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Column 366
anxious that, when he dies, her maintenance will end and she will be left destitute. Another woman described that general denial of pension rights as a "double betrayal"--first by her partner, then by the law.There is plenty of evidence in my mail of the problem; I have received many letters about the subject. Mrs. M of Devon wrote: "I knew my husband for 50 years and we were married for 45 years . . . During the"
divorce proceedings, his company
"would not divulge his pension rights."
He paid up at first, but soon after, he remarried and the money was stopped.
Mrs. K of Bedfordshire was married for 32 years and, similarly, her husband stopped paying maintenance. She writes:
"I have no savings whatsoever. Just what does one do? Fall back on the State?"
Mrs. P of Essex was married for 20 years. She says:
"My husband has informed me he intends to leave me . . . to buy a bigger boat and live on that by himself. I asked about his pension and whether he"
would give
"me half . . . He said there is no way he will pay me any of his pension. This pension will amount to tens of thousands of pounds . . . plus a sizeable monthly income. Indirectly I feel I have been paying towards that pension but legally have no rights or access to it whatsoever. His financial future is assured. Mine holds nothing but question marks and fright".
Mrs. W of Essex said:
"I divorced my husband after 31 years of domestic violence, mental cruelty and also living with a husband who was a pervert." It is the same story-- she then had no rights to his pension. Mrs. M of the Isle of Wight, married for 43 years, with five children, went to court to obtain her pension rights and found herself denied legal aid. When she applied, she was refused, on the grounds that
"your prospects of deriving any benefit from defending the" divorce
"petition are too slight to justify the issue of a certificate." Her husband, incidentally, with a larger pension, obtained his legal aid for the proceedings.
After 27 years of marriage, Mrs. L of Truro lost her pension rights under the existing law. She states:
"Through no fault of my own I now face a future of emotional and financial insecurity . . . In Scotland and in several other countries the courts have the power to divide a pension on divorce, and recent reports have urged the Government to alter the law in England and Wales to grant women their fair share of the pension to which they have contributed in kind. My experience shows that the courts cannot be relied upon to use the powers embodied in the Matrimonial Act to protect women in my situation. There is no substitute for an index-linked pension".
There is plenty of evidence, and it is crystal clear--the Government must know that.
The Government's survey, which is to report at the end of 1995, merely kicks the matter into touch for another decade. The Pensions Bill is before Parliament this year. If the change is not made now, there will not be another Bill and another opportunity for many years. I understand that an amendment to the Bill is to be tabled in the House of Lords and that it will be supported by peers from all parties. In the interests of fairness, I urge the Government to accept such an amendment and such a change.
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In my last few seconds, and as it is Burns night, I thought that I would quote a bit of Burns, like the true cockney I am, and tell the Government not to be a"Wee, sleekit, cow'rin', tim'rous beastie,"
and accept the legislation, so that
"Should auld acquaintance be forgot,"
it can be a case of
"O, gie the lass her fairin', lad".
Question put and agreed to.
Bill ordered to be brought in by Mr. Harry Cohen, Mr. Tony Banks, Mr. Malcolm Chisholm, Mr. Jeremy Corbyn, Ms Jean Corston, Mr. Neil Gerrard, Ms Mildred Gordon, Mr. Bernie Grant, Mrs. Helen Jackson, Mrs. Alice Mahon, Ms Clare Short and Mrs. Audrey Wise.
Pensions (Divorce)
Mr. Harry Cohen accordingly presented a Bill to amend the law so as to provide for the equitable division of pensions in the event of divorce: And the same was read the First time; and ordered to be read a Second time upon Friday 24 February, and to be printed. [Bill 38.]
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Orders of the Day
Finance Bill
(Clauses Nos. 2, 5, 8, 15, 52, 64 and 91, Schedules Nos. 1, 4, 11 and 14, and any new Clauses first appearing on the Order Paper not later than 19th January and designed to continue the statutory effect of any of the Ways and Means Resolutions of the House of 13th December)
Considered in Committee [Progress, 23rd January].
[ Mr. Michael Morris
in the Chair ]
The Financial Secretary to the Treasury (Sir George Young): On a point of order, Mr. Morris. I wonder if it would be for the convenience of the Committee if we were to take clause 64, schedule 14 and the associated amendments together?
