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Scottish Enterprise has found that 70 per cent. of small businesses say that the biggest obstacle they have encountered relates to raising start-up finance and finding the funds that they require after about 18 months. Starting a business is an extremely risky venture. As the hon. Member for Orpington said, many people start up businesses because they have been made redundant from bigger enterprises. They are not used to a small business environment, and it takes them time to adjust. The proposals in the Bill represent a missed opportunity to help create the environment which would allow small and medium-sized enterprises to become established and grow. I am concerned about the point made by my hon. Friend the Member for Oxford, East (Mr. Smith) about the property exclusions. There is always an attraction for money to go where the easy option is-- towards property. That is what happened in various schemes in the past and it is extremely disappointing that the Government have not sought to recognise it and plug that loophole.

Referring to amendment No.15, it is important that we get some empirical evidence of how the schemes operate. Particularly throughout the 1980s, there were numerous schemes aimed at generating finance for small and medium-sized enterprises, but we in Britain have not yet got it right. We are still getting wrong the structures that we create. Too much emphasis has been placed on providing tax incentives for those with money. Perhaps some of those on vastly inflated salaries from newly-privatised utilities will consider putting some of their money into schemes that will help create small businesses. Quite frankly, We have missed the opportunity to do something meaningful for the small business community.

Two years is an inadequate time in which to assess the scheme. Here in the Chamber it may be an interesting debating point, but in two years a man or a woman seeking to set up in business can go from being prosperous and hopeful, with plenty of opportunities, to personal bankruptcy and the need to dig oneself out of a hole that one is in because of the inadequacies of the financial sector in Britain.

I was interested that the Financial Secretary referred to the role of Rothschild. Perhaps he has an inside track into the thoughts of Rothschild through Lord Wakeham who joined the firm yesterday. He referred to the Association of Investment Trust Companies that initially welcomed the proposals from the venture capital trusts, but has since entered caveats into the operation of the trusts and wishes the Inland Revenue to take a closer look at how the trust companies can operate in the best interests of investors. I should like the Inland Revenue and the Treasury to examine them to make sure that they operate to the long-term benefit of the businesses that, hopefully, will be started.

I share the view of the hon. Member for Orpington; there is a need to take start-ups into account. I greatly regret the fact that the proposals in the Bill represent a massively missed opportunity and I have even more regret that, after more than a decade of looking at how we can fill the equity gap for small businesses, the Government have failed to grasp the nettle and address the problems that the businesses create and, in failing to do so, limit the potential for economic growth in Britain.

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Mr. Forman: I shall try to be brief, because many of the most important points have already been made.

It is clear from the speeches of the hon. Members for Oxford, East (Mr. Smith), for Gordon (Mr. Bruce) and for Monklands, East (Mrs. Liddell) that there is a great deal of common ground on both sides of the Committee, at least on the principle that we want to attract more risk investment into business start-ups and small and medium-sized businesses generally which, in certain circumstances, could have a really dramatic future. One thinks of the drugs sector and some of the high-tech firms that have grown up on science parks and so on. Even in Britain, with all the criticisms levelled against our systems and our culture, we achieve some significant breakthroughs and that is a good thing. We need more of that, and the answers to be provided to encourage it do not consist simply of tax relief measures, although they play an important role and the idea of venture capital trusts is very helpful.

Clearly the banks have a much more important role to play than hitherto. I agree with the hon. Member for Monklands, East that business angels--an idea very much promoted by the Government--also have an important role to play. We want a country in which they are many more high-net-worth individuals who are prepared to take risks because they are attracted by them, and not necessarily with the benefit of tax relief. That would be the best outcome.

I am rather saddened by the way in which the Labour party--and to some extent the Liberals, too--seem still to be obsessed with a form of voodoo economics whereby, when examining any form of tax relief, they immediately look not so much at the potential benefit of the relief and the result for the supply side of the economy or the jobs, as at who is likely to put their money into it or be induced to do so, and whether it is fair.

All money, so long as it is legally earned, is welcome as investment, whether for business start-ups, small businesses or anything else. Britain needs more investment and more risk taking. We should not be so preoccupied with where the money comes from.

Mr. Malcolm Bruce: The hon. Gentleman's remark was a little cheap. Is he suggesting that, when the Government amended the business enterprise scheme because of the abuse of property, they were also behaving in a somewhat disgraceful manner?

