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Mr. Pearson: Not at all. I believe that those who will run VCTs are exactly the people who are likely to provide institutional finance for management buy-outs. I think that they will say, "We will provide you with a £6 million package for your management buy-out, because the company can meet the £10 million criterion. VCT money will provide £1 million, and ordinary institutional venture capital will provide £5 million." I ask the Financial Secretary to impose an embargo on VCT funding of management buy-outs.
I understand that the financial intermediaries and claims office of the Inland Revenue will be responsible for supervising it; the task would be greatly assisted, and financial probity assured, if regulations were introduced providing for an annual independent valuation of each VCT's unquoted portfolio.
The purpose of VCTs is laudable, but some of the detail is fundamentally flawed. As a result, the money that hon. Members on both sides of the House agree is necessary to support businesses is unlikely to be forthcoming. I expect the risk-reward ratio to prove unfavourably balanced in favour of reward in the long term. I think that VCTs will be used to fund management buy-outs at too high a level, providing deals involving £1 million VCT money as part of a syndicated deal with loan-funding institutions.
VCTs are only part of a piecemeal response to small business finance. A more coherent approach is required, and I welcome the comments in the Bank of England's second report about the need for a White Paper on the subject.
Mr. Tim Smith: The hon. Member for Dudley, West (Mr. Pearson) has considerable experience of the market, and he is entitled to ask whether the proposed tax relief is directed specifically towards what we all consider to be the area of market failure. That, I think, is the starting point for the debate: the area of market failure is the equity gap.
Although the equity gap has been identified by countless reports over the years, we have not yet found a satisfactory solution to it. Whether it makes sense to address it by means of the tax system is an interesting question. Like my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), I am not always
Column 403enthusiastic about creating new tax breaks: on the whole I prefer a broad tax base and low tax rates. First, one man's tax break is another man's tax bill; secondly, there is no doubt that tax breaks affect economic behaviour, and may distort it. They may not achieve what Parliament hopes to achieve.
The fact is, however, that we have been living with the equity gap for many years. I consider that we are justified in introducing this new relief, as long as it is focused as the Committee wishes it to be. It should be focused on smaller investments. There is, I think, a consensus in the Committee that venture capitalists are normally able to provide amounts of £500,000 or more, and that therefore the level should generally be below that.
Why does it matter? It matters because, as some growing small businesses are unable to obtain the equity finance that they deserve, they must go to the bank--but the cost of bank finance makes it unsuitable for a rapidly growing business, and in certain circumstances may cripple it. It makes much more sense for at least the fixed as opposed to the working capital of a business to be financed by equity, although long-term bank debt is certainly a possibility. That is what the new relief is all about.
Obviously, one has to try to find a satisfactory balance that will provide a sufficiently attractive tax incentive to bring in investment that would not otherwise accrue. At the same time we must try to ensure that the scheme is not so attractive that all sorts of tax avoidance experts abuse it. In practice, it is difficult to strike such a balance.
I agree with my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) that in such circumstances it makes sense for the Government to provide in the schedule a provision to allow the Treasury to change by regulation the definition of a qualifying investment. That means that if there is evidence of the kind of abuse that some Opposition Members obviously fear, it can be dealt with quite quickly. The Revenue is quite capable of dealing speedily with such abuses. It can issue a press release which states that the law will change from the date of that release and, under the schedule, it can table regulations quite soon thereafter to put the matter beyond doubt.
That is important because we must avoid the marketing of venture capital trusts principally for tax reasons. Far too many people went into business expansion schemes for the wrong reasons and many of them got their fingers burned. They may have received tax relief, but that is not much use to people who lose all their money. Many of the schemes were not viable and lost a great deal of money. That is unsatisfactory for taxpayers and the Treasury, and it is certainly unsatisfactory for the economy because we are debating means to grow businesses. We are not debating any old small business but growth businesses. We are trying to identify businesses with real growth potential which can be encouraged by venture capital to grow and create jobs quite quickly.