The Chairman of Ways and Means (Mr. Michael Morris): Is it the wish of the Committee that we take the clause, schedule and amendments together? It seems that it is, and the Chair is happy to assist in that.
Clause 64
Approval of companies as trusts
3.52 pm
Mr. Andrew Smith (Oxford, East): I beg to move amendment No. 15, in clause 64, page 57, line 44, at end insert--
`(1A) No approvals shall be given under this section after 6th April 1997.'.
The Chairman: With this we shall take schedule 14 and amendment No. 11.
Mr. Smith: Our difference with the Government is not on the importance of investment, especially for smaller and higher risk companies. We have argued long and hard that the Government should do more. A form of venture capital trust properly put together could have a role in that. Our strong concern is that the way in which venture capital trusts are designed in the Bill and the manner of their tax treatment will not provide the stimulus to the right sort of investment in an efficient way.
If the scheme goes ahead, the Government will find--as they did with the business expansion scheme--that they end up using taxpayers' money to subsidise many low risk investments backed by property, primarily for tax avoidance purposes. Given the business expansion scheme experience, we have to ask why the Government are bringing forward a venture capital trust scheme in this way--with no explicit exclusion of property companies and only limited exclusions of property-backed companies.
When I saw in yesterday's Financial Times that the Chancellor of the Exchequer was considering flogging off the Treasury, I thought that I saw a connection--perhaps venture capital trusts will be used to market the Treasury itself. I can see the glossy venture capital trust prospectus now: "Invest in a prestigious central location. Buildings rather tarnished by present occupants. Fake blood to be removed from office of the Chief Secretary to the Treasury. Real beer to be removed from the floor of the
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Chancellor's office. Excellent potential in an exciting project to be under new dynamic management within two years".The tax breaks in the scheme are huge. Compelling though the case for assisting in flogging off the Treasury may be, we have to ask how the cost can be justified. The Government estimate that venture capital trusts will cost the Exchequer almost £700 million over three years. The House is right to ask how the Government can justify huge tax breaks to facilitate investment, including some very safe investment. The answer is that they cannot.
As I will set out in my speech, there is every prospect of venture capital trusts as designed in the Bill and defined in the clause becoming a monumental tax avoidance device, stimulating the business of the tax planners more than that of the companies which the Government claim that they are trying to help.
Mr. John Butterfill (Bournemouth, West): I am grateful to the hon. Gentleman for giving way and I am sorry to interrupt so early in his speech, but I should like to clarify his thinking for the convenience of the Committee. I fully understand his concern about the absence of an interest-in-land rule in the proposals before us, but apart from the opportunity for what might otherwise be safe investment, would the Opposition support the principle that some tax advantages--such as roll- over relief and the freedom from ultimate capital gains tax--should be afforded to encourage venture capital investment?
Mr. Smith: Later in my speech I shall propose some ways in which the Opposition believe that that concept could be applied more successfully. We have never argued that there is no case for fiscal incentives in investment. Indeed, we have advanced that case very vigorously in relation to much-needed investment in research and development. It is a question of weighing properly and realistically the balance between the cost to the Exchequer of the tax subsidies involved and the actual gain to the public through stimulating beneficial investment. Because of the nature of the tax breaks within the scheme and the property exclusion to which the hon. Gentleman referred, we do not think that the proposal gets the balance right. We believe that the Government should at least concede that there are risks involved in embarking on this scheme. They should have learnt from the experience of the business expansion scheme. It is wise to propose a sunset provision in the legislation, as Opposition amendment No.15 does, so that Parliament can re-examine the operation of the scheme after two years. We can then assess whether the cost of the tax relief involved has been justified by the additional capital invested in genuinely high risk but potentially productive and profitable enterprises. It is important to invest capital in high risk ventures, but we want those ventures to have at least some probability of success; we do not want to squander taxpayers' money. Past schemes, such as that involving DeLorean, were not always a wise use of economic resources and taxpayers' money.