Mr. Forman: Not at all. I was trying to speak in a friendly and ecumenical spirit, as the hon. Gentleman will learn if he listens on.

The evidence that the Chancellor's idea for venture capital trusts goes back to 1993 demonstrates that the Government have been keen to learn such lessons as have been appropriate from the experience of the business expansion scheme.

It has been said that this is not a business expansion scheme; it is a different approach, but the very fact that it is a different approach suggests that Ministers and officials have learned that there were shortcomings in the BES--that are now widely

acknowledged--and they are not repeated in this approach.

Mr. Betts: Is it not true that exactly the same comments were made by Ministers when the business expansion scheme was introduced? They said that there

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were no problems, there would be no abuses and there was no need for proper monitoring. All the problems came to the fore many years later, and the Government had to take action, so it is not surprising that the Opposition should be suggesting that the scheme should be reviewed in two years to see whether abuses exist as they did with the business expansion scheme.

Mr. Forman: One of the main concerns that emerged from the business expansion scheme was the emphasis on investment in land and stationary property which did not generate development potential or much else in the way of extra activity.

The Opposition seem to have got their knives into property companies, but there are two issues that they have not considered. First, in answer to the hon. Member for Gordon, if someone were dealing only in the buying and selling of land, that would be excluded under the terms of the clause.

Secondly, Opposition Members frequently complain about the need for the Government to do something to boost the construction industry and all the professions related to it. We hear them talk about all the unemployed building workers, but whether a company is engaged in the building of new capital plant or the maintenance of buildings, it is creating jobs in the economy and it will have a real and virtuous effect on the economy, even if the venture capital trusts lead to new companies being created which essentially are involved in property development. I see nothing wrong with that; it creates jobs and economic activity that is recycled into the economy.

The Opposition seem to fail to recognise that riskier ventures--which are, by definition, the ventures that the Government are seeking to promote in the clause--can and do generate higher rewards for some investors prepared to take risks. The higher risk necessarily engenders the higher reward on those occasions when it works out. It seems perfectly proper to spend some £290 million of taxpayers' money on that very good cause.

I am not over-enamoured of tax relief as a general principle. If we were not starting from here, I would prefer a tax system that embodied the minimum tax expenditures and reliefs, lowest possible rates and broadest possible base--but that argument is for another day. As long as we deal in the currency of tax reliefs as a way of encouraging certain forms of activity that are not sufficiently buoyant at present, the scheme represents an effective, targeted and adequately circumscribed approach.

I am surprised that Opposition Members complain that the scheme is full of potential loopholes. It occupies four and a half pages of what is already a long Bill. If hon. Members take the trouble to read them closely, they will find all sorts of caveats and belts and braces, to ensure from the Revenue's point of view that the scheme does not lead to unintended abuse. If it does, we can all be sure that the Revenue will act promptly to close any loopholes in next year's Finance Bill.

I say, not in anger but in sorrow, that, despite all the pretensions of the Opposition parties to be new Liberals, new Labour, new this and new that, a lot of the old thinking was evident in the speeches of Opposition Members. I wish that they would modernise as fast as the small companies being backed by the clause are modernising themselves.

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Mr. Stevenson: This is another Government scheme that has tax perks at its base, and no Conservative Member has challenged that fact. There may be differences at the margin, and from previous, more fundamental schemes, but the proposal is dependent on tax relief for any chance of success. We have been that way before under this Government. However much Conservative Members protest the valid points made from this side of the House, they seem reluctant to address the fundamental issue.

I understand that the tax relief will be backdated to April 1994, presumably because the Chancellor announced the scheme in 1993. The proposal is based on several fragile assumptions. One is that presumably dynamic and go-getting venture capital trusts will be unable to survive unless they enjoy tax relief. That is a dubious proposition. If I were involved in such a trust, I would not be filled with confidence if the Government based their proposals on that assumption.

It is also assumed that the proposed legislation is watertight enough to give the Government some confidence that their proposals will eliminate abuse. Both assumptions raise important questions. We would not be having this debate were it not for the fact that the financial sector has let down small and medium-sized businesses--if banks and financial institutions had not been racked with such chronic short-termism that they failed that sector. That factor has not been acknowledged in any speeches by Conservative Members.

