capital generated in deprived regions to investment in an expansion of those regions. Some of the regions with the most serious economic problems--the north of England, Scotland and Wales--have a strong tradition of savings ; a degree of capital is


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maintained by the thrifty and careful. An obvious illustration of that is the power and strength of the Trustee Savings bank in Scotland, which testifies to the willingness of the Scottish people to save.

We have somehow failed to match savings and investment in business in the regions where it is most needed. The business expansion scheme should be the vehicle for that purpose, but it is not yet meeting the needs.

I hope that the Minister will consider ways of making the business expansion scheme more effective and less heavily tilted towards investment in property. If he does not do that, it will cease to fulfil its most important purpose. Having said that, I must advise my right hon. Friend and hon. Friends to oppose amendment No. 4 because it would yet again introduce retrospective legislation.

Mr. Battle : We are entitled to ask for a clear and detailed statement of the evidence of the impact of the business expansion scheme, and what contribution it is making to the economic restructuring that we all know is taking place. Is it contributing to geographically unequal and uneven economic development? The Financial Secretary said that the scheme was not an aid to tackle unemployment or an instrument of regional aid. That being so, where is the investment going and what sort of businesses are being invested in? To use a word that the Government regularly use, where is the targeting in this instrument of intervention?

The business expansion scheme is beginning to expose not only the Govenment's total lack of regional policy but the fact that the only instrument of intervention that they are prepared to use is tax relief that is indiscriminate except that it goes to those with the most means. It is ironic that the only form of intervention that the Government will make in their free market experiment is by means of tax relief to those who do not need it.

Where is the detailed evidence of the effects of the business expansion scheme? I seem to remember that the Government were very concerned about the spending of public money locally when it came to another instrument of intervention--urban policy and the urban programme. Let me give an example from my own city of Leeds, where the urban programme money accounted for 1 per cent. of the council's budget, or £4 million a year. Yet two years ago the city council, the voluntary bodies and the private sector bodies which took funds in partnership from the urban programme were required to fill in forms to spell out precisely how every penny of that money had been spent. I am inclined to ask the Financial Secretary to provide us with a similar annual monitoring report on the business expansion scheme. As tax relief, the money comes from the Treasury ; it is public money and we ought to be able to ask that it be accounted for.

I agree with my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) that the research done at Southampton university and at the university of Ulster at Jordanstown shows not that the scheme has proved to be a neutral or indiscriminate form of intervention but that it has reinforced the existing social and economic divisions in our society. It has acted as a bulwark in building those divisions into our economic structure. In other words, the BES is worsening the north-south divide in Britain, which seems to be the opposite of the Government's declared intention.


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There is a drift from north to south in equity investment raised under the business expansion scheme, and the researchers at Southampton are reported as having said :

"In terms of its geographical impact, the BES is reinforcing the economic advantages of southern England and discriminating against the economically- lagging regions of northern Britain."

Apparently, the research shows

"a difference in the type and quality of investments, with more sunrise' and service-based investments in the south-east compared with more of the older type of manufacturing investments in the north. The scheme is not therefore helping the north to restructure and widen its industrial base".

At the turn of the century, Leeds was a city of 5,500 firms. It was not dominated by one industry or one company. It was built of medium-sized and small family firms spread across the manufacturing sector--in textiles, engineering and in printing in particular. With the restructuring of the economy that has occurred during the past 20 years, many of those manufacturing firms have been taken over or rescheduled--"rationalised", as the phrase went. Jobs have been lost and plants and factories closed.

With the decline of the manufacturing sector, there has been a clear shift to the service sector. Although there was an expansion of the public service sector in the 1970s, more recently it is the financial services sector that has expanded and developed. That has done nothing to tackle the unemployment that has resulted from the decline of the manufacturing base in cities such as Leeds. Jobs are supposed to have been "recreated" in the service sector. In the 1970s, 17,500 jobs in manufacturing were lost in Leeds and in the same decade, 17,500 new jobs became available in the service sector. The difficulty was, that many of the new jobs were temporary part-time jobs, and even lower-paid than the jobs in manufacturing had been. Such developments have not helped to strengthen and regenerate the economy. Instead, they have built on the divisions and contributed to the continued existence of classic low-wage economies such as that of West Yorkshire. They have done nothing to take such regions up to the wealth of the M4 belt, for example. It is interesting to consider whether the business expansion scheme has had anything like the impact in Yorkshire that it has had on the M4 belt between Reading and London, which is now one of the wealthiest areas in Europe. That is the real question that the Government have to answer. Is the scheme being targeted? Is it merely reinforcing economic divisions? Is it contributing to growth throughout the economy and for all those in Britain, or is it only of benefit to a few in the south east who latch on to it?