Mr. Nigel Forman (Carshalton and Wallington): The hon. Gentleman was implying that it would be sensible to form a judgment on a company's prospects after two years, when it has been involved in the risky enterprise
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that one assumes would be the frame for a venture capital trust. Realistically, does he think that two years is sufficient time for that judgment?4 pm
Mr. Smith: I take the hon. Gentleman's point. Even if, after two years, it seemed sensible to allow the scheme to continue, further evaluation would still be needed. After two years, however, it would be clear whether the Government are right in their contention that the scheme will direct savings into high-risk, productive industrial enterprises, backing up entrepreneurs who are currently short of capital or whether, as we feel, it is likely to divert savings from other investments.
The terms in which the venture capital trust is structured are such that within the parameters of the scheme the influx of funds will gravitate towards the low risk investments which the limited exclusions facilitate. That judgment could be made after two years. We would then be able to assess the balance of costs and benefits and a proper evaluation could be made of what benefits there are, who gets them, and the considerable costs involved.
The Government must face the issue squarely. The tax breaks are enormous: it appears that either the Government have made a major blunder in the way in which the scheme has been designed, or they want to give money away.
Let us consider how the definitions in the clause will work in practice. Those putting money into the scheme will not pay tax on the dividends that they receive up to a limit of £100,000 invested per year, and they will not pay tax when they sell their shares in the venture capital trust. Indeed, it is worse than it first appears. It does not just mean that investors can get up to £100,000 back from the trust in any one year and pay no capital gains tax; it means that everything is free of tax, including the return on the £100,000 invested per year. If the £100,000 yields a £150,000 return, there would be no capital gains tax on the extra £50,000.
Investors can claim tax relief at 20 per cent. in any one year on up to £100,000, provided that the shares are held for five years. A 40 per cent. taxpayer can thus avoid tax of up to £20,000 by putting in the maximum £100,000. So long as an investor has income of £100, 000 or more, as the increasing number of privatised utility profiteers do, they need invest only £80,000 after tax because the Inland Revenue will contribute the other £20,000.In total, if the shares purchased in the venture capital trust yield a 50 per cent. growth over five years, for the expenditure of £80,000 of post-tax income the investor will get £150,000 back with no tax to pay and no tax on the dividends received in the meantime.
Even that is not the end of it: investors can also use the venture capital trust to defer capital gains tax. A 40 per cent. taxpayer could sell assets --perhaps in shares or property--with a capital gain of £100,000, put that gain into a venture capital trust and thereby defer the capital gains tax of £40,000. The gain, at least in theory, would be liable to taxation when it was withdrawn from the trust, but there would be nothing to stop the investor reinvesting the money, perhaps in another venture capital trust, further to shelter it. If the Government want to establish a scheme whereby they are not taxing income which goes into saving--and academics argue that it is an intelligent direction in which
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to point the taxation system--they should do so in a way which enables everyone to take advantage of the provisions and not simply gear them towards venture capital trusts and other investment schemes which are particularly beneficial to a minority of very wealthy people.Mr. Butterfill: I am sure that the hon. Gentleman appreciates that the Government are trying to encourage investors away from existing investments that are safe but are not producing the results we want and towards risky entrepreneurial activities. The investor could defer that liability just as long by leaving the money where it is. Provided that he does not realise his existing assets, he can defer liability indefinitely. He is not being offered any real advantage, other than the incentive to move his money from something safe and unproductive to something less safe but, one hopes, more productive.
Mr. Smith: I answered that point earlier. Our fear is that the scheme will provide an opportunity to move investment from something safe and unproductive not to something high-risk and productive with tax advantages, but to something equally safe and unproductive offering a much higher rate of real return because of tax breaks. That cannot be right.
The scheme offers huge tax breaks when the money goes in, with relief from income and capital gains tax; breaks when the money is in the trust, when dividends are not taxed; and tax relief when the money comes out, with relief on capital gains. It is no wonder that Mr. John Speirs, director of BES Investments and a leading adviser on business expansion schemes, stated in The Sunday Times on 4 December 1994:
"I cannot see why anyone should pay capital gains tax again . . . If we had written it ourselves we could not have come up with a better Budget for the tax shelter industry."
He did not say "a better Budget for high-risk, productive small companies."