Mr. Tim Smith: Ludicrous.

Mr. Stevenson: If the hon. Gentleman wishes to challenge my remark, I am willing to give way.

Mr. Smith: I thought that the one point on which there was a consensus in the Committee is that the equity gap in the UK was first recognised by the Bolton committee more than 30 years ago, and that we are trying to find a solution.

Mr. Stevenson: I am not sure that I am grateful for that intervention. I was making precisely the point that one must question the elements that created that equity gap. I argue strongly that the financial sector has played an important role in creating the investment gap from which small and medium-sized businesses in particular are suffering. Therefore, the Government's faith in the financial sector is touching.

Conservative Members said that the cost of the proposal will be £290 million. I accept that my arithmetic may be wrong, but from the Government's own publications it appears that the cost to the Exchequer over a three-year period is likely to be £680 million--and that figure should be on the record. It is dependent on venture capital trusts achieving their objectives over three years. They may or may not do so, and that will have a considerable effect on the cost to the Treasury. The figure will be high at the start, and may prove incorrect. The estimate is probably on the low side, because it ignores tax perks on capital gains and dividends.

Despite propaganda about the way that the financial sector has created investment, the scheme has the hallmarks of another expensive and unfounded experiment. My hon. Friends referred to reports that cast

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serious doubt on the value of tax breaks, including that produced by Warwick university and quoted by my hon. Friend the Member for Oxford, East (Mr. Smith). Such reports cannot be dismissed as irrelevant. They were produced after careful research and consideration, and reached the conclusion that tax relief-based schemes do not deliver the goods.

Mr. Tim Smith: Is the hon. Gentleman saying that financial institutions have failed to fill the equity gap, and that he does not like tax relief as a way of dealing with the problem? How does he think the problem should be tackled, if not through the tax system?

Mr. Stevenson: I cannot remember saying that tax relief cannot be used in a positive way. Perhaps the hon. Gentleman was not listening carefully. I repeat that there is no real evidence to suggest that tax relief-based schemes have worked or will work. It does not matter how much Conservative Members try to manoeuvre or manipulate the argument, because there is evidence to justify our concerns. When I intervened on the Financial Secretary earlier, I compared venture capital trusts with the business enterprise and enterprise investment schemes. He rightly said that one problem with the BES was that it was not spread widely enough, and that the Government are trying to avoid concentration in the new scheme. That may be true, but schemes based on tax relief do not deliver the goods. The hon. Member for Orpington (Mr. Horam) presented a different scenario, but I am sure that he is aware, as we are, that his proposals would be anathema to the Government.

Expensive schemes are being put forward with no empirical evidence to justify them. The Government, with their head down, are sailing as if in the Mary Celeste. At the end of the day, they will be discovered with nothing on board. That is why we are concerned. The Department of Trade and Industry part-sponsored a report entitled "Understanding the Small Business Sector". When considering the business expansion scheme, which I am prepared to argue is ill-fated, it stated that the objective of the scheme is that small and medium-size enterprises should focus on tax breaks as "tax avoidance vehicles". The terms "tax avoidance" or "tax abuse" can be used in whatever way we wish, but a report that was partly sponsored by the Government creates great doubt about schemes that are based on tax relief. Will the Government ever learn?

I turn to the amendments. It is--

Mr. Forman: I am glad that the hon. Gentleman is about to speak to the amendments. Before he does so, will he tell us what approach he would favour? He has not done so yet, although he has told us what he does not favour.

Mr. Stevenson: There is a strong case for the Government to use whatever resources they may have available, but not in the way they propose, which is indirect and possibly extremely expensive. We should be looking to the Government to take direct measures to stimulate investment in an important sector of the economy. There is the distinction between the

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Government's approach and the one that I would take. I would agree with some of the elements of the approach that would be adopted by the hon. Member for Orpington.

Mr. Butterfill: Will the hon. Gentleman give way?

Mr. Stevenson: No. I think that I have given way enough. I would like to bring my remarks to an end.

We, the Opposition, are saying that there are sufficient doubts about the assumptions that the Government have made to justify support for the amendment. Unless the Financial Secretary can give reasonable assurances that the Government's proposals will not result in tax abuse--I think that everyone recognises that there is potential for that--and that the scheme has a reasonable chance of delivering investment in small and medium-sized businesses that has been so lacking and that we all want to see, it seems sensible to say that, in two years' time, we should be looking again at how the scheme has developed and whether there need to be any changes to make it effective.

