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Sir George Young: This scheme is more like an investment trust--it is quoted and pooled--than the business expansion scheme.
Having carried the hon. Member for Oxford, East with me so far, I hope that I can persuade him to stay with me for another paragraph or two. With respect to the hon. Member for Stoke-on-Trent, South (Mr. Stevenson), the VCT scheme is not a tax scam for the wealthy, as he likes to portray it. He misunderstands the contribution that it can make to supply-side reform, the expansion of successful firms and the creation of jobs. Fiscal incentives may be needed if we are to capture those benefits. That is why I said, and I repeat it now, that the Labour party was ill advised to come out so firmly against VCTs as proposed by the Government.
There has been an encouraging response to our proposals. Already, many people say that they are seriously considering setting up venture capital trusts, and
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as far as I am aware none are focusing on nursing homes, granny farms or any of the other schemes mentioned by Opposition Members. The main details of the scheme have been widely publicised. Investors who buy quoted shares in a venture capital trust will be able to invest in a spread of unquoted companies. That shows that it is very different from the business enterprise scheme which, by and large, was not quoted and consisted of single product schemes. Investors will be exempt from tax on dividends from the venture capital trust and from capital gains tax when they dispose of shares in the venture capital trust.4.30 pm
If investors subscribe for new ordinary shares in the VCT, they will in addition be entitled to income tax relief at 20 per cent. provided that the shares are held for at least five years. They will also be able to defer capital gains tax on a chargeable gain which arises from the disposal of any assets where that gain is reinvested in the venture capital trust by that same subscription. There is a limit for tax relief on subscriptions of £100,000 a year. Venture capital trusts must be quoted on the stock exchange and will enjoy the same exemption from corporation tax on capital gains as investment trusts. At least 70 per cent. of the investments of venture capital trusts will have to be in unquoted trading companies with not more than 15 per cent. in any one company or group of companies. Venture capital trusts may count investments of up to £1 million in any one unquoted trading company in any one year towards the 70 per cent. unquoted trading company requirement, provided that the gross assets of each company do not exceed £10 million before each investment. I am afraid that that knocks out doing the Treasury building under the ingenious scheme that the hon. Member for Oxford, East floated at the beginning of his speech. He will find that the sums involved are substantially in excess of £10 million. Each venture capital trust may put up to £1 million a year in each company. The trust would be well advised to keep its eyes on rather more than 70 per cent. because it must not fall below that percentage. To put it another way, the legislation gives the VCT a 30 per cent. leeway for when it buys and sells investments.
The VCT may invest in most types of unquoted trading company but as the hon. Member for Oxford, East said, certain activities are specifically excluded. They are: dealing in land, commodities and other financial products; dealing in goods otherwise than in wholesale or retail distribution; banking; insurance; money lending; hire purchase financing, and so on; the leasing of assets or receiving royalties or licence fees; and providing legal or accountancy services.
That considerably reduces the scope for the venture capital trust scheme to be used for low-risk investment. Unlike the business enterprise scheme, it does not apply to investment in private rented housing companies. The VCT legislation follows the enterprise investment scheme legislation in providing for the Treasury by order--subject, of course, to Parliament--to amend the meaning of qualifying trades and the figures of £1 million and £10 million. That should give a measure of flexibility in running the scheme. The theme of the speech by the hon. Member for Oxford, East was that the scheme would become a major tax break for the few. The Chancellor anticipated such
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reactions in his Budget speech. Tax reliefs of this kind are designed to stimulate much-needed investment in business and enterprise and to create jobs rather than new tax loopholes. As I said on Second Reading, some firms have a high growth potential because they are able to benefit from innovations, but they are sometimes unable to get access to normal sources of finance through the stock market or the banks. That is because they have special characteristics which the financial system is unwilling or unable to accommodate, hence the funding gap which the industrial finance initiative has identified.Mr. Andrew Smith: What evidence is there that the tax treatment of investment in those companies is the problem?
Sir George Young: The problem is the shortage of risk capital, of investors being unwilling to provide capital for such firms without some sort of fiscal incentive. Many serious commentators who have looked at that structural problem in the UK economy have been drawn to that conclusion.