A second aspect of the role of the BES should be monitored. We should consider carefully the measure in last year's Budget, under which the Chancellor applied the relief to the acquisition and management of private rented sector property under the assured tenancy scheme.

I served on the Committee on the Bill that became the Housing Act 1988. I see that the hon. Member for Fulham (Mr. Carrington) has left the Chamber. He seemed to suggest that there was no evidence that the scheme was being misused. We resisted the introduction of the scheme at that time because, while we were discussing the Housing Bill in Committee, at the very same time as the Budget was being presented, we were discussing the fact that a landlord in the City of London was being taken to court


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by Chelsea and Kensington council because of the way in which he treated tenants in his properties. That landlord is Mr. Nicholas Hoogstraten.

There was a long trial because it was felt that the way in which he treated his tenants was totally unacceptable. The then Minister with responsibility for housing, who has moved on to the Foreign Office for his efforts, regularly used the phrase in Committee that there should be social, good landlords who do not give people the conditions that that man expected his tenants to live in. All were expecting the outcome of the trial to be that that man would be found guilty for keeping tenants in conditions that they should not be in. 5.30 pm

What was the outcome? Because that man did not have his name on the rent book and used close company structures--he had so many companies set up that the authorities could not catch him under company law--he got away with offences under the housing law. We should pay attention to where the business expansion scheme is being applied. That same person declared on the television that he welcomed the business expansion scheme as a means of extending his property empire. I should be interested to receive a report from the Department spelling out whether parts of that empire have applied for and received money from the business expansion scheme. Clearly, it would be a demonstration that the money is not going to the kinds of people whom even Conservative Members believe should manage housing.

Mr. Chris Smith : My hon. Friend is making a powerful point. However, does he agree that the very nature of the business expansion scheme, involving a tax-free capital gain at the end of five years, will put a powerful momentum into the system to discourage landlords from being good, social landlords and encourage them instead to maximise their profit?

Mr. Battle : I am grateful to my hon. Friend for that intervention. During the debate on the Finance Bill last year, it became clear that the Government's intention was to give the kind of tax concession that my hon. Friend has outlined. It was only then that the real and genuine intentions of the Housing Act were revealed. Throughout the debate, we argued that the Housing Act 1988 was clearly a landlord and property charter. It had nothing to do with giving tenants rights and improving the stock of housing or tackling homelessness. It was about pushing the market place in terms of the provision of housing. We must examine the concessions that are given under the Treasury's arrangements and the statements that were made in Committee about housing conditions and the need to enable landlords to have more power over their tenants. The Government were nervous simply to let the market rip in terms of being able to treat tenants as they wished. It is worth reminding hon. Members that tenants' rights were significantly eroded under the legislation. As my hon. Friend the Member for Islington, South and Finsbury mentioned, schedule 2 altered the grounds on which a landlord could winkle out tenants. The two grounds were redevelopment and the non-payment of rent. Despite the fact that a person's rent may not have been paid on time because he was on housing benefit and the money had to be claimed through the local authority and


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from the Department, as it stands now, the law says that the landlord can mandatorily evict the tenant and repossess the dwelling. The tenant has lost the right to go to court to appeal and state why he could not pay his rent. Similarly, if a landlord wants to redevelop the property, he must serve notice on the tenant and the tenant must leave, without a right of appeal to ask where they should go. As my hon. Friend suggested the conditions exist for landlords simply to take a tax handout and make a profit on property at the expense of tenants and under the guise of providing housing for the people.

It is incumbent on the Government now to tell us clearly how the close company structure will be used. Will it be, as the Minister said, that the business expansion scheme will be exploited by small groups of individuals? Where is the language of the previous Minister with responsibility for housing, that only those with a track record in tenant management should be allowed to be landlords? That language seems to have disappeared. People can use the business expansion scheme as a means of becoming a landlord.