Venture capitalists say that there are three requirements for a satisfactory investment. First, one obviously needs money. Secondly, satisfactory management is required and, thirdly, there must be a sensible business proposition. In practice, it is often difficult to find satisfactory management. Some business propositions are clearly
Column 404much more attractive than others and, in practice, shortage of capital is not normally a problem. At the moment capital comes from the United States rather than from the United Kingdom because UK institutions feel that they have enough invested in venture capital. Generally, there is no shortage of capital, but particularly there is a shortage of amounts of £500,000 and below, and that is the area on which the new scheme needs to be focused. It should be made clear that that is the scheme's object.
Mr. David Shaw (Dover): My hon. Friend says that there is no shortage of venture capital, but surely there is a shortage of venture capital provided by private individuals. There has been far too much investment by institutions in high-risk areas and the individual who may also bring management skills to a company has not been given the opportunity to invest. Does my hon. Friend agree that we need an increase in the proportion of such venture capital rather than to have just institutional investment?
Mr. Smith: I entirely agree. People talk about capital gains tax, which has a very narrow base. My hon. Friend will know that many institutions pay no capital gains tax. It was quite possible to have a venture-capital backed company in which the only investor paying capital gains tax was the person who worked in it and managed it. Because all the other investors were tax exempt institutions they did not pay capital gains tax. That is indefensible, and it shows how unsatisfactory is the present capital gains tax regime. I agree with my hon. Friend that for people who take a considerable risk it is right that after a period of five years, during which they will have their money locked up, they should be able to take advantage of capital gains tax relief. That is an important aspect of the issue. Another aspect which has perhaps not been sufficiently emphasised has been compared with the business expansion scheme. It is that under the business expansion scheme tax relief on the up-front investment was 40 per cent. The maximum relief in this instance will be 20 per cent. and that significant difference means that only half of the investment will be tax-deductible. That considerably changes the balance about which I spoke.
Mr. Smith: My hon. Friend thinks that it may have gone too far, but it changes the balance of advantage between the two aspects which I described. We need an attractive arrangement to bring in investors. My hon. Friend may feel that offering only 20 per cent. may make it difficult to persuade individuals to come in. However, offering 40 per cent. under the BES created the difficulty that people were able to say to prospective investors, "Look, you can simply eliminate your entire tax liability in relation to the amount which you invest in this company."
Relief of 20 per cent. is the right level at which to start and if it is found that it is insufficient to attract people we could have a look at increasing it. The fundamental difference between the two schemes will change the balance considerably.
The Liberal Democrat amendment seeks to eliminate property development. If I have understood it correctly--and the legislation is complex--property investment and
Column 405property dealing are already excluded. Therefore, it is property development that the amendment seeks to exclude. The hon. Member for Gordon (Mr. Bruce) suggested that property development did not create any new economic wealth. It seems to me that if somebody builds a factory or a warehouse he adds to the total of the nation's assets. There is often considerable risk involved in that. The property may be pre-let but it will often be speculative. A large warehouse may be built and only afterwards will an effort be made to let it.
Mr. Malcolm Bruce: Perhaps I could clarify the matter. I did not say that property development per se was incapable of creating wealth but that the simple appreciation of property value was a paper transaction that did not create wealth. The Government introduced restrictions last time because it was non-productive.
Mr. Smith: My hon. Friend the Member for Bournemouth, West dealt satisfactorily with that point. Over the past few years the property market has been transformed, to the point where the idea that one can make a fast buck out of property has gone. I cannot believe that the hon. Gentleman is seriously advising his friends to invest in property. Perhaps he knows something that we do not, but I cannot see that.
