House of Commons Hansard Debates for 10 May 1989

Dr. Lewis Moonie (Kirkcaldy) : As the outset it would be churlish not to say that I welcome clause 44 and the Government's attempt to put right a clear wrong in the working of the business expansion scheme, just as in the past they have put right other wrongs in other schemes, especially those relating to forestry and, in 1984, to agriculture.

On the surface, it seemed a perfectly good idea to raise capital for small businesses, to help to create employment and to reward enterprise through encouraging equity investment in what, by the Government's own definition, were higher risk organisations, and to help them, in turn, to acquire money for expansion without the severe loan charges that they would otherwise incur as a result of the Government's high interest rate policy. Therefore, in theory the business expansion scheme is consistent with a strong supply side macro-economic policy. However, problems arise and it is incumbent on us to point them out in the debate.

The cost has been high since tax relief on investment is given at the top rate. Obviously, since the top rate was reduced last year, that cost is less than formerly. However, the scheme has been costly, at over £100 million per year in recent years. It has been used as a tax shelter and for tax avoidance whereas the original intent was to reward and facilitate enterprise. The scheme has been widely abused in speculative building, a sector that is concentrated largely in London and the south-east. Therefore, the scheme has been concentrated on the sector of the economy that is most hurt at present by the supply side constraints and the capacity constraints that we have experienced and which are evident in our current account deficit of over £2 billion last year in materials related to construction. The construction sector is the worst hit sector, and the worst hit area of that worst hit sector is where the money and investment have principally been concentrated in the past year. Therefore, there is a wide distortion in the market and an accentuated drift of investment from Scotland and the north towards London and the south-east.

Because the money has been used largely for speculative building, it is incumbent on the Financial Secretary to try to tell us that this is the best way to invest in house construction and that it is the most cost- effective way of using public money--that is what it amounts to, because of the subsidy that is given. I do not believe that it is the best way. If a similar sum had been invested in the public sector, I believe that we should have seen a far greater return for our money, and housing far more appropriate to the needs of those who are without it at present. That in turn would have served to reduce the capacity constraints that are arising in the south-east.

All that underlines the fact that a poorly directed supply side policy is a danger not a benefit to our economy. The Government are reaping the harvest of their own somewhat narrow definition of supply side policies.

I have referred to the labour and housing shortages in London and the south -east that are a direct result of such policies and to the capacity constraints that are leading to excess imports. At a time when there is a surplus of labour and skills in the north-east and Scotland, surely a proper effective supply side policy would concentrate on the whole economy ; as my hon. Friend the Member for Leeds,

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West (Mr. Battle) has said, that requires a strong regional policy. However, it also requires investment in other aspects of the supply side, especially in training. We must redress the skills shortages that our economy is now facing and encourage more young people to stay on at school and to go on into higher and further education. We must not forget that we have the lowest levels of participation in higher and further education in western Europe--and that, again, is hurting our economy.

Mr. Rhodri Morgan (Cardiff, West) : Yes, lower than in South Korea.

Dr. Moonie : Yes, we must always remember that labour is as important as capital in supply side economics. The Government are finding that out only too clearly as industrial unrest rises in the economy and as the former surplus of labour is eroded by demographic change.

Much of the United Kingdom is still suffering from under-investment, for example, in our infrastructure. That can be seen most clearly in my own area of Scotland where we have a great need for roads and for a motorway from Leeds to Edinburgh and from Carlisle to Glasgow. We need better intercontinental air links for Scotland and the north-east of England, and electrification of the north-east line, not only to Edinburgh as intended, but further north to Aberdeen and Inverness.

An effective supply side policy requires proper regional development otherwise the shortage of capacity and the overheating in the south-east, which is slowing down the movement of people and goods, which London is now experiencing, and which has been mentioned by many manufacturers as a key element in their rising costs, will rapidly worsen until London will start to choke to death under the burden of its own population and enterprise. That is the real challenge to the Government on the supply side which, to date, the business expansion scheme has failed to address.

The Financial Secretary said that in the past the Opposition have been inconsistent and that we now appear to criticise a scheme that we formerly supported. There is no inconsistency. It was right to support what was, after all, the only limited measure of help that was being given to help industry to expand. If it is a question of take it or leave it, thanks very much, we will take it. However, surely it is also right for us to conduct a proper critical analysis of what has happened as a result of the implementation of the policy. We must point to deficiencies in their policy and ask the Government to come forward with some means of redressing them.