Is the Minister checking who is receiving the money? Is he checking whether a monitoring report will be plainly published and available to all, so that the money that is spent from the tax system and given in handouts to people to provide money is clearly and publicly accounted for? If not, the Government have no excuse. They can say, "We must welcome the business expansion scheme as a means of intervening in the economy," but we want clear evidence that the intervention is appropriate and that it does something about the uneven and equal development of our economy. We need an assurance that, if it is the Government's intention to free the private sector to provide rented housing for people, it is not simply a cover for people to speculate with and make money from property that they prefer to be kept empty, rather than have people living in conditions that are suitable for the late 20th century in Britain and at a rent that they can afford. If the Minister cannot tell us that he can provide a publicly available monitoring report, there is unfair discrimination going on.

When it comes to local authorities spending public money and budgeting and implementing schemes such as the urban programme, they are expected publicly to account for every penny in a record that is sent to Marsham street. Every tree that is planted under the urban programme is accounted for, and every journey that is made by a mini bus to take elderly people to and from luncheon clubs is accounted for. I do not object to such amounts being accounted for, but I demand parity of treatment of public money as a whole. It will be incumbent upon the Treasury to publish the report and tell us where the business expansion scheme money is going. The Financial Secretary has suggested that, so far, the evidence is conflicting. It would not be too difficult for him to use his civil servants to find out where the money is going and make the details available to all.

Dr. Kim Howells (Pontypridd) : I have no objection to the business expansion scheme. It seems to be a good idea, especially when we often lack mechanisms for regional aid for areas such as mine. As the Financial Secretary stated, it has a proper, educative role to play in the business community. I have no quarrel with legislating for education of any sort, as long as it is progressive education. Constituencies such as mine have long needed


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an expansion of small businesses. They have needed injections of what the Financial Secretary referred to as venture captial to help to diversify our manufacturing and service base. However, I am afraid that the tax relief which should have been focused on small companies as a result of the provision of the business expansion scheme, does not appear to my constituents to be applied precisely to those companies and businesses which could have helped diversification. The amendment would rectify abuses of tax relief and shift the focus of relief back to those areas for which it was designed in the first place. If the educative role to which the Financial Secretary referred is to function properly, it must begin to show more equitable results in terms of the geographical spread of the investment. I do not fully understand why the regional disparities which have already been referred to should exist. I trust that the Financial Secretary is not employing any kind of genetic basis to his argument about why the take-up should be greater in the south- east than, for example, Scotland or the north of England?

The Chief Secretary to the Treasury (Mr. John Major) : One reason is that there are more people in the south-east.

Dr. Howells : Let me modify that and say that proportionately the take-up is not so great.

The object must be to close the loopholes which appear to be preventing the business expansion scheme from fulfilling the aims for which it was first designed. I fully appreciate that the business risk will continue to be greater in areas on the so-called periphery of the British economy--for example, in coalfields--where there continue to be declining staple industries. We hope that the scheme will work to rectify that situation.

The business expansion scheme should be, and could still be, a boon, although not a great boon, to constituencies such as mine. However, I am afraid that it is not viewed in that way in my constituency. I am afraid that it is seen as another way of massaging the profits of those concerns and businesses in the south-east that do not fall into the original categories for which the BES was designed.

My constituency would like the BES to help push it even further along the road of the remarkable transformation that it has already experienced during and since the decline of its basic industries. I believe that the BES should help to revive that spirit of innovation--often a small but vigorous spirit of innovation--that makes a reality in terms of new products and jobs of the brave title, "venture capital". The amendment serves to remind us of the original purpose and would bring some discipline back into the business expansion scheme, which would be most welcome in constituencies such as mine.

Mr. Peter L. Pike (Burnley) : I intend to speak briefly on the amendment moved by my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith). I shall be echoing some of the comments made by my hon. Friend the Member for Pontypridd (Dr. Howells). My hon. Friend the Member for Leeds, West (Mr. Battle) spoke with considerable expertise, having served on the Committee that considered the Housing Bill, which created the assured tenancies, and which, in turn, was one of the reasons that the business expansion scheme has proved to be a boon. My hon. Friend was also involved in


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housing matters in Leeds prior to becoming a Member of Parliament. I believe that my hon. Friend made important points that the Financial Secretary should consider. Even if he does not respond to them today, they are worth considering in depth. The Department of the Environment should also consider some of the implications of my hon. Friend's comments.