Mrs. Helen Liddell (Monklands, East): Does the Minister accept that there is a considerable problem in the venture capital industry, particularly in relation to small and medium-sized enterprises? There is a funding gap, and one of the reasons for that, the venture capitalists tell us, is that it costs as much to service a loan for a major management buy- out or for a major privatisation as it does to service one for a small or medium firm. Nothing in the Bill gives any hint that that gap will be filled in any way.
Sir George Young: The whole purpose of the clause is to reduce the cost of risk equity capital for small businesses. We are making it easier for those businesses to access the capital that they need. That is the thrust of the measures before the Committee this afternoon.
The proposals in the Bill are the result of the painstaking consultation that has taken place in the past year. It is a balanced package and it has been warmly welcomed. The Association of Investment Trust Companies has said that the scheme has a good chance of success in encouraging equity investment in small, unquoted companies. Rothschilds has said that the measures will nurture business in the United Kingdom food sector. Others have said that the trusts are imaginative and bold, and that the measures will bring investment in private companies within the reach of more investors. The challenge now is to secure that potential.
Mr. Clive Betts (Sheffield, Attercliffe): The Financial Secretary has used one or two extracts from the comments of various commentators, who seem to commend the scheme because of its tax benefits. Given the calculations that are being done on the tax relief that is likely to arise from these measures, perhaps the Financial Secretary could say what sort of people on what sort of incomes will benefit from that tax relief. Will he give clear Treasury estimates of what sort of schemes will benefit, how much more investment will go into small manufacturing firms rather than into property schemes, and how many jobs will be created? Have those estimates been done or are we living in a vacuum?
Sir George Young: If the hon. Gentleman reads the publication that we put out on Budget day, he will find the best estimate that we can make of the take-up of the scheme. We have worked out roughly what the forgone
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tax relief will be. As I said, we have excluded a number of activities that we do not think are appropriate. At this stage, a number of merchant banks and investment trusts are putting together potential venture capital trusts. The information that I have read contains no evidence that they are going into the sort of low-risk, property-backed investments that the hon. Gentleman mentioned. I have noticed the investment mentioned by Rothschilds, which is interested in helping small firms in the food manufacturing and food processing business, which needs to access high technology and where a problem exists in raising capital. I hope that no one in the Committee will criticise firms benefiting from this sort of scheme.Mr. Andrew Smith: The Financial Secretary has mentioned Rothschilds twice. In what form were Rothschilds' comments made to the Government? Did it make them as an adviser or as a consultant on the matter?
Sir George Young: Speaking from memory, Rothschilds put out a press release welcoming the scheme on Budget day and it was available for everyone to read.
Sir George Young: As far as I am concerned, that is all. One of the amendments proposed by the hon. Member for Oxford, East would restrict the take-up to schemes that were taken up before, I think, April 1997. Because the Government are keen to ensure that good-quality investment arises from the venture capital trusts scheme, I do not think that that is a sensible way to proceed. Everyone agrees that it takes time to look this out and to encourage it. VCTs will often want to research the sort of investment that they wish to make before they get off the ground. Putting a time limit on the scheme, especially one as short as two years, will tend to hurry that process, which will not always have good results.
The second reason for objecting to the amendments is that they may have a perverse effect. More VCTs may seek approval in the first two years than would otherwise be the case, simply to meet the deadline. The purpose of the amendments may have been to save the Exchequer money, but they would not necessarily achieve that, and we could be left with a large number of potential VCTs lying dormant, without raising any new capital for the economy.
As with all enterprise investment scheme rules that the Government now believe it is reasonable to relax, the land rule was inherited from the business expansion scheme. It was introduced to prevent companies that held more than half their assets in land and buildings from using the scheme. The rule, however, became onerous to operate because it required regular valuation of assets. Even more worrying, it could prevent a trading company --for example, a manufacturing company--that owned its own premises from using the scheme. It surely is not right to preclude a company from using the VCT scheme merely because it owns its own premises. That would be a ludicrous proposition and that is why we are not supporting that exclusion.