The principle was not unsound. It was supported by people such as myself when I was in local government before I came to this place. When I was one of the trustees of our pension fund in Fife regional council, I supported its investment in venture capital schemes. The only money going into venture capital schemes in Scotland at that time came from local authorities. It certainly did not come from the private sector. We welcomed this as a principle and a means of perhaps enticing more money into valuable areas. Unfortunately, it has turned out to be a shyster's charter and a home for fast buck merchants that bedevils our economy.

6 pm

Yesterday, in another debate, I criticised the principle of widening tax rates on income. I still believe that this scheme has produced more problems than it has solved, as

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has the scheme about which I talked yesterday. It needs to be modified, if not abolished. It is a warning to us to be careful when we try to influence market decisions in this manner.

I have welcomed clause 44 and I also support the amendment of my right hon. and learned Friend the Member for Monklands, East (Mr. Smith). I do so for one simple reason. I believe that a genuine mistake was made and that the Government's intention was to ensure that the scheme had its present and not its past form. It is wrong that people should be allowed to profit doubly from a mistake such as this. Although I would not normally support retrospective legislation, there are reasonable grounds for us to do so tonight.

Mr. Morgan : The Opposition are trying to put over the fact that we have sought to give the business expansion scheme a fair trial. We are expressing on behalf of the communities that we represent--Leeds, Kirkcaldy, Pontypridd and Cardiff--

Mr. Dennis Turner (Wolverhampton, South-East) : And Wolverhampton.

Mr. Morgan : I am talking only about my hon. Friends who have spoken. We have given the business expansion scheme a fair trial, but have had to draw a sorry conclusion about it.

There are Conservative Members present, although not many seem to want to speak. That could be for two possible reasons : first, that there is a news blackout on "Today in Parliament" and secondly, that they are deeply ashamed of the performance of the business expansion scheme because they know that it has not achieved what it was cracked up to do.

The Financial Secretary was good enough to agree that when the business expansion scheme was first introduced, the Leader of the Opposition welcomed it. Certainly, when I came to the House I said that I had been a fan of the scheme. Many others, including my hon. Friend the Member for Kirkcaldy (Dr. Moonie) also said that they wanted the business expansion scheme to be given a fair trial. The scheme was supposed to encourage people to take risks with their money in a way that would contribute to the expansion of enterprise in this country and, therefore, to the expansion of jobs and the correction of our chronic balance of payments deficit.

The Financial Secretary also said that he thought that the business expansion scheme had been part of the amazing resurgence of venture capital industry in this country. He boasted that we had a venture capital industry that was bigger than that of any other European country and second only to the United States of America. He completely misunderstands what the business expansion scheme was originally cracked up to do and the difference between venture capital and seed capital.

The business expansion scheme is not about venture capital. The companies involved in it are far too small and young. By and large, the gap that the business expansion scheme was supposed to fill was the seed capital gap and not the venture capital gap. The scheme was supposed to say to people, "Would you like to put your money at risk? You could lose the lot or make a lot of money. This is not a safe investment, and if you want a safe investment you should put your money in the Post Office. This is a high risk investment." High-risk investment is for companies that either do not yet have products to market, or that

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have just got a product to the market place that still needs an enormous amount of working capital spent on it to market it properly so that it is capable of being sold overseas, not merely within the company's home town or region.

These are not the sort of industries that have been funded by the business expansion scheme. The scheme should be a million miles away from putting money into old people's homes, private cleaning and contracting companies and other enterprises that are largely asset based. It should be a million miles, if not light years, away from putting money into the provision of private residential accommodation under the assured tenancy scheme.

This is one of the failures of the scheme and I hope that the Minister will address that problem when he returns to the Dispatch Box. If the scheme was supposed to involve venture capital, surely, there has been a complete misunderstanding. We should have been talking about high-risk, high-growth companies, which could be funded and from which the investor's money could either be returned 10 times over at the end of five or seven years, or he could lose the large bulk of it, if not the lot. Such companies have not benefited from the scheme.

We have to educate the Financial Secretary about the regions. He has failed to understand our point about venture and seed capital. He has also failed to understand our point about regional drift. He does not have the facts straight in his head about this country's geography. When asked why more than 50 per cent. of the schemes and more than 65 per cent. of the money had been invested in enterprises based in the south-east and East Anglia, which we considered to be one of the scheme's failings, he said that there was more business in those regions. In response to my hon. Friend the Member for Pontypridd (Dr. Howells), he said that there were more people in those regions.

