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Column 415there was an export element in its business. I am not sure whether that would be possible, but perhaps we could think about it for a future Finance Bill.
Mr. Malcolm Chisholm (Edinburgh, Leith): Every time I have spoken in the House in the past two weeks I have been asked to be brief. I hope that that is because I have been speaking towards the end of debates, and not for any other reason.
The Opposition have a record of real concern about investment in our economy, the lack of which is one of the main problems, if not the most important problem, in the economy now. We are therefore interested in any measures designed to increase investment, including investment in small businesses. However, we have at least four concerns about the proposal before us.
Our first concern is the sheer scale of tax reliefs available and the consequent loss of money to the Exchequer. We are told that that will be £680 million over the next three years, but that calculation assumed 27 per cent. tax relief, and it has already been asked whether that was an underestimate. The amount of tax relief available is astounding. Initially it can be up to 60 per cent.--that actually applies to £200,000, because although a person can invest no more than £100,000 in a venture capital trust the same person can also put £100,000 into an enterprise investment scheme. On Second Reading I quoted from "BESt Investment", which was full of exclamation marks because it could not believe how many tax reliefs and tax breaks there would be. It asked whether anybody would ever have to pay capital gains tax again.
Secondly, we worry about the type of investment into which the money will go. It has been said that much venture capital money goes into management buy-outs, and those do not appear to be excluded. However, an even more serious worry exists about property, which was mentioned by various hon. Members. An explanation was given by the Financial Secretary of the abolition of the interest in land rule, but we are still worried about the type of companies that will now be brought in--companies that will have a big interest in land and property. As other hon. Members said, there is no specific exclusion of property. Why is there not? People will be suspicious that that is what the money will be used for if a specific exclusion is not written in.
It is also a fact that only 70 per cent. of the money has to go into qualifying holdings, so 30 per cent. of the money can be invested in literally anything, whether in this country or abroad. That is surely unacceptable when there is massive tax relief. The third worry is about the displacement effect. Will the money go into the new investments and come out of other investments? My hon. Friend the Member for Oxford, East (Mr. Smith) quoted from a magazine Small Company Investor , which graphically illustrated how experts thought that money would go into property-related investments and come out of the small businesses which needed it.
The fourth worry is about whether investment will be targeted at the companies that need it. That was first mentioned by my hon. Friend the Member for Dudley, West (Mr. Pearson), who is an expert in those matters. He said that the companies that needed help were the ones that were starting up--the small companies. He asked
Column 416why the £1 million limit and the £10 million limit were not reduced, because investment was not properly targeted.
I fear that that badly targeted device is all that appears to have emerged from the great review about which we heard last year of ways to channel savings into investment. The key problem remains of how small companies can obtain long-term finance--long-term loans. Other major investment issues are totally ignored by the Finance Bill. I suppose that we should be grateful that we have got anything, because in the Budget, when he argued against capital allowances, the Chancellor said that he did not think that we should distort investment decisions. I am all in favour of distorting investment decisions when investment is not being made, but I am afraid that this measure is the only thing that is included in the Finance Bill. The rest of the Bill is a vacuum. We should have measures to encourage investment throughout the economy. The missing subject is dividends, which the previous Financial Secretary was considering until Lord Hanson told the Government that he was a socialist; then he stopped doing it.
I urge hon. Members to support our amendments tonight, because they provide that, if the measure goes through, at least we shall be able to review it in a couple of years' time and discover how it is working. We are also asking for specific exclusions of property, so that we do not create a second business expansion scheme.
Mr. Alistair Darling (Edinburgh, Central): I am grateful to my hon. Friend the Member for Edinburgh, Leith (Mr. Chisholm). The reason why we ask him to be brief is that we know that he can make his arguments extremely well briefly, which he does time and again--and I say that not only because he happens to be one of my next-door neighbours in an Edinburgh constituency.
The debate has been extremely useful. On few occasions that I have witnessed in the eight years I have been a Member has the House spent so much time discussing directly problems which affect so many of our constituents, and also a problem that is fundamental to the future development of the economy.