The Government have inflation so effectively under control that we are in a new environment, but it is difficult to persuade people of that. For over 30 years we have had a culture of inflation and people are finding it difficult to become accustomed to the new environment. I am not sure whether the hon. Member for Gordon made that point earlier. People will not make money simply out of the appreciation of property or any other asset over the next few years. That is not a threat. However, if the hon. Gentleman turns out to be right there is provision in the Bill to deal with that at the moment at which the Treasury feels that action is appropriate.
The difficulty with the hon. Gentleman's proposition, which I think he said he had taken from the business expansion scheme, is that it precludes some genuine business propositions and commercial arrangements from being eligible under the scheme. It is again a question of balance but we should not accept the Liberal Democrat amendment and allow such schemes to be advanced.
The hon. Member for Oxford, East (Mr. Smith) tried to encourage us to impose a time limit of two years. That is not necessary because it is open to us to reconsider the matter. We consider these matters when we are debating the Finance Bill each year. It will be some time before a venture capital trust is launched. There will have to be a stock market flotation to raise the capital and it will be some time before the cash can be invested because nobody will rush into that: the money will be invested only when satisfactory investments come along.
The period of two years in the amendment is totally unrealistic because the average time will be considerably less than that. Imposing a two-year limit would be premature. We need more time to review matters as they develop. If there is abuse in the meantime the provisions in the Bill will deal with it.
Column 406problem. There has not been much dissent from the fact that that issue must be dealt with, as we need to get more investment into our industry.
I was interested in the comments of the hon. Member for Bournemouth, West (Mr. Butterfill) on the pensions industry. I agree that that is one of the industries that should be looking long term. People have their investments in their pensions and that involves a long period. We should accept that the short-term requirement of investment managers in that industry--to show how high up the performance league table they can come each year--causes concern, and militates against the long-term approach that should be taken.
Some of the Bill's requirements are being considered in another place. The hon. Gentleman is right to say that they are a cause for concern in relation to the investment side of the pensions equation. I hope that, at some stage, consideration will be given to the potential effects of the legislation. The issue may have been lost in the concerns that people rightly have about people receiving a proper pension when they retire.
All the issues are being considered separately. It is generally accepted that a problem exists in relation to the equity gap, short-termism and the lack of investment, especially in small companies, and it is recognised that small companies will be the vehicle for growth and jobs--a growth in employment is likely to come from that sector--but where is the overall strategy to which the various mechanisms, ideas and suggestions may relate? That worries me. Where is the Government's overall approach, which identifies, deals with and proposes a range of measures that can be taken to deal with this real and pressing problem in the next few years? Earlier, in response to the hon. Member for Orpington (Mr. Horam), my hon. Friend the Member for Monklands, East (Mrs. Liddell) drew attention to the fact that the proposal contains no specific assistance to companies that are just starting up. That omission should be dealt with. It would presumably be dealt with if the Government had an overall strategy that identifies the range of issues that need to be solved, and that produces a range of mechanisms and solutions to the problems. Many issues, such as that of start-ups, do not get a look in and are not properly dealt with because the Government approach the matter by producing one single mechanism and claim that it will address the equity gap problem. Tax relief has been mentioned by a number of hon. Members. I do not think that Opposition Members are objecting to the principle of tax reliefs. However, it is our duty, as the Opposition, to raise the question of whether tax reliefs are effective. I agree to a great extent with some of the comments made by the hon. Member for Beaconsfield (Mr. Smith), but we must be careful, when dealing with tax reliefs, that we do not introduce to the market distortions whose impact we cannot predict.
In the Committee that considered the Finance Bill last year, the then Chief Secretary to the Treasury said that a good case had to be made for tax reliefs to be introduced, and that one had to be clear about what their impact would be. All too often, it is believed that tax reliefs can be introduced and that no real cost is involved. If, however, the Government pay money in the form of grants or subsidies, they must be much more careful because such public expenditure is taxpayers' money.
Column 407Effectively, tax reliefs are exactly that. They use the public's money. As the hon. Member for Beaconsfield said, tax reliefs are someone else's tax increase or someone else's service cut, if the Government choose not to raise extra tax to fund the relief that they are introducing. We must be careful to ensure that we know what impact tax reliefs will have.