The Financial Secretary should listen to the facts about this country's geography. The number of people who live in the south-east and East Anglia totals about 19.5 million, which is almost one third--33 per cent.--of the country's population. The fact that 65 per cent. of the money is invested in the south-east and East Anglia, which is where 33 per cent. of the population live, creates a massive disparity of almost 100 per cent. between the regional share of this country's population in the south-east and East Anglia and the money invested there under the business expansion scheme. That is a massive failure of the scheme and it is no good his saying that there is more business in the south-east. That is palpably not true. There is no evidence to suggest that there are fewer new business formations or enterprises in the outer regions of the country than in the south-east and East Anglia. However, there is more capital in the south- east.

The fundamental problem with the business expansion scheme is that it is not attuned to where there is enterprise, to the needs of the risk taker, inventor or person willing to invest in a new business, but to the needs of capital. It is attuned to the needs of people with money in their pockets. They are told that they can double their money through the scheme, that they will not have to take any more risks than they want, and that the taxpayer will give them a bonus on top of that.

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The regional disparity in this country is not simply that the south-east of England is a large region, although clearly it is. In fact, it is the biggest region. If East Anglia is thrown in, the south-east region contains one third of the population. Another disparity is the fact that it contains about 50 per cent. of the middle classes and 90 per cent. of the wealthy people. It is where, by and large, the millionaires live, apart from a few wealthy landowners who live in Scotland and the south-west. If a scheme is attuned to the needs of millionaires, and people interested in the tax breaks for higher rate tax payers, clearly those areas with more wealth will be where it operates most strongly. The scheme is not targeted on areas where there is more enterprise.

There is no evidence of less enterprise in Pontypridd, Kirkcaldy or Cardiff or in the outlying regions. The problem is that those places cannot get together with the owners of capital, because the owners do not live there. In the south-east, capital, is easily available because, historically, it has accumulated there for various reasons--it has agricultural wealth, the capital city is there, Parliament is there, and so on.

If the Government persist in misunderstanding the deeply risk-averse nature of British capitalism--the failure of the business expansion scheme to remedy it over the past five years is further evidence of that misunderstanding--they will never devise a set of policies that will close the trade gap and bring it back to parity and beyond ; for we shall need surpluses in the 10 or 15 years after the deficits to pay off the colossal debt that we are now running up.

All Opposition Members were keen to see the BES have a fair trial. We are deeply disappointed by the way in which it has been pushed further in the direction of risk aversion rather than risk taking by the inclusion of residential property under the assured tenancy scheme. Now, even more than before, the BES has become a political gimmick. Last year it meant the Secretary of State for the Environment suddenly reflecting, when considering the Housing Act 1988, that he should not approach the next election without a single scheme having been put in place and with no private capital having flowed into assured tenancies. That would have made him look even more foolish than he usually looks when the courts declare his leaflets illegal. He wanted belts and braces to ensure that a couple of schemes--assured tenancy and private capital funded schemes--were brought forward, thinking that he would not pay for them himself but would get the British taxpayer to do so. Rather than depend on the willingness of British capital to put risk money into private rented property, he decided that, if it were given the extra bonus of a tax break on the top rate, British capital might get some schemes going. Well, there may be some schemes, so the right hon. Gentleman will be able to claim that there are some at the next election. They cannot be compared on a fair and equal basis with schemes for developing new laser beams or new silicon chip factories that might produce products to sell to Japan or the United States. The BES projects are a straight tax break to ensure that the Secretary of State's few remaining shreds of political reputation can be held together respectably when it comes to writing the next Tory election manifesto. The scheme always carried the risk of being a political gimmick and this has proved that more true than before.

We are now retrospectively trying to put close companies in order. The Government feared that financial

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manipulation was going on, and so it was. I welcomed the Financial Secretary's expression of horror at the way in which certain financial middlemen were abusing the scheme, but that is in the nature of the scheme--that is what it is all about. It is not filling the gap that it was meant to fill. It is not putting people into manufacturing industry. In America, a person starting a new silicon chip company can go to his local rotary club or masonic lodge and get people to give him a couple of thousand dollars each to help him get started, knowing that they can lose all the money. That does not happen here, and the BES does not fill that gap.