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The proposal is a serious response to a serious problem. Nothing I have heard so far in the debate has convinced me that the premise on which it is founded is otherwise than correct. Real potential exists in taking the concept forward. A real opportunity exists to open up lower-cost risk capital for small and promising new businesses. I very much hope that the Committee will reject the amendments and give the clause a Second Reading.Mr. Malcolm Bruce (Gordon): I wish to speak to amendment No. 11. I hope that, in spite of his opening remarks, the Minister will consider the amendment because it recycles the Government's own argument, and with legitimate force. He has not convinced me that circumstances have changed so dramatically that serious consideration of the amendment is not required. However, let me first put the debate and the amendment in context.
It is generally recognised that there needs to be a fundamental shift-- perhaps even a cultural shift--in the way in which we finance small businesses and in the availability of finance to small businesses. To the extent that the Government's proposals for venture capital trusts are a contribution to that, I and my colleagues welcome them and, in principle, support them. The amendment is specifically a qualification; it in no way constitutes opposition to them. They could be useful and helpful although I stress that they are not the whole answer but a contribution towards the resolution, or at least a reduction, of the problem.
One problem is that of developing new incentives for business investment by means of tax breaks. Surely after 15 years in power, the Conservatives are able to recognise that tax breaks have their uses but, by definition, create the potential for abuses. One person's tax incentive is someone else's tax avoidance scheme. That is not a contentious statement; indeed, it is accepted as part of the business of tax avoidance. However, the right balance must be struck so that we do not create a system that is geared more to tax avoidance than to the creation of investment for small businesses.
Mr. Forman: I do not think that the hon. Gentleman was a member of the Standing Committee that debated last year's Finance Bill. Had he been a member, he would have had the opportunity to take part in an important debate on the difference between tax avoidance and tax evasion. Will he place on record the fact that tax avoidance is a legitimate activity, whereas tax evasion is not?
Mr. Bruce: I have no problem with that proposition, but the fact that something is legal does not mean that it is efficient; nor does it mean that it is in the Exchequer's interest or that it will create the benefits that the tax breaks were created to achieve. So that there is no doubt, I repeat that basically we welcome the proposals on venture capital trusts. I hope that they will succeed in helping more money to get to the small businesses that need it. I see no conflict of interest, but I am concerned to ensure that we get the balance right.
Before I examine that particular part of the amendment, it is worth asking the House to make a simple comparison between small business finance and the success of small businesses in the United Kingdom and those in, for example, the Republic of Germany. There are some fundamental differences that will not carry over, but there
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is a growing recognition--perhaps because of the difficulties in the property market that we have experienced in recent years--that it is a matter of culture that we tend to regard investment in property as a higher priority than investment in business. That is one difference between the cultural attitude of the average Briton and that of the average German.Before he buys a house or invests in property, the average German will choose to invest in a family business in which he can have a stake, either directly, if it is his family's business, or indirectly, if it is someone else's business, through which he can contribute to the wealth-creating process, the economy and, of course, his own prosperity. We have to find a way to make that cultural shift in this country.
Perhaps the one silver lining that might yet emerge from the otherwise disappointing state of the property market is that circumstances are forcing us to reassess whether it is right for us as individuals--let alone business people--to put so much of our savings into property rather than business. To the extent that the climate is changing, I accept that the scheme may make a contribution.
Mr. Butterfill: It has been said from the Opposition Benches that property is a low-risk investment. Does the hon. Gentleman agree that that view would not be accepted by many of the people who now have negative equity on their homes? Experience over the past few years shows that property is a very high-risk investment. Nor would that view be accepted by the many property companies that have gone bust or have had to be rescued by all sorts of schemes. The state of the property market in the past few years has shown that there are just as many risks in property as there are in any other business. Under those circumstances, does the hon. Gentleman think that the scheme is likely to be abused?
Mr. Bruce: I accept the first half of the analysis. That is a fairly widespread, obvious observation of what has happened. I shall return to the hon. Gentleman's particular point when I address the detail of the amendment, because he made a fair comment, but first I shall finish the broader argument about schemes for encouraging investment in small businesses.