The Opposition's concern is that the scheme before us may generate a lot of activity. The Government are forecasting the tax relief level that they will take into account in their public expenditure accounts. The Opposition ask how one can be sure that that tax relief will achieve for the British people a benefit that makes the tax relief worth while. We have a right to ask that question and to receive a detailed answer to it.
How can we be sure that the schemes that are introduced will not generate an increase in the productive capacity of the economy and an increase in jobs? The schemes might lead simply to property development that is aimed, not at producing more manufacturing capacity, but at taking advantage of the tax relief. How can we be sure that, if the schemes improve and increase our manufacturing base, that would not have happened without the tax relief?
My hon. Friend the Member for Dudley, West (Mr. Pearson) made the point that venture capital is available for some schemes at present, so we cannot be sure that venture capital that would have gone into schemes before the change will not simply go into the same schemes, but with the benefit of tax relief. Those questions must be dealt with. The Government must convince us if we are to acknowledge that the scheme is worth while.
On VCTs, the Financial Times said:
"The chancellor had barely sat down after last months's Budget before Rothschild Asset Management said it would set up a venture capital trust".
Two articles in the Financial Times used the words:
"The chancellor had barely sat down".
If Rothschild Asset Management said that it would set up a venture capital trust when the Chancellor had "barely sat down", either it knew something about the nature of the scheme before the Chancellor's Budget speech--I would not like to imply that that was the case--or the scheme was such an obvious benefit in terms of tax relief and an easy make that the company got in before it considered the nature of investments. That is our worry. Such companies are not sitting down and examining the nature of the investment and whether it is a good risk, because they know that there is easy money to be made. We become a bit more worried when, within a matter of weeks, an organisation that apparently believes that it is going to do very well out of the Government's scheme appoints a senior member of the governing party to its board. Somehow, that does not fit comfortably and easily with the Government's comment that the proposal is all about real jobs for real people in manufacturing. It is certainly about one job for one high-profile member of the Conservative party in an asset management company. It caused concern that that organisation believed so quickly that benefits existed.
Column 408only 20 per cent. of all people employed are employed in the manufacturing sector? The difference is that they are producing a great deal more per man and per woman.
Mr. Betts: I accept that not all jobs are in the manufacturing sector and that many real jobs are in the service sector. I was questioning whether it was a real job when an ex-Minister was involved in activities in the House for the benefit of a certain organisation, and then got a job with that organisation. The term "real job" should not be applied to such a job.
Our concerns are reinforced by the fiasco of the business expansion scheme. We would be a lot more reassured if the Government, who introduced that much-derided scheme, had recognised the problems quickly and had done something about them quickly. Everyone else saw the problems with the BES. Everyone else could see that the money was going into property development. The Government, however, sat there for year after year, and Finance Bill debate after Finance Bill debate, and refused to act.
Therefore, we are naturally concerned when the same Government claim that their proposed new scheme will not be the same as the BES. They say that we will not have the same problems and that, if problems arise, they will act on them. What confidence can the Opposition have that the Government will be as good as their word, when we know from past experience about their reaction when property development was the name of the game, when the scheme was abused, and when no real risk existed because the scheme included guaranteed exits?
I accept that that particular loophole will be closed under the proposals, but property development is still a cause for concern. The property market may not be in a healthy state at the moment. It is interesting to hear Conservative Members talk about the impact of Government policies on that market but, unfortunately, it is not only they and some of their colleagues on the investment side but individual home owners who have suffered. Nevertheless, there is the possibility of a return to better days and the potential for the scheme to be abused.