There is no difference between the two sides of the House on the principle of venture capital trusts. We all agree that it is desirable, and from time to time necessary, to use fiscal incentives to ensure that investments are made in the sectors where we need it. The difference between us is threefold. First, we believe that the Government need to consider other sectors, which have been mentioned on both sides of the House. Secondly, we believe that there must be safeguards to ensure that, if one gives a tax incentive, one does not end up subsidising undesirable behaviour, such as the behaviour that occurred when the business expansion scheme was set up. In that respect, too, there was common ground on both sides of the House. The difference between the two sides is that those who support the Government do not appear to accept that there is a case for ensuring that there should be safeguards in relation to venture capital trusts.
I suppose that the third difference between us is that we believe that the Government have given fiscal incentives in undesirable ways, such as the business
Column 417expansion scheme, but the Government will not accept that the taxpayer's money has thereby been poured down the drain. I shall perhaps discuss that later.
The Minister appeared reluctant to accept that there is no difference of principle between us, so we should perhaps not spend too much time trying to make differences where none exist. Perhaps British industry as a whole will welcome the fact that there is cross-party support for the principle of encouraging investment in what is known as the investment gap, which has been identified by almost every hon. Member who has contributed to the debate. However, I took exception when the Minister said that because no one was focusing on granny farms, as he put it, that was all right. In support of his proposition, he cited the fact that Rothschild's supported the Government. What a surprise--Rothschild's supports the Government. I am sure that a bank such as Rothschild's, which has no fewer than 14 times been the recipient of public largesse, either as an adviser to the Government or as an underwriter of its flotation schemes, should say, "Well done the Government for coming up with that scheme."
Indeed, as my hon. Friends the Member for Sheffield, Attercliffe (Mr. Betts) and for Rotherham (Mr. MacShane) said, if venture capitalists do take great care in assessing the risks and evaluating the projects before them, it is scarcely surprising that the Chancellor hardly sat down after his Budget statement before our old chums at Rothschild's announced that they were going to set up a venture capital trust. They could not have known what was in the Budget, could they? How on earth would they know what a surefire bet it was--unless, of course, they had the amazing foresight of the noble Lord Archer of Weston-super-Mare?How could Rothschild's say so confidently that it was going to set up a venture capital trust unless it had made an evaluation of the type of tax breaks available and knew that, no matter what the risk, no matter what venture it backed, it was guaranteed to obtain a suitable return?
I do not think that the Minister can rely on Rothschild's for support, therefore, and I believe that both he and Conservative Members generally, today of all days, would do well to be very quiet about Rothschild's and the Conservative party, for reasons that people outside and inside the House will understand.
The main subject to which successive hon. Members drew attention was the funding gap between quoted companies and small businesses, many of which are funded by family money or by bank overdraft. As my hon. Friend the Member for Dudley, West (Mr. Pearson) said, that is starting to change; nevertheless, there is obviously a funding gap and we welcome the fact that the Government are tackling it. I want to take up an argument that the hon. Member for Gordon (Mr. Bruce) made about property. I think that we all accept that if inflation remains low--a big "if"--obviously property will not be the kind of bet that it was in the past 30 or 40 years. However, in my travels around the City of London I have been surprised how many people tell me that they are getting back into property again. We all remember the property collapses of the 1970s, the late 1980s and the early 1990s; yet people are getting back into property because it is regarded as a major asset in a portfolio.
Column 418I do not think that we can take it for granted that, simply because inflation is low at the moment, the bad examples that the BES scheme threw up when it was in force will not return. I think that the hon. Member for Bournemouth, West (Mr. Butterfill) conceded as much in his contribution. Although he said that he believed that it was unlikely that property speculation would become a problem again, none of us can rely on that being the case for ever. That appears to be another reason to support the Opposition amendment, which says that we should review the scheme in a couple of years' time.
Several Conservative Members have said that two years is not long enough to evaluate the schemes, and I accept that. I am not asking for schemes to be considered after two years, but obviously in the two-year period we shall have a pretty good idea if we notice the bad old habits re-emerging. If, as we have suggested, and on the basis of the many articles that have been mentioned, people do regard the scheme as a honeypot for tax avoidance and if we notice bad habits returning, it is surely right to ensure that taxpayers' money is not used to subsidise wholly undesirable behaviour.