Instead, curiously, the scheme presents a free gift to a certain breed of financial middlemen who can sell safe little earners--this is supposed to be high-risk new venture capital, but it is proving the reverse. The middlemen promise to fix people up with nice little earners ; all they have to do is answer the advertisement, tear off the coupon and a salesman in the latest sharkskin suit will call round to see them. I advise people to watch out for these salesmen. I said in an earlier intervention that the scheme was providing packed lunches for sharks, but I forgot that I am deeply interested in marine wildlife. I should have said packed lunches for vultures--vulture capital, not venture capital.

The Minister must give serious consideration to the failure of British small businesses to take risks. He must understand that if the money from the tax break goes into residential property, DIY warehouses, old people's homes, and private caterers and contractors, which take over on a sweetheart basis from local authorities and hospitals, that will do nothing to solve our balance of payments. It will redouble all the economic difficulties from which the country has suffered and continues to suffer. We have a £15 billion balance of payments deficit, and this scheme in no way contributes to solving our severe economic problems.

6.15 pm

Ms. Diane Abbott (Hackney, North and Stoke Newington) : I support the amendment. The extension of the business expansion scheme to private rented accommodation under the assured tenancy arrangements is cruel and irrelevant. It is irrelevant because, as my hon. Friends have already said, the purpose of the scheme was to encourage risk investment and create jobs. It will create very few jobs. It is also irrelevant and cruel because of the effects it will have on the housing market and on people in housing need, especially in London and the south-east.

In London and the south-east, the private housing market has for many years been the prey of sharks, vultures and people such as Rachman. There is already a terrible problem in London ; private landlords try to winkle out sitting tenants so that they can sell off flats and transform accommodation into assured tenancies. Now that private landlords receive a tax break to do up such accommodation, the financial pressure on them to get rid of private tenants will be even greater.

I know that the Minister takes no interest in these matters, but he has only to go half a mile down the road to Westminster, Bayswater, Pimlico or Maida Vale to see elderly sitting tenants who have lived all their lives in

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mansion blocks--many of them in marginal Conservative

constituencies--living in fear and leading unhappy lives

Mr. Morgan : Their Members of Parliament, too.

Ms. Abbott : Indeed. The Minister would not have to go far to find such people, or to find families being harassed by landlords who want to remove them so that they can transform the accommodation to assured tenancies. This tax break will provide an additional financial incentive for such harassment.

The growth of the assured tenancy sector to which this extension of the scheme will lead will make no practical contribution to the housing problems of London. These assured tenancies will be offered at prices way beyond the reach of the average person who works and lives in London. They will be offered to businesses, tourists and rich people who want a pied-a - terre in London. The tenancies do nothing to help the average family who want somewhere to live or the homeless. The scheme will only put money into the pockets of speculators and the heirs of Rachman. To bring it forward under the guise of encouraging enterprise and creating jobs is hypocritical, bogus, cruel and irrelevant, and I hope that even at this late stage the Government will see their way clear to withdrawing the idea.

Mr. D. N. Campbell-Savours (Workington) : I try each year to take an objective position in Budget debates. Over the years I have invariably supported the Government when I thought that they were right, and I have been open in my support ; I have been critical when I have thought that they were wrong. Last year we had a debate on these matters. If I recall correctly, we were debating the possibility of abuse of assured tenancies where people might enter into arrangements with those who took out the tenancies over a period of five years and where the investor might have a direct pecuniary and, indeed, occupational interest later.

I persisted in raising the matter last year. If I recall correctly, my hon. Friends may have raised it in Committee upstairs. I persisted in the hope that this year the Minister might be able to report on how things had developed. I should like to know whether abuse has taken place or been reported to him. If it has not been reported, will he consider my original predictions about how the scheme might be abused and make a statement to the House during the debate that may take place on Report? There may not be much chance to discuss the matter in Committee upstairs, and I will not be on that Committee this year.

I want to speak more specifically to the whole question of the intellectual base on which the BES scheme was submitted originally to the House and argued by Ministers publicly. As I understand the Government's position, it is generally that Government need not intervene directly to create jobs, that they can reduce their commitment to regional policy and that, by a system of tax aids, individuals will be given the opportunity to take decisions and invest where, in other conditions and under other Governments, those decisions might be taken by Ministers or by civil servants in conjunction with industrialists.