The Government say that we should not worry because, as is too often the case, schedule 14(12) states:
"The Treasury may by order amend this Schedule for any or all of the following purposes"--
that is, the businesses and trades that qualify for the purposes of venture capital trusts. Conservative Members may draw comfort from the fact that the Treasury can change the rules to deal with any anomalies or abuses but we worry that the Treasury, run by the Conservatives, might change the rules to benefit even further their friends who might be seeking tax relief and a quick buck through such a scheme. If the scheme can be altered one way--loopholes can be tightened--it can equally be altered in the opposite way without reference to the House. Pure speculation in land assets could be allowed through modification by the Treasury without reference to, or the approval of, hon. Members.
I also seek reassurance from the Financial Secretary on a matter that is not made clear in the Bill. Although there are limits on the amount that can be invested in one particular company by a venture capital trust, and although there is a limit to the assets of a company that can be owned by a venture capital trust--a limit of 15 per cent., as I understand it--is there anything to prevent two
Column 409venture capital trusts, owned by the same organisation, acting in concert and between them owning 30 per cent. of a particular company' assets? Or can an organisation establish more than one venture capital trust and, in so doing, breach the rules set out in the Bill for one VCT? If there is no such restriction, it means that there is a loophole and someone will walk through it before too long. I would appreciate the Financial Secretary's comments.
We are suggesting a two-year limit not because we believe that the scheme will not work but because previous Government action in this sphere leads us to be cautious. We want to be assured that there will be a proper monitoring arrangement and that Ministers will not walk away and pretend that everything will be fine once the legislation is passed; they must ensure that we get proper reports and that the Government are held to account for the expenditure of public money. That is absolutely right and proper.
The Financial Secretary has already forecast the amount of tax relief that he believes will be given under the scheme. We have a right to be concerned and ask who will benefit. Surely some assessment has been made of the income levels of those who will benefit. I do not say that because we are against people on high incomes and for those on low incomes. We are rightly concerned to ensure that when tax relief is offered and when potential benefits are available, it is not only one section of the community that receives them. Will such benefits be available for smaller investors? What is the Government's view at this stage of who will receive tax relief from VCTs when they are established? The Government have a duty to give us some idea of the work that they have done. What are their plans?
The Government have listed the industries and trades that will not qualify for investment under the scheme but where do they anticipate that the money will be invested? What part of our economy's capacity will be enhanced? How many and what sort of jobs will be created? Ministers will probably shrug and say that they do not have such information, but why not? It should be available if public money is being spent. If the Government were putting forward a scheme for grants, they would be able to explain the expenditure involved and the number of jobs to be created.
Mr. Butterfill: The hon. Gentleman must appreciate the fact that we do not know how much money is being spent until we know how much money is forthcoming. The two things are interrelated, so how can the Government possibly know?
Mr. Betts: The Government are proposing to spend public money on a large scale. They would be highly critical of us were we to propose such expenditure without being able to explain how it was to be spent and what the consequences were going to be. We are asking for strict monitoring of the scheme, and the two-year period is included in the amendment to establish a definite limit on the time within which information must be made available, not so that the scheme can be stopped but so that it can be reviewed to ascertain how effectively it is working. I hope that the Financial Secretary will take our suggestion seriously.
We are not saying that we want to stop the scheme but we have suspicions and concerns. Let the Government reassure us that they have planned how the scheme will
Column 410work and that there are to be proper reports and monitoring so that it can be amended in the event that it does not work as the Government claim that it will.
Mr. Mike O'Brien (Warwickshire, North): It is common ground among the parties that there is a need for investment in small firms. The question is whether the venture capital trust is the best way to achieve it.
In its second report on finance for small firms, the Bank of England referred to the fact that bank finance available to small firms fell 5.1 per cent. to £37.2 billion between December 1993 and June 1994. As has already been said, the equity gap is a failure of the free market and VCTs are an attempt by the Government to intervene in the market to deal with that failure. It is interesting that the way in which the Government choose to intervene is by creating circumstances in which the well-off will pay less tax. That is certainly how the media have identified the prime appeal of the VCT--a big tax avoidance scheme. It is legal, but is it in the public interest?