That damning indictment of the Government's scheme is anything but an isolated comment. The savings and investment press is full of more of the same. On Second Reading, I quoted from the excellent publication, Small Company Investor . Perhaps the Financial Secretary will say whether he has yet adopted my advice and taken out a Treasury subscription to that magazine, which gave a commendably informative guide to the real consequences of the Government's proposals. It published a feature headlined:
"Life is just a bowl of tax cherries. Will you need to pay capital gains tax again? Maybe not."
Another article in the same issue asks:
"What has our Chancellor, Kenneth Clarke, been doing to turn our smaller company investment dreams into a reality? How could he get his budget so right"--
the Committee can tell that I am not quoting selectively-- "and yet so horribly wrong? No, not the VAT on fuel blunder, but the tax relief for smaller company investment. He did what was needed to pump up investment by making the reliefs huge--and then he took some of it away by dragging in property. Isn't that just what happened with BES? Our bet is that there will be an avalanche of lower-risk, property-backed schemes taking money away from entrepreneurial small companies."
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That is precisely the opposite effect that the Government claim. It added:"Think again Chancellor."
Such comments are not confined to the savings and investment press. A number of academics have reached similar conclusions. A report produced by the SME centre at Warwick university and published by the Government entitled "An Assessment of Firms Located On and Off Science Parks in the United Kingdom" stated:
"Other options which have been suggested for overcoming the financing problems which developing high technology businesses claim to experience include:
The establishment of venture capital funds which would focus exclusively on the high tech sectors. Such funds, however, have been established in the past without achieving significant success." It continues:
"Additional tax support for business angels. The introduction of the Enterprise Investment Scheme could be seen as a satisfactory development in this light. However, other research casts doubt upon the use of taxation incentives in inducing desirable changes in this area."
In a study sponsored, I understand, by the Department of Trade and Industry and others and entitled "Understanding the Small Business Sector", the author, D.J. Storey, an acknowledged expert on these matters, said:
"The research evidence suggests that government has to look very carefully at proposals to use the taxation system to provide `incentives' to modify the behaviour of individuals who own small businesses. Currently, it is unanimously recognised that small business owners have to invest more heavily in their own businesses rather, than being excluded from doing so, as was the case with the BES. For example, research evidence consistently shows that individuals who do not reinvest sufficiently in their own businesses run a much higher risk of business failure. However, the history of BES is one of desirable objectives of small firm policy being the focus of taxation exemption, for these only to be used as tax avoidance vehicles. Our recommendation would therefore be to avoid, wherever possible, the use of the taxation system to provide incentives in this area. Instead we feel that government would be best advised to use its powers of persuasion, possibly through collaboration with banks and accountants, to emphasise the investment message. The message that excessive withdrawals from the business are likely to lead to its failure has to be drilled home to small business owners, rather than emphasis being on the provision of tax breaks for the wealthy."
That gives a wider perspective of the context in which VCTs are being introduced and their likely effect on the small business sector. Unlike the Government, Labour believes that such comments should be taken seriously, and that a measured and careful approach must be taken to fiscal incentives of these types, although we acknowledge, as I have said, that a role can be argued for them. Faced with the weight of comment and the quotations and analyses that I have cited, we believe that the Government must give some answers, rather than--as always--arrogantly expecting the public to accept that Ministers know best, especially when they patently did not know best about the business expansion scheme and other schemes which they subsequently had to return to the House to change. It was revealing that, when the Financial Secretary replied to the debate on Second Reading on Tuesday last week he had no answer to the charge that the form of VCTs that the Government are proposing will be used disproportionately for tax avoidance and tax sheltering. I expect that when the Financial Secretary replies he will
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claim that the clause takes care of tax avoidance dangers. I am arguing that it does nothing of the sort. I accept that the clause excludes dealing in land, goods, banking and other financial services, some leasing business and legal and accountancy services, but most crucially of all it does not exclude, as I understand it, property-backed schemes. Similarly, it does not exclude elderly people's accommodation.There is ready scope for abuse of the scheme for tax avoidance purposes, which will not provide investment in the high-risk productive businesses and manufacturing businesses that the Government claim for it. That is why we tabled amendment No. 16, which would have put limits on the way that property could be used to back companies qualifying for VCT relief. A Liberal Democrat amendment which would have the same effect has been selected for debate today. It seeks to stop schemes mainly backed by property from benefiting from the extensive tax reliefs of venture capital trusts. Both amendments--the Labour amendment which was not selected and the Liberal Democrat one which was selected--introduce into VCTs the same property restrictions that the Government felt that they had to introduce into the business expansion scheme and the enterprise investment scheme.