As Conservative Members never tire of telling us, it is not the Government's money, but the taxpayer's money. They should think long and hard about using taxpayers' money to subsidise behaviour that most Members on both sides of the House find objectionable. Granny farming is not an activity that should be encouraged in general, and it certainly should not be encouraged by subsidy.
It was interesting that the hon. Member for Orpington (Mr. Horam) and my hon. Friend the Member for Monklands, East (Mrs. Liddell) made similar arguments. I wondered whether the hon. Member for Orpington was having second, or perhaps third thoughts, and reverting to his original beliefs as he rightly drew attention to the fact that there is a problem with start-up finance, as did my hon. Friend the Member for Monklands, East, who has considerable experience in that sector. The hon. Member for Orpington argued that it is sometimes difficult to obtain funding for projects of less than £2 million.
I have an annual debate with the hon. Member for Bournemouth, West on the subject of his various interests. Each year, he is a member of the Finance Committee. I would advise him not to make the British Venture Capital Association his only port of call as the authority that no business need go without funds. Of course, that association has a view, but it is not the only one. As has been said, there is a funding gap and the Government should tackle that problem.
Mr. Butterfill: I am sure that when he reads my speech carefully the hon. Gentleman will see that I did not make that association my only point of reference. I referred specifically to the report of the Select Committee on Trade and Industry--of which I am a member--which looked into the matter in great depth.
As usual, the hon. Member for Carshalton and Wallington (Mr. Forman) made an informed and highly enjoyable speech--apart from the silly crocodile tears that he wept over whether we were new or old Labour or new or old Liberal. Closing tax loopholes is a matter of right or wrong, not new or old. Our concern is not to open a mammoth tax loophole without adequate safeguards.
Column 419I emphasise that we all agree that Government intervention may be necessary where there is market failure. We must surely all also agree, however, that if fiscal incentives are to be used it is essential for the Government to ensure that those incentives achieve their intended aim and are not abused. That was the point behind the campaign launched by Labour to close tax loopholes. We are not against high rewards for those who undertake high risks, but we are against high rewards for low risk.
I commend to the Minister the contribution of my hon. Friend the Member for Dudley, West, who knows a thing or two about such matters. I also commend to him the suggestions made by others of my hon. Friends, including my hon. Friends the Members for Warwickshire, North (Mr. O'Brien) and for Rotherham.
One or two hon. Members spoke about the tax avoidance industry. I wish that Conservative Members would pay more attention to that industry. Tax avoidance is wholly legitimate; we are all entitled to reduce our tax bills and are obliged to render unto Caesar only that which is due to Caesar. That does not mean that we should help the tax avoidance industry. Conservative Members sometimes seem to regard that industry like piracy: it demonstrates the entrepreneurial spirit and they cannot bring themselves to criticise it or get in its way.
Mr. Darling: Absolutely. Although it is not a declarable interest, I am happy to declare a sort of interest in that I am a member of the Institute for Fiscal Studies committee set up to examine the complexities of taxation. I cannot remember which Conservative Member represents that party on the committee.
Mr. Darling: My response to the sedentary intervention of my good colleague the shadow Chief Secretary is that I am not going to sort them all out myself: I shall report back to him so that he can sort it out in two years' time when he is sitting in the Treasury along with the Japanese tourists or whoever else happens to populate it then.
The need for investment in this country is crucial--no one has denied that- -but I wish to return to the issue which appears to separate the two sides: the need for safeguards. Conservative Members and the Minister said that we should not pay too much attention to what happened with the business expansion scheme. I have a quotation on which the Minister might wish to reflect. It comes from an interesting speech that was made a couple of years ago. It states: "Think back six years. The yuppie revolution was in full swing . . . But it was built on sand. The wheeler-dealer was the man of the moment. The best returns were to be found in trading financial assets. Demand for property seemed inexhaustible. Money inevitably flowed towards these apparently sure-fire winners. But the system"-- the business expansion scheme--
Column 420"was giving the wrong signals. Far from being sure-fire winners, many were, in fact, sure-fire losers. We can see them today marked by To Let boards outside brand-new buildings that will never make a return for the people who built them.
The absence of a proper return matters to the developer, but it also matters to the rest of us, because the resources that were attracted, like moths to a lamp-bulb, to the lure of easy money are resources that have been wasted."