On 15 January, the Observer ran a story with the headline "Taxfree Trusts for the Adventurous Investor". Most of the article was about the advantages available to the person who became involved with a VCT. In December 1994, the magazine Small Company Investor asked:
"Will you need to pay capital gains tax again?"
"Maybe not" was the answer. Media focus appears to be on the tax benefits, but the issue of the equity gap remains. The venture capital trust is at least an attempt by the Government to deal with it.
We need to help small businesses and to get the capital to them to create jobs and prosperity. In its report, the Bank of England raised the issue of how to do that. Those involved often find that it is not viable for venture capitalists to invest relatively small sums of equity. Typical professional venture capital investments are certainly in excess of £250,000 and early-stage and start-up finance, for example, accounted for only £69 million, or 6 per cent. of the total invested by British Venture Capital Association members in 1993. Clearly, therefore, we need a way to channel investment. In its first report on financing small businesses, the Bank of England dealt with the role of the so-called "business angels", venture capital providers who link up with particular enterprises, often contributing their expertise and adopting a hands-on approach. However, the problem identified by the Bank of England is that, although banks such as NatWest have launched two pilots for national business angel networks, the majority of existing business introduction services remain fragmented and unco-ordinated. There are numerous business introduction magazines and, of course, the training and enterprise councils in different parts of the country provide services that are often useful. But we need a comprehensive business angel network to reduce costs and to simplify the process of making deals.
That leads me to the point made by my hon. Friend the Member for Sheffield, Attercliffe (Mr. Betts). The Government need to have a more comprehensive approach to the problem of small businesses, ensuring that the equity gap is bridged by not only looking at one solution to the problem but addressing issues such as the need for a business angel network. At the moment, the
Column 411Government have not shown that they are adopting a much broader approach. In his winding-up speech, will the Financial Secretary say what the Government are proposing to do about the business angel network?
There is clearly a need for investment and the question is whether venture capital trusts are the way in which to encourage it. I accept that it is right in certain cases to give tax breaks to encourage investment, but it is important that it is done with caution to ensure that the Exchequer uses those subsidies to best effect because, as Conservative Members have said, one person's tax concession is another person's tax increase. The business expansion scheme has raised questions about the use of tax breaks and the Government should therefore be prepared to answer openly and clearly questions about the way in which this new venture of theirs will deal with the concerns raised.
How much will the VCT scheme really cost? The Government estimate that it will cost £150 million in 1995-96, £290 million in 1996-97 and £240 million in 1997-98--a total cost of about £680 million. Does that include relief on capital gains tax and income tax relief? If the figures do not include those two, what is the overall figure? What is the actual loss to the Exchequer?
When the Government lost the vote on VAT on fuel, the Chancellor was most definite in the argument that, even if relatively small sums of tax were involved, it was essential that the Government should be able to account for them and say how that money was to be raised--hence the 4 per cent. increase in beer prices and the various other tax increases.
I have always taken the view, as I know the Chairman of the Public Accounts Committee has, that the loss from not imposing the VAT increase was probably within the margin of error of any Budget. After all, last year, the Chancellor must have had at least a margin of error of £4 billion because of the way in which the public sector borrowing requirement panned out. Given that the loss of revenue due to the VAT vote was much less, the Chancellor was well within the margin of error and need not have increased those taxes on beer and so on.
If the Chancellor felt that it was essential to come up with clear figures for the loss of revenue from extra VAT on fuel, surely he must provide clear figures of exactly how much money is being conceded in the VCT tax relief. Will the Financial Secretary also tell us what analysis the Government have done on the defects in the business expansion scheme? How can the faults that arose at various stages in that scheme, which required some remedy, be avoided in the VCT scheme? How will the Government ensure that?
Are such high tax concessions really necessary to get the venture capital trusts going? They are very large concessions and the Financial Secretary has not properly justified the size of them. Would not venture capital trusts be workable without such large tax concessions? That is a legitimate question that Labour Members should ask.