The premise is that as a substitute for a regional policy of state intervention we should rely on individuals to take decisions which will have the same effect in creating employment in the regions. Ministers will recall that I have

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supported aspects of the BES scheme over the years. I put it to the Minister today that the scheme is not working in the way that the Government originally hoped it would. They may feel that it has had some success, but a report on the Peat Marwick report of 1986 said : "With the benefit of a longer time-period this report has also been able to reveal the high loss rates amongst fund investments made under the BES (over 50 per cent.) and in the early years of the BES (over one-quarter of investments made in 1983-84 and 22 per cent. of the capital invested in that year had been lost by late 1987). Overall, of the £175 million invested by funds and managed schemes in the seven years to April 1987, 17 per cent. had been lost by late 1987."

As I understand it, that report was fairly favourable to the scheme.

I cannot believe that the Government ever intended such losses on the scheme. That must indicate a deficiency in it. I cannot believe that the Government, if they were being reasonable on these matters, would have been so willing to support some of the schemes. Earlier, there were references to wine merchants and art dealers. I cannot believe that it was ever the intention of Ministers that such people should be involved. The scheme should have been geared far more to manufacturing industry.

The 1986 Peat Marwick report made a point about the regional base for investment. The document from which I am quoting said : "Finally, the report highlights the significant regional inequalities in the impact of the scheme. The South East and East Anglia contain considerably more than their fair share' of BES investments relative to their shares of the total stock of UK businesses (51 per cent. of investments and 65 per cent. of the invested capital in the period 1983-84 to 1985-86 inclusive)." The scheme has failed because of its emphasis on the south-east, although I accept that there are pockets of high unemployment in Kent, in some of the Medway towns. I recognise, as I am sure my hon. Friends do, that those problems need resolving. Indeed, Labour's case is that we would single out many of those areas and target them for special treatment. We would ensure that they are given the support that they need to develop.

In wealthy Kent and wealthy south-east England generally, those areas stand out as blots on the employment landscape. In some of them unemployment is as high as it is in Yorkshire and Lancashire. I am sure that the people in Kent, Surrey, Sussex and all those areas would accept that in the main they are affluent counties. Yet they are getting the lion's share of the BES investment. If Ministers want to substitute for a regional policy, by way of state intervention, schemes that are tax-based they must find a regional basis on which to give tax concessions.

I have had correspondence with Ministers who say that it is not possible to build into the tax system a regional basis for tax concessions. I do not subscribe to that. The Prime Minister may have done things that I do not like, but she has proved in many ways that things can be done when the will is there. If Ministers set out to find a way, I am sure that they could establish in finance law principles that would benefit areas of high unemployment through the tax system. In that climate and under that regime, Labour, without any sense of equivocation or adding any condition, would wholeheartedly support the scheme in the same way as I did when it was much narrower in its early days after its introduction in 1983-84.

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There is work that can be done. It would be nice if the Minister, in reply to the debate, could say, "I have never conceded the case before but I will ask my officials to see whether it is possible somehow to incentivise regional investment through the tax system on the basis of a scheme akin to the principles laid down in the business expansion scheme." It might be geared to the manufacturing sector. The Government would not be compromising any principle. They would not be conceding the case for Government intervention in a way that might lead to an ideological backlash from Government supporters or that might offend the views set out in the Conservative campaign guide for the last election when they were preaching vigorously about the need for as little state intervention as possible. I am asking them to use what they accept are the weapons--no, the tools--that the state has at its disposal : that is, a tax system, in trying to drive a greater regional incentive into small business investment. Another matter irritates me. I want to read to the House an advertisement. This is what discredits Government tax policy. The advertisement was put in by a firm called Johnson Fry Corporate Finance Limited. It is taken from The Times of the--the Economic Secretary smiles. Perhaps he will tell me why he does so or, after I have read this, whether he still feels like smiling.

The Economic Secretary to the Treasury (Mr. Peter Lilley) : A sedentary smile.

Mr. Campbell-Savours : That is an original term.

The advertisement appeared in "The Times" of 25 February 1989. Its headline is :

"High earner pays no tax".