I, too, have some fears that some of the Government's assurances at the time that the Housing Bill was going through Parliament last year have not been fulfilled under the business expansion scheme, and that the scheme has been used in a way that was not anticipated. I recognise that the amendment seeks to change the effective date of the blocking of a loophole. We all recognise that the Government have acted correctly, as it would have been completely wrong to allow people to get a tax concession on their investment and to receive additional tax relief if they were borrowing money to invest. The debate today is about whether the blocking of the loophole should be backdated for 12 months. One must remember that, when there is such an investment in property, a capital growth is almost assured. There has been continued capital growth in housing property over many years. In such a scheme, the investor would make a considerable amount of money.

5.45 pm

I am not completely opposed to the principle of the business expansion scheme, because it has some welcome features. I have recognised for many years that one of our failings is that we make it extremely difficult for venture capital to be invested. At times our actions militate against venture capital. This scheme goes part of the way towards rectifying that. One of the problems of getting investment, for example, into industry is that we fail to take long-term investment views in the same way as our competitors in other countries, especially those in Germany. It is regrettable that to some extent our financial institutions militate against that. We want to see investment in our areas, so it is important that we have a scheme such as the BES. However, we want investment in sectors that will create jobs and will help to rectify the balance of payments situation. We should get our manufacturing industries on to a better basis. It is appalling that we still import so much more than we export. After all, at the end of the day, this nation's bread and butter depends on its manufacturing industries.

Investing in assured tenancies by means of the business expansion scheme, which appears to be the main issue emerging in the debate, does not create jobs in the way in which we would wish. Of course, last year a £500,000 limit was introduced on the business expansion scheme, but there was an extension to £5 million for property. One could have argued that it was wrong to do that. One must of course ensure that the system is not abused and money wrongly made by receiving tax concessions. The least worthy cause was allowing people to invest in the private rented sector. Some of us fear that, perhaps, the Government, with their determination and obsession for creating a private rented sector, have had to consider means whereby people can put money into it.

I was surprised that in my constituency the business expansion scheme and the Housing Act 1988 have been used. We have surplus housing stock in Burnley of some 6 per cent., both in the private and public sectors. There are


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semi-detached houses on council estates and private houses standing empty because of the declining population. I was surprised that a company was buying every property initially under £10,000, then £20, 000 and now up to £30,000. To many hon. Members those figures will appear surprising, but in an area such as mine a house costing £30, 000 is expensive. That company, Northern Renewals, is buying those houses and then improving them. I do not criticise it, because the agents involved, Ingham and Bulcock, are a reputable company. I shall be meeting them in a week's time to discuss their plans. I am criticising the Government for making that scheme available, because I do not believe it is needed.

I recognise that the company must make management judgments. I believe, however, that it may have made a wrong judgment, because it is difficult to believe that it will find the tenants for those houses. I recognise, however--the Government will say this--that it will stop some houses becoming derelict and it will ensure that work is carried out on those old stone-built terrace houses and stop them declining. If that happens, I shall welcome it.

However, instead of the tax concession being used in that way, I would prefer it to be used to give money for grants to enable people to buy such houses and to improve them. Many people do not buy such houses because of the non-availability of improvement or repair grants with which to do them up.

Because of the laws of supply and demand, another problem that is caused when companies buy houses is that they increase demand, and that is bound to increase the price of houses and to reduce the housing stock available to younger married couples.

As the debate has made clear, there has been a considerable growth in and use of the business expansion scheme, especially in the past few months, and I am not surprised by that, because the growth has been the result of the enactment of the Housing Act 1988 which tied in with last year's Finance Bill. That has led to the surge of investment in this scheme to which the Financial Secretary referred. However, when he replies to the debate, the right hon. Gentleman must say whether he believes that that is what the Government want. I can see the difficulty about whether the provision should be applied retrospectively. One could argue that point for some considerable time. I recognise that on other occasions we could be arguing equally well against retrospective legislation and that is the danger in advocating an amendment such as this.

However, even more important than the principle of the date is whether the Government really believe that there are any fundamental errors in the business expansion scheme. I am sincere in saying that I am not totally opposed to the scheme and recognise that it has some good points. Nevertheless, I should like it to be used to encourage venture capital and the growth of small manufacturing industries, jobs and employment. I had hoped that it could play a small part in improving our balance of payments and thus the country's financial position. The way in which it is being used for assured tenancies in conjunction with the Housing Act 1988 is not the best way forward. Although it could be argued that those points are not directly related to the amendment, I hope that the Minister will recognise that they are important points which could


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have been argued in a stand part debate. I am glad that those important points have been put on the record and hope that the Financial Secretary will respond to them.


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