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Having looked a little more closely at other aspects of small business finance in the United Kingdom and in other countries, I saw that there was clearly a role for the banks in general. It is interesting that the Minister, quite without question, acknowledged that there is a venture capital gap. Most hon. Members who take part in debates on small businesses probably agree with that, but it is not always true that central bankers and joint stock bankers in this country agree. I have often heard the argument that there is absolutely no shortage of money, but there is a shortage of suitable enterprises. That, of course, is a matter of judgment and depends on what a banker decides is a good investment.
The banks have poured money into dubious ventures in South America, which they have had to write off, while denying many potential enterprises in this country the funding that they wanted. There is no doubt at all that too much business is also funded on short-term overdraft
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rather than on longer-term loan and equity. The structure is not always satisfactory, which makes businesses vulnerable.The Government could explore a partnership between themselves and the banks to try to find ways in which small businesses could have access to finance through the banking system comparable with that available to larger companies. In my own experience of running a small business--I am told that it has not changed all that much over the years--I went along to my bank with a proposition, a business plan and an indication of my cash flow and my requirements, and the bank more or less said that it did not want to see my business plan. I was told that, depending on my equity, if I owned my own house and if I was prepared to put it on the line, I would be given the money. That was not the help that I needed. It was not the right attitude. It meant that I had to take a considerable risk.
However, what really irked me was that even though the bank was getting its security, I was told that, of course, as an untried small business, I had to pay cash in advance when ordering basic working capital equipment to run the business, as I could not get credit. I paid a premium rate of interest on the money that I had to borrow from the bank because I did not have a proven track record--despite the fact that the bank had total security over my home. It seemed double jeopardy for me and double security for the bank. Time and again, small business people say to me that they have to pay more interest to finance their wage bills than their customers, who do not pay them and who make them wait for payment. They say that they are being squeezed at both ends.
You may call me to order, Mr. Morris, but the point is relevant. The scheme is helpful, but it does not deal with the problem that I outlined. I hope that the Minister will recognise that we need to look more widely at ways in which to change the culture. However, I accept that the scheme contributes to that change.
I shall refer to the specifics of amendment No. 11 and the restrictions in it, and also address the point made by the hon. Member for Bournemouth, West (Mr. Butterfill). It is true that the property market has been somewhat depressed, although it is variable. Indeed, in certain sectors of commercial properties, there are signs of an upturn. However, it is acknowledged--the Government clearly had to amend the business expansion scheme to take account of the fact--that property-based schemes, essentially, have been used as an abuse of the previous schemes. People were not investing in productive enterprise but were simply building up property portfolios--that is the cultural point that I am making.
The Government introduced the restriction, and I am sure that the Minister is aware that the wording of my amendment is taken entirely from their own legislation on business expansion schemes. I do not think that the Government have made their case; although in the short term the climate may not be encouraging, the property market problem could lead to abuse in the future, and that could turn a good scheme into something that to some extent falls into disrepute.
I respond to the hon. Member for Bournemouth, West by saying that all that is required for there to be a potential abuse is an upturn in one sector of the property market, taking it significantly ahead of inflation--I hope that he is optimistic enough to see that that may happen in some places.
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Far be it from me to give tips to those who plan such things in the City, but I represent an area that has not suffered the collapse in property prices that has happened elsewhere--we have experienced quite the reverse--and I can see that someone could easily be interested in offering a property-based portfolio in Aberdeen and the rest of north-east Scotland, where over the past few years there have been rent revaluations adding 200 and 300 per cent., and increases in both domestic and industrial property prices well ahead of inflation. People may say that we have also had a downturn, but it did not happen at the same time as the national downturn.Circumstances can change. I do not wish to disparage the idea that people can invest in property, or to suggest that property is not a legitimate business. However, simply investing in the capital appreciation of bricks and mortar does not fundamentally add to the national wealth. I repeat my earlier analysis that that is part of the problem of the British culture-- [Interruption.] If I buy a piece of property and it appreciates, nothing has been done to create new material resources, whereas if I buy a business making or selling things or providing services, something definite has been done to create national assets. Furthermore, as we have experienced over the past few years, what goes up can come down with one hell of a crash, especially if it was based on paper revaluations.