Mr. Butterfill: I should preface my remarks by reminding the Committee that the Register of Members' Interests shows that I am an adviser to the British Venture Capital Association. I remind the Committee also that the association has warmly welcomed the proposals for venture capital trusts that we are discussing.

I know that the BVCA would be unhappy if VCTs were used in the way suggested by Opposition Members to create tax shelters or property-based schemes. That would not be attractive to its members to whom I have spoken. The BVCA would certainly not be happy if that were the outcome of our deliberations. At the same time, the BVCA recognises that there is an urgent need, as the hon. Member for Stoke-on-Trent, South (Mr. Stevenson) said, to encourage more investment in venture capital and to make finance available to smaller companies. It believes that a scheme of the nature proposed by the Government is a worthwhile way of achieving that.

There is a difficulty that became apparent during the course of the research undertaken by the Select Committee on Trade and Industry, of which I am a member. The hon. Member for Gordon (Mr. Bruce), who unfortunately is no longer in his place, was a member at the time. It became clear that there was a funding gap. Many of the large institutions did not feel able to invest directly in very small companies because the costs were, as they saw it, disproportionate. That is why the venture capital industry is one of the fastest growing industries in the United Kingdom, to try to bridge the gap. In response to the hon. Member for Monklands, East (Mrs. Liddell), I do not think that it is risk-adverse. It makes mistakes, some of which have been well publicised, but on balance it achieves success. The industry has made a worthwhile contribution to the British economy in recent years.

Some venture capital companies are prepared to make low-level investments. For example, 3i will make investments down to £50,000 in individual companies. Many other companies will go down to £250,000, and sometimes to a lower level if they think that a company

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has an interesting future. Nevertheless, there is a shortage of available funds. Many other financial institutions are reluctant to help provide funds.

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The hon. Member for Stoke-on-Trent, South criticised the banks. It should be recognised that, essentially, the banks borrow money short-term. They take our deposits, and they may have to repay them at short notice. For example, the hon. Gentleman may go to his bank tomorrow and take out everything he has in it, and so may other depositors. The banks are required by law to maintain liquidity levels that make it difficult for them to make long-term investments, and especially risky ones. Their role in life is to take in money in the relatively short term and lend it out in the relatively short term. That lending role is their prime function.

Major investment must surely be made by insurance companies, which have long-term commitments and long-term money coming in, and by the pension funds. There are difficulties for both in investing in risky ventures. They obviously have a fiduciary duty, especially in the case of pension funds, to their beneficiaries. They can invest only a limited amount of their portfolio, therefore, in high-risk investments.

There is a problem with the funding that is available for venture capital in the United Kingdom. The BVCA tells me that only a small proportion of the total sum that it has been investing in the past year or so has been provided by UK investors. A much greater proportion of its money has come, curiously enough, from overseas investors, especially American pension funds. In the United States, a recent provision encourages pension funds directly to invest in venture capital, in a way that does not happen here.

We may be taking a slightly different route. In the new legislation that we are proposing to introduce for pensions, we are rightly focusing on the need to maintain minimum solvency ratios to protect pensioners. The changes that we are making will make it even more difficult for pension funds to invest in the provision of equity--even equity for major companies--and still more difficult, because of the valuation and yield rules that we shall be introducing, to invest in venture capital. They may have to accept that no money will come in through dividends for the first couple of years, three years or even four years. They may even have to wait much longer than that. There is fear in the venture capital industry about the very provisions that I support, as chairman of the all-party group on occupational pensions. I am passionately committed to the idea of adequate solvency for pension funds, but that in itself may in future make the provision of money for venture capital much more problematical. It is important, therefore, that we try to stimulate other forms of raising money. The provision of tax incentives is an important way to encourage that.

First, we must encourage the provision of money. Secondly, we must encourage our brightest and ablest managers, who may at present be in major companies, and perhaps in receipt of high salaries with a comfortable and secure existence, perhaps even with comfortable share option schemes, to abandon all that and start new enterprises, using their skills to create new wealth for the economy. To tempt those people out, to tempt the capital

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out, we must provide an incentive. I believe that the incentives that we are providing through the trusts are important in that process.