No one in the Labour party said that. Conservative Members will remember who said it, because it was none other than the Secretary of State for National Heritage when he was Financial Secretary to the Treasury.
Conservative Members may wish to reflect on the fact that those words were said by a member of the Cabinet, and perhaps one of the most decent and informed people to be sidelined in the Cabinet reshuffle. Indeed, he may have been sidelined not only because he set up a committee to look into the long-term and short-term attitudes in the City, before Lord Hanson said that that had to stop, but because he was astute enough to say that resources that were attracted "like moths to a lamp-bulb, to the lure of easy money" have been wasted. The case is made for our amendment by a member of the Conservative Cabinet. Conservative Members can surely learn from the mistakes that they made quite recently--not long ago in their 16- year span--with the business expansion scheme.
We are anxious to ensure that investment and entrepreneurial spirit is encouraged and that where there is a gap in the market the Government use all their powers to fill it, but we cannot and will not support a device which is likely to give rise to yet another tax break. I suspect that the present Government are responsible for creating more tax breaks than any other Government in history. That is partly because some Conservatives are, by inclination, attracted to such breaks and partly because some of them have connections with people in the tax avoidance industry.
The public interest demands that if public money is to be spent there must be safeguards in the public interest to ensure that money is directed to those sectors which need investment and have a high risk. They could include high-tech sectors and the very sectors in which Britain has not, historically, been able to compete. It seems that hon. Members on both sides of the House have tonight recognised that gap and the fact that far more needs to be done.
With our amendment we are merely asking for an assurance that the Government will not create a huge tax break for people who do not deserve it. Conservative Members are right to say that people are entitled to take advantage of the tax system, but it should never be a function of the Government or of the House simply to nod something through while knowing full well that there is a substantial risk that it will create the mother of all tax breaks. It is for that reason that we tabled our amendment.
Mr. Malcolm Bruce: I wish to press the Minister on the subject of property. The issue has been debated, but I am not convinced that all aspects of it have been taken into account. We are trying to ensure that, at the start, the right signals are given to show that venture capital trusts are designed to divert money, by tax efficient means, into productive investment.
Despite the debate about the state of the property market and the intervention of one or two Conservative Members, I must repeat that the problem in the past has
Column 421been that investing simply in the management of existing properties on the basis of speculation about their value, while it may be a perfectly legitimate business and has, at times, been profitable, does not add to the sum total of real wealth. However, it can be the source of a great deal of attracted, diverted, tax-subsidised investment.
The property market is currently in a more complex state than it has been for some time. One cannot say that the property market is globally depressed, as some sectors are performing reasonably well. There is no doubt that a well-managed property portfolio has every prospect of attracting a return that is significantly better than the rate of inflation. That being so, clearly the added benefit of a tax incentive is likely to encourage the promotion of more such portfolios.
In recent years, I have been a very small investor in a unit trust-related property fund which, throughout the recession, has not only out-performed the property market but out-performed the general index, even in the depths of the property recession. It did so because it was astutely managed and well targeted. I do not criticise that, but I criticise the fact that such funds should be encouraged for purely tax-relief purposes.
An ironic, contradictory, but equally valid point is that a tax incentive might provide the reassurance to secure a property portfolio and give it extra underpinning. Having a tax investment built in might allow people to hedge their bets. On both counts, I think that the Government are in danger of opening up a very good scheme to speculative investment which will be unproductive and which could divert a great deal of money away from the Treasury and from the businesses which need it. For that reason, I believe that the Committee should accept the amendment, and I hope that the Government will rethink their position.
Sir George Young: I agree with the hon. Member for Edinburgh, Central (Mr. Darling): it has been a good debate, with hon. Members starting from the common position that there is a problem which needs to be addressed. I shall deal with the major questions raised during the debate and I write to those hon. Members whose questions I do not reply to directly.
The hon. Member for Edinburgh, Central referred to my right hon. Friend the Secretary of State for National Heritage who was, quite rightly, promoted from the Treasury to the Cabinet in the July reshuffle. His reference to my right hon. Friend being "sidelined" is one of the most preposterous things that I have heard in the Chamber for many years. I hope that the hon. Gentleman will be "sidelined" in due course--if that is how he interprets it.