Mr. Butterfill: Will the hon. Gentleman explain how, if his amendment were accepted, he would overcome the problem of a manufacturer with a substantial asset--perhaps his own factory--that would take him above the limit? By what methods would the hon. Gentleman cater for that?
Secondly, how would the hon. Gentleman deal with the problem of the variations in valuations that appear from time to time, both because different valuers are used and because of rapid changes in the property market? Surely we now know that that market is far more volatile than we used to think. At the time of the BES abuses, we all thought that property values would go up for ever, but I do not think that many of us believe that any more.
Mr. Bruce: That is a fair point, but although the Government are relaxing the provisions now, they administered the scheme on their own terms in the past. The argument about valuations is important and valid, but the question is administrative and can be resolved. There could be a periodic revaluation by the normal methods--either by using the district valuer or by having two competing valuations. That would be perfectly reasonable.
The more specific arguments about valuations and about a manufacturer with a substantial property investment raise two points. First, if such a person owns a substantial amount of property, he also has the means to raise the finance himself. One therefore wonders whether he needs the attraction of venture capital trust funding. He has an asset against which he can borrow.
Mr. Butterfill rose --
Mr. Bruce: I have already given way to the hon. Gentleman a couple of times.
The second point is that I am somewhat sceptical about the idea that many companies are geared so that the value of the property is more than 50 per cent. of the value of their total business. In my opinion, unless it is a property-based business--in which case it should be
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properly restricted--that business has got its gearing slightly wrong. However, that issue comes into play in some businesses, such as hotel businesses, and the potential restriction that the amendment proposes is relevant in those circumstances.In effect, the Minister has said, "We did have that restriction but, perhaps because the property market is rather quiescent and because people have complained that it is slightly complicated, we have decided to relax it." However, the commentators--not only myself and not only the Liberal Democrats--say that the Government are making a fundamental miscalculation, which they may live to regret. That is my argument.
I think that the Government accept that the amendment is not a wrecking amendment, nor is it spiteful or irrelevant. It is pertinent, and its aim is to protect the virtue of the Government's scheme, to ensure that the scheme does not fall into disrepute because it becomes open to abuse of development simply as a tax shelter rather than what it is designed to be-- a real contribution to opening up investment for small businesses.
Maurice Fitzpatrick, senior tax consultant of Chantrey Vellacott, commented:
"EIS share issues are potentially subject to the same kind of marketing abuse which existed for BES in the 1980s."
He said that investors would now be
"bombarded with schemes, only a proportion of which made sense". He said that effectively they would be
"squandering their tax relief on manager or proprietor expenses". The Government should be mindful of those worries.
Mr. Tim Smith: That was referring to the enterprise investment scheme, not venture capital trusts.
Mr. Bruce: I appreciate that, but the same problem will continue if the Government are so relaxed about it. We ask the Government not to spoil a good idea by being too relaxed about it and allowing it to become a marketing tool for tax shelters, rather than a genuine contribution to small business investment because, if that happens, the Government will need to modify it substantially later. It is possible to spoil a good idea by being too lax about it. After all, the Government have said that they are anxious to maintain tight control of public expenditure and public finances.
If, as a result of miscalculation, the budget is exceeded because the take- up is greater than expected, because the opportunities are much greater, simply for tax shelter purposes, or if money is diverted away from genuinely productive investment, the danger is that people will say that the scheme is bad and did not deliver the goods, and we shall have to go back to the drawing board. I repeat that I believe that the Government have the basis of a good scheme. We propose an amendment that will ensure that it continues to concentrate on the objectives that the Government have in mind, which we support and endorse.
I think that there is even uncertainty about the scheme on the Government Benches. The Government should take seriously the argument about tax loopholes. They have, understandably, poured scepticism on the argument of, for example, the shadow Chancellor of the Exchequer, that substantial amounts of money can be reclaimed by closing loopholes. They have retorted, also with some justification, that closing tax loopholes effectively places extra taxes on business.