What calculations has the Treasury done on the possible diversion of capital that is currently invested in small businesses? If a person who is considering investing in a small business goes to his financial adviser to find out the best way in which to invest and says that he is thinking of becoming a business angel and getting
Column 412involved in direct investment, what risk is there that the financial adviser will tell him that, from a tax point of view, it is best to get involved in venture capital trusts and to try to get the tax concessions available?
The business would presumably have to apply to the venture capital trust scheme to get the investment that it needed and, obviously, judgments would have to be made by the venture capital trust investors. They may decide to invest in less risky businesses than the business in which the potential business angel was thinking of investing. Therefore, will the Financial Secretary state the Treasury's calculation of the potential diversion of investment? Again, that is a legitimate question that needs to be answered. Will the Financial Secretary set out exactly which trades will qualify? The Bill says which trades will not qualify by excluding particular types of businesses. Will he try to define to some extent his target qualifying companies? Will he also set out clearly his thinking on venture capital trusts and property-backed schemes? He appears not to want entirely property-backed schemes and I accept that. He referred to those schemes in his earlier speech, but he did not set out clearly the Treasury's exact attitude to schemes that involved property. A great deal more detail is required.
What about residential homes for the aged? Does the Financial Secretary intend to include them in the scheme or to exclude them? It was not clear from his earlier reply exactly what his view was. He said, as I remember, that he had not had notice of many people seeking to exploit the venture capital trusts with residential homes in mind. Is it his intention that the scheme would be available for such uses if people chose to use it for that purpose?
Does the Financial Secretary agree that the legislation is extremely complicated? While it appears that two investment trust groups, Murray Johnstone and Rothschild Investment Management, have said that they are interested in VCT, will not the complicated legislation deter investors from getting too involved in the scheme? Why did the Government settle on restricting income tax relief to companies with initial growth assets of between £1 million and £10 million per annum? Why not extend the limits above and below those figures? There is greater availability of finance for the larger companies and we need to tackle the smaller-scale investment of around half a million pounds. Will the Government set out how they reached the conclusion that those two levels were appropriate, so that we may at least have some understanding of Government thinking? The key issue for Labour Members is this: if the main focus of venture capital trusts becomes tax avoidance rather than investment, what will the Government do about it? Clearly, the media have identified venture capital trusts in that way so far. The Government must take into account why that has taken place. If it appears that VCTs will go the way of the business expansion scheme, how do the Government plan to deal with that?
I repeat that I agree that investment in small firms needs to be enhanced. The Government say in the Red Book that they intend to boost overall investment across the economy to 11 per cent. in the next year--a tremendous boost given that the current level is around 3 or 4 per cent. It is certainly nowhere near 11 per cent. That target of 11 per cent. has an awful lot of wishful thinking about it and a certain aura of unreality. Likewise, I suspect that
Column 413venture capital trusts embrace a combination of wishful thinking and a lack of reality about the market. That is why the amendment to limit venture capital trusts to two years initially gives us an important chance to review the scheme in future--an opportunity that the House ought to have.
Mr. Denis MacShane (Rotherham): In preparing myself for this interesting debate--I have enjoyed the exchanges--I turned to the spiritual father of venture capital in this country, Lord Lawson, the former Chancellor of the Exchequer. In his memoirs, he says that by 1993 the business expansion scheme and other start-up schemes had been brought to an end, which could be justified because
"the UK had by then a venture capital industry equal to that of any in the world".
If that is the case and if, as the hon. Member for Carshalton (Mr. Forman) said, the Bank of England in the form of Mr. Pen Kent said yesterday that the banks are now far more co-operative, lending more generously and moving from overdrafts to loans, how come we need venture capital schemes? In the middle of what the Government say is a boom, with everything going unbelievably, wonderfully, incredibly well for the economy, how come we need the schemes?