It goes on to say :

"Peter Fletcher is a successful entrepreneur who will earn £200,000 in this tax year. Last year, his tax bill was a frightening £105,000 . This year Peter will pay nothing at all. He is taking advantage of special tax concessions offered through Business Expansion Schemes (BES) and Enterprise Zone property investment"--

I am not condemning that ; I am just drawing attention to the way in which such investment schemes can be abused and how that can anger people such as myself who see the mistreatment of millions of people in our society within tax law and the benefit system--

"which together will completely eliminate his tax liability." 6.30 pm

I supported the original enterprise zone proposal, as the Financial Secretary will recall. My efforts were rewarded with one in my constituency which has been a glowing success. I do not dissent from my original view, but, unfortunately, the whole scheme has gone over the top.

The advertisement goes on :

"What's more, he won't have to dig deep into his pockets to do this as all his investments are totally self-funding, through specially arranged bank loans."

I understand that, with the support of my hon. Friends, the Government are now closing that gap.

"Peter has invested £140,000 in Enterprise Zone property, £40,000 in BES and his remaining tax liability is mopped up by personal allowances and mortgage and pension tax relief."

No doubt my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) will be dealing with those matters in Committee. I shall not be there to play my part on this occasion, but I am sure that my hon. Friend will make a good job and an effective case. The advertisement continues :

"But good news for the Fletcher family doesn't stop here. Peter's brother Michael, who is 28"--

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I presume, a yuppie Porsche man--

"works in the City and takes home"--

maybe not--

"£35,000 a year, has found that he too can eliminate his entire higher rate tax liability by investing in a Smaller Companies Assured Tenancy (SCAT) BES Scheme, with a 100 per cent. loan."

I understand that that is elegible for tax relief if it is done through a close company.

"Michael will receive tax relief on the interest"--

yes, he is doing it ; it is coming out now--

"on his loan and, in five years' time, he will be able to sell his BES investment, which is not subject to Capital Gains Tax. Charles Fry, Chairman of Johnson Fry,"--

the corporate finance company whose advertisement I am now quoting--

"a company that specialises in BES and Enterprise Zone investment, comments All higher rate tax payers should be examining BES and Enterprise Zones very closely. The Assured Tenancy Scheme effectively enables investors to invest, at a 40 per cent. discount, in companies that buy and rent out residential property. This is the first year that this type of investment has been available. BES has a £40,000 limit per person, so the wealthier individual should also be looking at Enterprise Zone investment which enjoys full tax relief on approximately 95 per cent. of the investment.' "

I am slightly out of order, Sir Michael, but I shall go on. " One important point to stress, however, is that people should invest now before possible Budget changes. Why pay money to the taxman when you can utilise the same money (without any further capital outlay) to make good quality property investments instead?' "

I am sure that my hon. Friend the Member for Hackney, North and Stoke Newington (Ms. Abbott) will find those remarks offensive. She knows what will happen when such tenancies get off the ground. My hon. Friend the Member for Leeds, West (Mr. Battle) turns in his seat to grab my copy of the advertisement. I can tell him that I located it with great difficulty. However, having spent several hours doing so, it now features in every speech that I make wherever I go in the United Kingdom as an example of how tax law has got a little out of hand. It cannot be right for someone to offset a liability to tax on £200,000, taking allowances into account, by using such schemes. All that I say to Ministers in my modest contribution today is that they should target this scheme more effectively. It should be geared more to genuine service trade and manufacturing industry and it should be limited, perhaps to a lower level than it is today, unless it applies to manufacturing industry in the regions. I am talking about regions or localities of high-level unemployment, depending on how one draws the line. One could almost support an amendment for a considerable extension of the scheme if it had a firm manufacturing regional base. I should be willing to support further and greater tax concessions if that were the case.

Mr. Win Griffiths (Bridgend) : I had not intended to intervene and I apologise for not having been here at the start of the debate but I was attending the Select Committee on Education, Science and Arts. I want to ask one or two questions which I hope the Financial Secretary will answer. I apologise if he dealt with them when he opened the debate.

The Government have always been concerned to target help on those who need it most and where it can be most effective, whether it be in housing, industry or social security benefits. Therefore, can the Financial Secretary say how much money has gone to those areas where

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unemployment is higher than average through the business expansion scheme by way of tax relief, and so on? The Government should be able to do that by reference to travel-to-work areas in the United Kingdom. I should be interested to know whether the Government have any figures about the effectiveness of the business expansion scheme in areas of high unemployment and how that compares with the business expansion scheme in areas where the unemployment rate is below average.