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However, the Government must recognise that, if they create a potential abuse that costs a significant amount, they give credence to the argument that there is more opportunity to close loopholes. In those circumstances, it is astonishing that, having recognised that they got it wrong with their previous schemes, the Government appear to be knocking that lesson aside casually and, as some commentators are saying, they are in danger of making a potentially costly mistake.What alternatives exist? The Red Book calculates that the scheme will cost £150 million in 1995-96, which presumably is in lost tax revenue. That figure will be up to £290 million in 1996-97. Those are only estimates, because the figures are based on the presumed take-off. If our concerns are justified and the property market goes into some sort of unexpected pre-election or even post-election upturn--that seems unlikely at present--we are concerned that the figures could soar out of control.
The Government have a strategy to keep public finances under control. They want to cut taxes, but should they suddenly find that their figures are out by a factor of one or two, questions will inevitably be asked about how they managed to let rip the economy and how they lost control over it. The Government have not imposed cash limits or restrictions, other than the approvals that might provide some sort of control.
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The Government could find a substantial amount of money being used in that way. If that money was being used to achieve the cultural shift that I mentioned and for genuinely wealth-creating small business investment, I would say that it was well forfeited by the Exchequer. But if it was simply being used for schemes based on an upturn in the property market rather than for real wealth creation--schemes that were being promoted as tax shelters and havens--I would not regard that as good use of the money. The Government would be rightly criticised for failing to get a grip on public finance.
We are proposing a constructive and helpful amendment that is entirely in accord with the Government's realisation of what happened under their previous schemes. While I acknowledge that the Minister contends that the proposals are fundamentally different from previous ones, it is clear that they are not--not just to me, but to those who make a living in the City out of such packages. They believe that the Government may have made a mistake. The Government may find that the policy will be abused and the finances will go out of control. They may have to forfeit more tax revenue than they intended for less productive gain.
In those circumstances, I genuinely and sincerely commend the amendment to the House. It is constructive and designed not to undermine the positive and beneficial effect of the Government's proposals, but to ensure that they are targeted where they will be most beneficial--productive investment.
Mr. John Horam (Orpington): The clause, and the amendments and schedule associated with it, involve the subject of the financing of small businesses, and all our speeches today will concentrate on that. We should remind ourselves of the importance in the economy of small businesses. There are about 5 million businesses in this country at present, 97 per cent. of which have fewer than 20 employees and 90 per cent. of which have fewer than 10 employees. None of us are in any doubt as to the
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significance to the economy of small businesses, which are growing in importance, as the hon. Member for Gordon (Mr. Bruce) acknowledged.The down-sizing of large businesses, the stripping out of layers of management in a relatively ruthless fashion and the out-sourcing of all sorts of competencies that have traditionally been done inside large companies provide opportunities for small businesses and starting up small businesses. I am delighted that my hon. Friends, not only in the Treasury, but at the Department of Trade and Industry, have come up with a large number of schemes.
I do not think that the Opposition have questioned the size of the Government's effort, although they may have criticised the direction. I understand that in the Budget alone, the schemes combined add up to about £1.7 billion over the next three years--a substantial sum. That takes into account, not only the VAT thresholds, but the transitional relief for business rates and the venture capital trust scheme. I have one concern. The measures fail in one crucial sector: start-ups. A surprisingly small number of the schemes we are discussing help people to start businesses as opposed to helping them to expand them. The balance between providing help to start a business and providing help to expand a business is wrong. More help is needed at that crucial stage.
In my experience of talking to venture capitalists I have found that they are not concerned to consider schemes that require less than £2 million--
Mr. Horam: My hon. Friend says that the figure is £500,000. But even if the minimum level of interest is £500,000, the same is still true. Venture capitalists say that it is simply not worth their while to put all their effort into such schemes, when the figures involved are often £50,000, £100,000, £150,000 or maybe £200,000 at maximum. In The Times I read of a dentist who had created a new portable dentist's drill to carry out dentistry at home--God forbid that we should have dentistry at home as well as in the dentist's chair. He was searching for finance and was quoted in The Times as saying: "The attitude in Britain was all wrong. It seemed as if we had to prove we were not defrauding anybody before we could start. Abroad we were welcomed with open arms."