I agree with some of the things that the hon. Member for Gordon (Mr. Bruce) said. There has been a cultural shift, but there has also been a change in the perception of property and property development in the past 10 years. That is one reason why investments are less likely to go into those sectors. I shall return to that matter in a moment.
On his point about the interest in the land issue, perhaps the hon. Gentleman should read the Revenue Law Committee memorandum written by the Law Society entitled "Revenue Law Reform". It states:
"Many bona fide trading companies, although not property-based, will not satisfy the requirement that the value of their interest in land does not exceed half the value of the company's assets as a
Column 422whole. Further, although the test may initially be satisfied, it may inadvertently be breached subsequently during the relevant period. Although the effect will be to exclude asset- backed companies, the restrictions will extend more widely than this".
In other words, it says that the rule which the hon. Gentleman wants to apply could exclude a company manufacturing widgets which happens to own its own factory. That cannot be right.
My hon. Friend the Member for Orpington (Mr. Horam) identified the opportunities for small companies presented by the structural changes in the economy. He will be reassured to know that the enterprise investment scheme has already provided help for start-ups. Approximately 30 per cent. of schemes funded so far under the EIS have been start-ups, and they have raised an average of £80,000, which hits the target that my hon. Friend identified.
The hon. Member for Monklands, East (Mrs. Liddell) asked why there was nothing in the Bill to help business angels. That assistance was provided in the Finance Act 1994 which introduced the enterprise investment scheme designed specifically for business angels. The hon. Lady is quite right: there is a role for them, but I think that their role is focused more accurately on the EIS rather than on the venture capital trust scheme in this Finance Bill. More than 50 per cent. of the enterprise investment schemes reported to Inland Revenue have involved business angels.
I am afraid that the hon. Member for Stoke-on-Trent, South (Mr. Stevenson) is just unreconstructed. There is a risk of being committed in theory to the principle of VCTs but then undermining and qualifying that commitment to such an extent that one is left with very little.
My hon. Friends the Members for Carshalton and Wallington (Mr. Forman) and for Bournemouth, West (Mr. Butterfill) made informed speeches correctly identifying the gap in funding that the VCT meets. I shall respond to their anxiety--I think that it was the main anxiety to come through the debate-- about what we shall do if the investment goes into schemes about which hon. Members have expressed reservations.
I can tell the Committee, and in particular my hon. Friend the Member for Bournemouth, West, that we shall keep the VCT scheme under close review. If there is evidence of the scheme being used for tax avoidance purposes or if a disproportionate amount of funds is invested in low-risk activities we shall not hesitate to take action to prevent that occurring. We shall make immediate use of the power included in schedule 14 to add to the list of non-qualifying activities if the need arises. I hope that that also gives some comfort to the hon. Member for Gordon.
The hon. Member for Dudley, West (Mr. Pearson) asked a number of questions and I think it will be easier if I reply to him in writing as some of them were highly technical and the Committee would like to make progress.
There have been extensive consultations about the scheme. It is a worthwhile proposal which has been welcomed by those who will operate it. There is a real need for small businesses to access the funds and I think that the Committee should make progress and put the scheme into action.
Question put, That the amendment be made:--
The Committee divided: Ayes 242, Noes 321.
Column 423Division No. 49] [7.34 pm
Column 423Adams, Mrs Irene
Ainsworth, Robert (Cov'try NE)
Anderson, Donald (Swansea E)
Anderson, Ms Janet (Ros'dale)
Beckett, Rt Hon Margaret
Benn, Rt Hon Tony
Bennett, Andrew F
Blair, Rt Hon Tony
Bray, Dr Jeremy
Brown, N (N'c'tle upon Tyne E)
Campbell, Mrs Anne (C'bridge)
Campbell, Ronnie (Blyth V)
Campbell-Savours, D N
Clarke, Eric (Midlothian)
Clwyd, Mrs Ann
Cunningham, Jim (Covy SE)
Cunningham, Rt Hon Dr John
Davies, Bryan (Oldham C'tral)
Davies, Rt Hon Denzil (Llanelli)
Davies, Ron (Caerphilly)
Donohoe, Brian H
Dunwoody, Mrs Gwyneth
Eagle, Ms Angela
Evans, John (St Helens N)
Ewing, Mrs Margaret