Given all that happened, particularly with the business expansion scheme, it is ironic that the Government propose to remove the safeguards from the BES and EIS in the Bill and not to introduce them into VCTs. What possible argument can there be for not ensuring the safeguards that the Government had accepted? Could it be anything to do with the fact that the property restriction is so unpopular with the BES and EIS tax planning industry? It is difficult to find any other reason why those safeguards should not apply.
Opposition Members believe in learning from experience and acting with a knowledge of the way in which markets have behaved, rather than planning simply on the basis of the way in which we might like to suppose that they would behave. If two investments have the same or similar return, investors will naturally tend to invest in the lower risk option. Their advisers will advise them to do just that. Experience shows that the tax planning industry can demonstrate great ingenuity in trying to create relatively low risk investments, often backed by property. We believe that the Government could and should create better mechanisms for ensuring that tax relief ends up supporting the financing of enterprises which generate the greatest value for the UK economy and which most need extra investment capital.
4.15 pm
As drafted, the schemes would also lead to a very complex structure which could produce some rather bizarre results. For instance, if someone bought a narrow boat and operated it as a holiday business, he or she could qualify for VCT tax benefits, but if they leased the boat to another person, who also operated it as a holiday business, that person would not qualify for the VCT benefits. If that person operated the boat as a holiday business for part of the year and leased it to someone who operated it as a holiday business for the remainder of the year, that person would probably end up in the High Court to determine whether or not he or she qualified for VCT tax benefits.
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We should think about those things while the proposed legislation is before the Committee so as to avoid the complexity and the never-ending growth in the volume of tax legislation. [Laughter.] The Chief Secretary and the Financial Secretary laugh, but they are responsible for the volume of tax legislation. Nothing is more onerous to the small businesses that they claim to be helping than the huge volume of legislation and red tape for which the Government have been responsible.I have a suggestion as to how the scheme can be changed and improved. The Labour party believes in listening to the real arguments and considering the real nature of the market with which we are dealing. It would be well worth the Government looking at the 50 per cent. rule, which requires that a VCT must hold 50 per cent. of its qualifying assets in the ordinary shares of unquoted companies. Let us not forget that that requires small companies to give up a good part of control and equity to raise the funds they need. That is something that small businesses view with a great deal of apprehension. The fact that it is required reflects something of an obsession with equity in this country which contrasts with the tendency to fund through debt which is more prevalent among our successful European competitors and in the far east. There is a strong case for relaxing the 50 per cent. requirement so as to allow companies preferring to issue, for example, fixed rate securities, to benefit from the VCT advantages.
Mr. Butterfill: When the hon. Gentleman refers to ordinary shares, does he mean only ordinary shares or would he include preferred shares? He will know that the structure of many of the schemes is that the lending institution will take the preferred shares, leaving the ordinary shares with the entrepreneurial management. That structure enables them to give a larger proportion of the ordinary shares to the management, thereby giving a greater incentive to management than would otherwise be the case.
Mr. Smith: The hon. Gentleman draws attention to an important distinction. It is a useful point, but I was making the case for shifting from the 50 per cent. requirement of equity, of holdings in shares of whatever form, to the case for enabling the company requiring the capital to take it in the form of fixed interest securities, which would not involve that surrender of control. It was the importance of control from the perspective of the firm receiving the savings and making the productive investment that was of concern to me.
Mr. Tim Smith (Beaconsfield): Is the hon. Gentleman seriously suggesting that tax relief under the scheme should be extended from equity investment to fixed interest investment? Is that what he is saying? Surely that runs counter to what he was saying just now about risk. There is far less risk in investing in fixed interest debt, which takes priority over equity in a liquidation. Surely he is not suggesting that the risk should be reduced in that way.