That dentist has taken his business to Austria, where he is receiving £200,000 from the Austrian Government towards research and development prior to launching his new product. We have missed the opportunity--perhaps to our regret.
Although the measures are welcome--I fully concede that they are substantial--they do not tackle that problem. Many of the other schemes that are part of the Treasury's armoury--for example, the loan guarantee scheme--are also not helping. The hon. Member for Gordon mentioned banks and the role of banks within small companies. His comments about how banks approach the issue were correct. But the approach taken by the banks does not help start-ups, and banks are becoming less and less concerned with start-ups.
The welcome new schemes in the Budget do not provide a great deal of help for start-up businesses. In addition, the money that has previously been available for start-ups is not as great as it once was. I learnt with
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consternation that one of the training and enterprise councils has recently had to cut out entirely all the money previously available for supporting enterprise. As a result of the new arrangements brought together in the single regeneration budget of my right hon. Friend the Secretary of State for the Environment, all the money is now being spent on training. As a result of the new framework, one TEC will have no money next year to support enterprise schemes. We need patient money--money that is willing to wait for a return for perhaps four, five or six years. Obviously, it is hoped that the return will be all the greater. In its excellent little pamphlet "Agenda for Enterprise", the Federation of Small Businesses states: "in order to encourage enterprise we would welcome the provision of secure, stable, long-term finance, with preferential, fixed, low-interest loans for small businesses . . . A Government-funded `soft loan' scheme should replace the plethora of Government enterprise schemes (Enterprise Allowance Scheme, Loan Guarantee Scheme etc)".That is what small businesses want.
Mr. Forman: It is precisely because my hon. Friend is right about patient money that it is foolish of the hon. Member for Oxford, East (Mr. Smith), who is not currently in his place, to suggest a fundamental review after two years. In many cases, much longer periods will be needed to form an intelligent assessment of the genuine risk capital prospects.
Mr. Horam: I agree. I do not think that we need any reviews. The balance of the schemes is broadly correct, but in the one sector that I have mentioned, more effort needs to be made. The effort required would not involve much money. I have written to my right hon. Friend the Chief Secretary and also to my noble Friend the Minister for Consumer Affairs and Small Firms at the Department of Trade and Industry with specific proposals on helping start-ups. The suggestions were made to me by a company called Alpha Europe Associates, which has considerable experience of the subject. I suggested that a small fund with a mixture of Government and private sector money--perhaps not more than £100 million of Government money-- topped up with £200 million of private sector money, managed by people with experience of starting up small businesses, would constitute the core of an effort to get quite a lot of small businesses off the ground. We are talking about only £10,000, £50,000 or £100,000; we could start a lot of small businesses with £100 million or £200 million.
I wrote to my right hon. Friend and, as usual, I received a well-written and sympathetic reply. However, he raised three objections to my proposals: first, they would cost money; secondly, they were bureaucratic; and, thirdly, they would distort competition--very traditional arguments from the Treasury. First, my proposals need not cost a lot of money. We could do a great deal of good with a small amount of money. We could achieve good value for money by putting Government or private sector funds in a proper framework behind small business start ups. If we were slightly less generous with the venture capital trust proposals--which are costing £290 million--and allocated some of that money to a start-up scheme, I think
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it would prove a wiser use of public funds. My proposal could cost the Treasury nothing but a redistribution of the effort that it has already made.Secondly, I do not think that my proposals are in the least bureaucratic. The machinery for assisting small business is already in place. My right hon. Friend the President of the Board of Trade has developed the business link scheme throughout the country. That sort of machinery could be used to provide some small financial help together with the counselling and training already provided under the business link scheme. There would need to be only a small guiding core of people at the centre of Government helping the process along.
Thirdly, any scheme--the Government have a large number--can be construed as distorting competition. Surely one more scheme would not distort competition unduly. I do not take that argument very seriously.