Opposition Members criticised the fact that we propose rollover relief from capital gains for money invested in that type of activity. I would remind them, as I said earlier, that there is no need at the moment for people to pay CGT unless they particularly want to realise the investment in which their money is located. That location may be secure and unexciting, but as long as they keep it there indefinitely, they will not crystallise their CGT liability. In my view, it is the minimum requirement if one says to them, "You will not crystallise your capital gain if you put your investment into a venture capital trust," because those people would be penalised if they moved their money from an existing investment into a VCT. Surely that is not what we want to encourage. I would go further and give them exemption from their existing CGT--if that were possible--because then we really would encourage people to move their money into something more dynamic and exciting.

Similarly, I believe that the other tax breaks that are incorporated into the proposals are important in motivating people to undertake what are really quite risky activities. The structure of the trust, too, is important, because in contrast to enterprise investment schemes, where one is investing in a single-company operation, we are encouraging a broader spread of risk. Although all the components of a VCT may be high-risk activities, by spreading the risk over a number of different activities, we minimise to some extent the problems that can arise from total failure of a single company. I applaud that.

The Labour party suggests that there should be a statutory requirement to review this in two years. Other hon. Members have pointed out that that is a short time horizon in which to assess the success of a new enterprise. As hon. Members who are involved in the venture capital industry will know, most companies are really only just getting off the ground at that stage.

In contrast to what the hon. Member for Monklands, East said, it certainly is not true that companies invest for the long term. 3i, for example, still has almost all the original investments that it made. It is not in there for a quick buck, and that applies to most of the other members of the British Venture Capital Association.

Mrs. Liddell: I can appreciate that the hon. Gentleman referred to 3i, but in doing so he emphasises one of the points that I sought to make: large venture capital organisations such as 3i will not go for the small to medium-sized enterprise that needs a small sum of money. The small to medium-sized enterprise is much more vulnerable to short-termism than the larger enterprise.

Mr. Butterfill: I am sorry that the hon. Lady was not in her place when I referred to her speech. She is quite wrong. 3i invests down to a level of £50,000 in individual companies, so it is the worst example that she could give. It goes down to a low level: it is precisely for that reason that I mentioned it. I am sorry that she did not hear my earlier remarks.

Mrs. Liddell: I referred to 3i with some feeling, because, in my previous occupation, which was interrupted by the parliamentary by-election that brought me to this place, one of my jobs was to try to get money

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from venture capital companies such as 3i, for start-ups that would have a turnover, within one to one and a half years, of £1 million to £1.5 million. Believe me, if I could have got money out of 3i, I would have been a much happier lady than I was when I entered the House.

Mr. Butterfill: I accept that the hon. Lady may find that not every proposal put before 3i or any of the other venture capital organisations is likely to find favour. It is always difficult. One must convince whomever one wants to invest in one's company that it will be a good investment, so I accept that many propositions are turned down.

But an awful lot are accepted, and if the hon. Lady reads 3i's annual report, or those of CinVen, Electra, Candover--or any of the other venture capital organisations--she will see the huge volume of companies that have been assisted. The point that I am making is that what we propose tonight will make that process much easier. Let us return to the amendment. I do not think that a review in two years is an appropriate time horizon. Nor do I think that it is necessary, for reasons that I shall come to in a moment. I do not think that the proposals suggested by the hon. Member for Gordon are appropriate either, because there is no doubt--I have been advised quite specifically by venture capital organisations--that genuine business activities fell foul of the 50 per cent. rule and were precluded from obtaining funding on that basis. It is certainly no business of any of us tonight to wish to preclude genuine businesses from that support, simply on the basis of an arbitrary rule. I accept that there is a genuine fear that VCTs might conceivably be used for some form of abuse of the tax system. They might conceivably be used for the same sort of abuse that we saw with the BES. I would be the last to wish that to happen, and the whole of the venture capital industry would be against it.

We have to look at a different climate today. In the 1980s, when BES schemes were popular, property prices, it seemed, were rising for ever, by huge margins every year. Property was the fashionable thing to be in. It was secure. One could not lose one's money. In fact, the longer one held it, the more it would be worth.