Mr. Andrew Smith: I am saying that a comprehensive look at the scheme would lead to a number of the parameters which are operating being varied. The 50 per cent. requirement on shares is one of them. The case for reducing the tax breaks also bears examination. Rather than the definition that the Government are using, which is essentially that the scheme can be applied to anything
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within certain broad terms and not on a list of exclusions, why not be more positive and say that the scheme will apply in the case of X, Y or Z or to those firms which satisfy the relevant criteria? By taking a number of elements of reform to the package one could put together a form of venture capital trust which would more successfully achieve the Government's stated aim of ensuring that available savings went to the high risk companies which are investing particularly in manufacturing or undertaking research and development. The scheme as designed by the Government will not achieve those objectives.Talking about venture capital trusts, the Financial Secretary said on Second Reading:
"The Labour party is ill advised to come out against them at this early stage."--[ Official Report , 17 January 1995; Vol. 252, c. 673.]
That seemed to imply that somehow we would be better advised to come out against them later when the hard earned money of middle and lower income taxpayers had been wasted in subsidies for tax avoidance by those with enough money to extract the maximum benefit from the trusts. The amendment gives us and the Government the chance to do just that.
If the Government will not look again at the schemes now, they should look again at them in two years as we suggest. They should look at them early in 1997, which may be just the time when the electorate is taking another--and final--look at the Government. If the Financial Secretary is so confident of his arguments, so confident of the public, economic and industrial benefits of the trusts as defined in the clause, he should have nothing to fear from such a mandatory review and should find it easy to accept the amendment. If he does not, we shall not only vote to try to make him do so and support the Liberal Democrat amendment to exclude property-backed schemes, a proposal that we also tabled, but we shall vote against this ill -judged vehicle for tax avoidance by voting against clause 64 in the Division Lobby.
Sir George Young: I hope that the Committee can be persuaded to resist the amendments.
The hon. Member for Oxford, East (Mr. Smith) began by saying that he supported the principles of venture capital trusts, but by the end of his speech he had so qualified his support that little remained intact. At one point he challenged the whole philosophy of using the fiscal regime and tax incentives to create fresh investment in new businesses. He focused almost exclusively on the relationship between the potential investor and the venture capital trust; he did not spend quite so much time examining the potential impact on supply-side change, job creation and investment in new and expanding businesses.
The hon. Gentleman asked me whether I had read a particular publication. I am not conscious of having done so. I recall that the last time the hon. Gentleman read out a list of publications held by the Treasury, he came across
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one called "Baking Technology". That was a misprint: it should have been "Banking Technology". However, I understand the hon. Gentleman's surprise.Mr. Andrew Smith: That does not stop the Treasury from cooking the books.
Sir George Young: My hon. Friend the Member for Beaconsfield (Mr. Smith) made a pertinent and perceptive point. Having criticised VCTs for being too safe for the tax breaks, he floated a suggestion that would have made them even safer by allowing more of the money to be invested in fixed- interest securities.
Let me try to put the debate in a slightly broader context. When my right hon. and learned Friend the Chancellor introduced the idea of VCTs in his 1993 Budget, he said that the biggest contribution that any Chancellor could make to reducing unemployment in the medium term was to ensure that the conditions were in place for new businesses to become established and for small businesses to grow. In the past year, through the industrial finance initiative, we have been examining savings and the flow of funds through the economy into the business sector. That initiative identified the shortage of equity and other long-term finance as one of the problems facing small businesses today.
The CBI has conducted its own surveys in the past few years. Those surveys have shown that there are difficulties in the raising of funds, particularly in the range of up to £500,000. Dr. Steven Abbott, in association with the London business school, has shown that the United Kingdom economy has the capacity to produce 20,000 potential "star" start- ups, but only half that number are created, and nearly half of those rely on "funding gap" finance, mainly short-term overdrafts and loans. The VCT scheme is one of the Government's responses to a problem that has been generally recognised by serious commentators.
Mr. George Stevenson (Stoke-on-Trent, South): I do not think that anyone would deny that there is a shortage of capital, particularly in small and medium-sized businesses. When suggesting ways of dealing with that shortage, however, will the Financial Secretary bear in mind the failure of the business expansion and enterprise investment schemes, which use tax breaks for that very purpose?
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