Secondly, how effective has the business expansion scheme been in providing jobs in those sectors which contribute to British exports? It is obvious that, if the Government have two target areas in terms of trying to encourage enterprise and create jobs, they should be those areas where unemployment is highest and those sectors where a contribution can be made to taking on the immense balance of payments problem which the Chancellor's other policies have created. I hope that the Financial Secretary will be able to give some information on those points and that he will consider a more radical reform of the business expansion scheme to take account of my questions.

Mr. Chris Smith : We have had a wide-ranging and lengthy debate about some of the major issues that lie behind the abuse with which the amendment seeks to deal. The debate has been characterised by the fact that, apart from the Financial Secretary, no Conservative Members have taken part. Clearly, they are not interested in the problems of the BES, in the tax abuse which the clause addresses, in the equity gap which exists or in the desperate need for more investment, especially in the manufacturing sector.

The only Conservative Back Bencher to intervene at all for most of the debate was the hon. Member for Dover (Mr. Shaw), who absented himself for much of the discussion, perhaps to conduct more research with his researcher into the net book agreement. He seemed to imply that he wished the Government to keep under review the £500,000 cap on non-property or shipping-based BES schemes. The Minister said that he would do so. I hope that he will not be tempted too far down that road, because the restriction to £500,000 was welcomed by the Opposition last year and we hope that it will be kept in place. It is worth noting that the hon. Member for Dover, as he himself said, is an expert on the BES. Last year, when I checked on these matters, I discovered that he was a director of four BES-financed companies--City Gate Estates, Hoskins Brewery, Private Investor Publications and Palladian Estates--all four of them, I am sure, making a major contribution to the manufacturing needs of the nation. He was, in addition, a director of three further companies, all of which were involved in the raising of BES finance. Those were Sabrelance Ltd., Sabrelance Business Service Limited and South Cumbria and North Lancashire Management Limited. He is indeed an expert on the BES, and as a result he appears to be benefiting substantially.

I was disappointed that the Financial Secretary--as he did last year-- trotted out the Peat Marwick report, which dealt only with the first year of operation of the BES. The favourable nature of that report must be modified in the light of further research, especially that done by the Small

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Business Research Trust, which saw major changes in the nature of BES investment from 1984 to 1988. The trust said in its report : "the economic impact of the scheme is less favourable than suggested by Peat Marwick."

The Financial Secretary must not attempt to convince us that Peat Marwick is the whole picture : it is not. It shows the picture in the initial stages of the BES and not the subsequent development of the scheme.

Many of my hon. Friends have said that we are not opposed in principle to the idea of the BES. However, we object to the way in which the scheme is being used, and the close companies mechanism is the most obvious of the deficiencies in the way in which the BES has turned out since 1984.

6.45 pm

My hon. Friend the Member for Workington (Mr. Campbell-Savours) said, for example, that the BES was not working in the way that had originally been hoped. My hon. Friend the Member for Burnley (Mr. Pike) said that he was not totally opposed to the scheme in its conception and recognised the need to raise capital to close the equity gap. I agree with my hon. Friend in that approach. My hon. Friend the Member for Pontypridd (Dr. Howells) also said that the BES was a good idea.

The problem is that the reality does not match the principles with which the scheme was introduced, the reason being that it has become a device for sheltering high rate taxpayers' incomes. It has become distorted from the original intention of the BES, which was focused on the raising of capital for small-scale risk enterprise. It has changed in nature. The primary purpose of the scheme now is tax avoidance rather than the raising of equity finance, and the problems that have flowed in train include the north-south flow of funds, the increasing emphasis on property and the increasing emphasis on asset-backed enterprise. The use of the close company device is a clear sign of the problems that come when a good idea turns sour and becomes used entirely for the purposes of tax avoidance.

The debate is primarily about an amendment which seeks to make the closing of the loophole retrospective for a year. Towards the end of his earlier remarks, the Minister--I fear that I must disagree with the hon. Member for Berwick-upon-Tweed (Mr Beith) on this--said that there had been occasions during the last 20 years when retrospective tax legislation had been regarded as worth introducing because the original situation that everyone had assumed to be the case had become distorted.

The use of the close companies device is such an instance. The Minister said that the private rented application of the BES had grown much more quickly than he had forecast this time last year. Indeed, the use of the close company device in the three months leading up to the Budget, specifically linked to the rented accommodation scheme, was not forecast at the time.

Nobody expected that that would happen and nobody

realised--certainly not the Financial Secretary--that it could be used in that way. The ingenuity which some bright financial operators put into developing a device

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