I do not think that anybody would pretend that we have the same scenario today. Property values have fallen substantially, whether it is residential property or major commercial property investments. Indeed, the developers of Canary Wharf, people in the City of London and throughout the nation lost huge amounts of money. I do not think that the risk of repeating the BES is very likely, given the present climate for property.

It is conceivable that, if we had a major revival of the property industry, some people might forget the chastening experience that they have had over the past three or four years and seek to go back into it again, but a provision in schedule 14 (12) of the Bill can deal with that. It provides that the Government can make regulations if it seems that they may be necessary as things arise in the future. I ask the Minister to give an undertaking that, if in future it appears that there is some abuse of the kind feared by Opposition Members, he will not hesitate to use those powers to put it right. I go further. Between now and Report, when we shall have an opportunity to consider the clause again, although we shall have an opportunity to consider the principle of

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it when we consider clause 60 of the Bill upstairs in Committee--I hope that I will be able to participate--if it becomes clear to the Treasury that all sorts of schemes are gathering place which are primarily asset-based schemes designed for tax avoidance, I hope that my hon. Friend will say that he will look again to see whether something more severe might be required. However, if it becomes necessary, I urge him not to consider the 50 per cent. rule, which caused so many problems in the past.

Mr. Ian Pearson (Dudley, West): I begin by making some wider comments on finance for small businesses and drawing the attention of the Financial Secretary to the second report of the Bank of England on finance for small firms, which was issued recently. I do not know whether he has had an opportunity to read it. The Bank of England always talks in very coded terms about anything that it produces that might be mildly critical. Nevertheless, it has some interesting comments to make on finance for small firms.

In particular, it talks about relationships between small businesses and the banking community--the high street banks. It says:

"There is still considerable room to improve further both relationships and the level of service provided."

That is the strong feeling that I receive from businesses in Dudley, West. They still feel that high street banks offer little alternative. They still find that the banks are extremely risk averse and are not considering cash flow, despite instructions in many cases from head office to do so when deciding on bankable propositions. The banks still very much consider security.

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One reason for that is the performance management targets set by some of the banking industries. I do not know what might be done about that. Setting performance targets to reduce the number of company failures, and so on, creates significant problems. It also creates problems at Government level, particularly when attempts are made to encourage small businesses to be more open and share financial information with banks.

If banks know that a business is in trouble, they will immediately want to pull the plug on it, because they understand that the Inland Revenue and Customs and Excise, as preferential creditors, are competing with each other to put banks into receivership because of their own performance targets.

Mr. Forman: In order to bring the hon. Gentleman's point up to date and to give a full picture, does he also agree that, in a recent speech, Pen Kent, the executive director of the Bank of England, to the parliamentary group for engineering development at the House of Commons, of which the hon. Gentleman probably has a copy, said that there is a continued shift away from overdrafts towards term loans in terms of banking support for small and medium sized businesses? He went on:

"When we first got involved in this subject, overdrafts were typically around 60 per cent. of all bank lending to small and medium sized enterprises. Now over 60 per cent. is in the form of term loans."

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Is not that a message of some reassurance to the hon. Gentleman?

Mr. Pearson: Yes, it certainly is a message of reassurance. I welcome the growing awareness of the small business community of some of the deficiencies of bank overdrafts and some of the benefits of other financial mechanisms that are open to them--not just term loans, but debt factoring and invoice discounting.

One reason for the great movement away from overdrafts is that many small businesses have seen them as a bad bet, and invoice discounting and debt factoring have provided far more attractive deals. The progress of term loans is welcome, but they are still very much granted on the basis of security rather than the cash flow position of a business.

It is also interesting that the report on finance for small firms comments on business angels and the dangers of the fragmented approach to business angels that currently exist throughout the country. That fragmented approach is equally apparent across a range of financial mechanisms that are available to small firms in Britain. We simply do not have an adequate and coherent package of small business support measures.

As an economist and a previous employee of an economic development and venture capital company, I believe that the case for venture capital trusts rests principally on market failure. Companies that wish to grow are unable to gain access to appropriate forms of finance at acceptable rates. That is a clear example of market failure.

However, venture capital trusts do not address the principal problem of small businesses that wish to grow and require finance--the need for long- term patient capital. I fully endorse the comments made by the hon. Member for Orpington (Mr. Horam) on that.