Although I fully support the imaginative, large-scale and generous schemes which my hon. Friend has introduced in the Budget, I think that more attention must be paid to the problem of business start-ups. The competitive economic climate created by the Government in the last few years offers the opportunity to generate many more enterprises and reduce unemployment significantly.
Mrs. Helen Liddell (Monklands, East): I am delighted to be called to speak after the hon. Member for Orpington (Mr. Horam) because I agree with a number of points in his speech. I wish to address my remarks to the area of business start-ups.
As the Financial Secretary said, it is important to look at the broader context of the purpose behind establishing venture capital trusts. The aim is to provide assistance to small and medium-sized enterprises but, regretfully, I believe that the Government have missed a valuable opportunity by going down this route.
There is a problem with the venture capital industry in this country. The hon. Member for Orpington referred to the reluctance to invest: it is difficult to raise money for projects of £2 million and less, particularly in the area of business start-ups. If the start-ups are high risk or high tech, the difficulties are even greater. The venture capital industry in this country is not adventurous; like our banks, it tends to be risk averse. If we are to promote the growth of small businesses we have to ensure easier access to finance.
I regret that the Government are concentrating on the tax-incentive side of releasing finance under venture capital trusts. I recognise, as does the hon. Gentleman, that we need to establish a fund to assist small businesses. However, I think that the Government must give a signal to the banking community that small business has an important and growing role in our economy. If people have to access finance for small business start-ups through a maze with a carnivorous plant at every corner we will not see the kind of growing, wealth-creating economy which allows everyone to benefit from the enterprise of a few.
The venture capital trusts as proposed by the Government are the son of the business expansion scheme. The Government have learned very little from the chaotic shambles that that scheme became when it was hijacked by those who used it to make a quick buck. We
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must also consider the role of advisors. Advisors are often the ones to benefit most from Government schemes, not the businesses which receive money in the first instance.Many people who start up in business are faced with a plethora of difficulties. The one-stop shop concept has not percolated through the economy to the extent that the Government anticipated and people are bemused by what they are expected to do in order to set up a business.
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As the hon. Member for Gordon (Mr. Bruce) pointed out, new business men and women confront difficulties every time they go to the bank. At the small or medium-sized enterprise level, property provides the collateral which enables people to raise money to start a business. At present, banks are willing to lend only if people are prepared to put everything on the line-- not just their house, but preferably their granny also--as security for the loan.
The Government's venture capital trust proposals address only one side of the issue. I am particularly interested in the field of business angels. I see nothing in the Government's venture capital trust proposals that will create a meaningful environment within which they can thrive. I have seen good business angels and I have also seen very bad business angels--those who seize any opportunity to rip off people who are prepared to put their livelihoods and careers on the line in trying to establish a business.
We must harness all available savings into the investment process in order to expand the small to medium-sized enterprise sector of the economy. The business angel comes into his or her own when he or she has a commitment to the business that is being established. A concern that I had about the business expansion scheme--notwithstanding the fact that it was hijacked-- that I also have about the Government's proposals for venture capital trusts, is that they build a remoteness into the relationship between the investor and the enterprise. Businesses require long-term commitment. I agree with the hon. Member for Orpington's point that money is increasingly available to small and medium-sized enterprises in the short term, but at the first hint of trouble--for a start-up, it is usually about 18 months in --the money starts to dry up and people face a tremendous void which can lead to business failure and personal bankruptcy. The Government have not proposed anything to ease that situation.
I would like to see more imaginative thinking in providing finance to small and medium-sized enterprises--not least because, as a Scot, I recognise the difficulties within the Scottish economy. Throughout the 1980s, there was a disproportionately low number of business start-ups in Scotland. I have cited the figures in the Chamber before and I hope that hon. Members will not be bored if I repeat them. They are extremely dramatic. If Scotland had kept pace in job creation terms with the level of business start-up experienced in the south-east throughout the 1980s, we would have created 195,000 extra jobs. Even if we had imported the death rate of businesses throughout the recession, we would still have been ahead by 36,000 jobs. There is a supplement in today's edition of The Scotsman which examines business start-ups. Every survey that has been undertaken by the newspaper and by
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