The term "tax break" has been used as often by Conservative Members as by Opposition Members in this debate on venture capital, so the queries raised by Opposition Members come into focus. If I may paraphrase Humbert Wolfe after Hilaire Belloc
"You shouldn't need to bribe or twist
The British venture capitalist
Just provide a tax break or two
And you will see what he can do".
There is a problem in my constituency, and the deputy chairman of the Conservative party, Mr. John Maples, who was heavily involved in the Wellington BES in the 1980s, is giving evidence in a court case involving a lot of people who lost their jobs. Mr. Maples advised Virginia Wade, Michael Parkinson and others to put their money into a scheme and it has now emerged that a great deal of money has been lost.
Conservative Members have said that venture capital initiatives often become adventure capital initiatives, and although it is hoped that real money may be made, a lot of money can be lost, too. The core lesson of the 1980s was that we need more supervision. What worries some Opposition Members is not the tax write-offs for the deputy chairman of the Conservative party or for rich sport and television personalities, but cases such as that in Rotherham, where 55 people lost their jobs and are now on the dole without any security at all.
If we have identified an equity gap--what the Macmillan committee as long ago as 1929 called the finance gap--it needs to be dealt with, but Opposition Members have genuine reservations about whether the venture capital proposals in the Bill will do that. I certainly want more investment in Rotherham, but I am in regular contact with Rotherham business men, with the economic partnership and with Business Link, and they all tell me that venture capitalists need to target the lower end of the market.
Column 414Apparently, venture capitalists have little interest in the kinds of small businesses that want to get going in Rotherham. They need a quicker turnround. There seems to be some contradiction in the debate, because although it seems that, even before the Chancellor sat down after his Budget speech, Rothschild was ready to put a venture capital trust into operation, Conservative Members who are experts and have declared their interest have said that such schemes take a year or two years to get going. The message from Rotherham is, please can that be done quickly and at a much lower cost?
In my constituency I have been told that the venture capital trusts do not have a customer-friendly feel to them. The rate of return that they expect- -generally 30 per cent.--is very high, which illustrates the short-termism and the lack of what is known as patient or stakeholder capitalism, whether venture or otherwise, in the United Kingdom economy. Indeed, as has already been said, in 1992 as much as 60 per cent. of NatWest's lending, excluding personal mortgages, was for less than one year. That shows the impatience and the "wham, bam, get out" approach of so many lending institutions in this country. My constituents in Rotherham are affected by all that.
It is not only the review period that is missing--although if Mr. Maples is planning to put more money into the new schemes being set up, let us have a review so that he and other investors can be protected. We also need venture capitalists much closer to the base where British business has to be carried out.
It is interesting that all the Conservative Members who have spoken have lived within commuting distance of the City. I should like there to be some form of ring-fencing that would help to turn venture capital trusts towards the needs of the regions. Every other country has regional banks in some form. The United States, which was the source of venture capital trusts before they were put into effect in this country, has laws which do not allow banks to operate outside their own state. There is no all-American venture capital trust industry, but a Californian industry, an Oregon industry, one in Texas, one in Massachusetts, and so on. That is what we desperately lack--an orientation that will take the money outside the hothouse growth areas protected by the Government, notably in the south- east. We could also consider the activities of the Prince of Wales's Youth Business Trust, which does wonderful work in Rotherham. The prince is responsible for 17,500 start-ups in Rotherham, at exactly that small business level, with perhaps one or two individuals trying to make a go of it. Those are people such as the managers leaving a company who were mentioned by the hon. Member for Bournemouth, West (Mr. Butterfill), and those who have lost their jobs and have the initiative and the get-up-and- go to start out on their own. On the whole I am a republican, but I find it strange that we have to turn to the royal family to get small businesses going in this country because the banks and the venture capitalists have let them down so disastrously.
Finally, we could consider introducing an export element into the equation. I am struck by what happened in Korea in the 1970s and 1980s when no company, whatever its size, got credit unless it could prove that