The venture capital trust legislation is complicated. I am slightly disappointed to see that it defines what is not allowed, leaving a number of grey areas, rather than positively defining what is allowed. As a result, the Opposition are concerned that it gives a licence to fertile City imaginations to devise tax avoidance schemes for the very rich which will do nothing to support growing businesses. I hope that that is not the case, and that the Chancellor will use what power he has to ensure that that is not the case. The 70 per cent. rule on qualifying holdings in a company does not strike an adequate balance. I would be interested to hear from the Financial Secretary what restrictions, if any, are placed on the remaining 30 per cent. of the funds available to venture capital trusts. As I understand it, there is nothing in the legislation to prevent that money being invested in Pacific rim countries and other stock markets. I do not see why tax incentives should be provided to British taxpayers to allow a proportion of a venture capital trust's funds to be invested in the stock markets of other countries. The three-year rule in reaching the 70 per cent. criterion creates the danger that money can be invested either in blue chip British companies or in ventures all over the world for a minimum of two years and that then there will be a final rush to meet the three- year criterion for investing in small unquoted businesses. I should like some assurance that that will not be allowed to happen.

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The level of 70 per cent. for investing in small and medium sized companies is wrong. Venture capital trusts are likely to be set up with sufficient critical mass in terms of funding, so a level of 80 per cent. overall would be more appropriate.

I appreciate the need for flexibility when buying and selling companies, but with venture capital trusts of £50 million or £100 million that restriction does not apply. The tax incentives that are available mean that, although the shares in the venture capital trust will be tradeable, I would not expect that tradeability to be so significant as to mean that an 80 per cent. criterion would be acceptable.

With regard to the 50 per cent. limit on eligible shares, I appreciate the comments of my hon. Friend the Member for Oxford, East (Mr. Smith) that that might influence deal structures and be insufficiently flexible. However, I assume that most venture capital trusts will probably invest pari passu with other institutions, which will provide other forms of finance, whether it be mezzanine finance, term loans or a range of other financial packages.

That brings me to a point that I want to discuss later in terms of eligibility. Schedule 14 sets out requirements with regard to a company's business and what is a qualifying trade. We have had a useful debate on property. There is a consensus on both sides of the House that no one wants to see VCTs used as primarily asset-backed property schemes.

I fully accept the arguments, and I know of a number of companies requiring development capital whose major assets would be their land and buildings. Therefore, I understand the reasoning behind what the Government are seeking to do. Nevertheless, I see no reason why what is regarded as an investee company should not be defined by its principal business activity, and primarily property-based companies excluded.

I welcome the provision for royalties and licence fees for research and development: I know of a number of organisations that hope to amass funds to invest in new technological inventions and early pre-market trading. I hope, however, that venture capital trusts will also be able to take equity stakes in some of those companies when they reach the trading stage.

The Bill imposes a maximum for qualifying investments in a relevant company. My experience in the venture capital industry suggests that a limit of £1 million in any one company in any one year is too high. There is currently strong competition among venture capitalists for any reasonable proposition requiring development capital of £500,000 or more, as the hon. Member for Beaconsfield (Mr. Smith) pointed out. Given that strong competition and the fact that the money is clearly available-- there has been no instance of market failure--I see no compelling reason why tax incentives should be made available for investments above £500,000.

In view of the present structure of VCTs, I anticipate a desire to invest in million-pound projects, which may be part of wider deals. That is not the real purpose of VCTs, which I support: the provision of development finance for those who cannot secure it by any normal means.

I also feel that the gross asset level of £10 million is far too high. The chief executive of the 3i group suggested that it might be worth considering £2 million, and in view of that, £5 million or so strikes me as much more appropriate. I suspect that the scheme will gravitate

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towards the financing of more robust businesses that could be funded conventionally--that VCTs will piggy-back on top of larger deals.

There is also a strong indication that VCTs will be used to fund management buy-outs and buy-ins. I have no objection in principle to companies' changing their ownership and management structures in that way, but I feel that such a churning of assets is not the primary purpose of the Bill, which is intended to support businesses that will grow, employ more people and deal with some of the country's unemployment problems.

Mr. Butterfill: Does the hon. Gentleman really think that VCTs will be used extensively to fund management buy-outs? It is fairly simple to finance them in existing circumstances. Complex rules will govern the use of VCTs; will not many of those planning management buy-outs decide that, given the complications, their use is not worth the hassle?

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