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Session 1997-98
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Standing Committee Debates
Finance (No. 2) Bill

Finance (No. 2) Bill

Standing Committee E

Tuesday 2 June 1998


[Part II]

[Mrs. Gwyneth Dunwoody in the Chair]

Finance (No. 2) Bill

(Except clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)

[Continuation from column 384]

8.30 pm

On resuming

Mr. Douglas Alexander (Paisley, South): I draw attention to the figure of 11 million mentioned by the hon. Member for Guildford (Mr. St. Aubyn). While the amendment would leave out the figure of 10 million and insert the figure of 20 million in schedule 13 at line 45 on page 213, it would not extend to the wording of line 1 on page 214, which states that the cap immediately following the investment

    "must not exceed 11 million" .

No other amendment deals with the limit of 11 million, so it strikes me as inconsistent with the subsequent line of the Bill.

None the less, some wild figures have been bandied about by Conservative Members. Caps of 30 million, 40 million and even 50 million have been mentioned. They do a disservice to the case as the cap on the size of a qualifying company under the enterprise investment scheme could be increased from the asset limit of 10 million given, as the Library confirmed to me today, that that limit permits only the very smallest of newly quoted companies to receive the relief.

It is worth bearing in mind that, of the 303 recipient companies of the relief in 1996-97, only 15 were in the 500,000 plus range. The cost of the EIS relief is tentatively estimated by the Inland Revenue to be 20 million for 1997-98. To increase that limit in line with the amendment, never mind the wild figures that have been bandied about subsequently, could double the cost of the relief to the Exchequer. I ask my hon. Friend the Economic Secretary to consider whether the limit could be revisited in the future by an amount that would involve a much lower, modest cost to the Exchequer than that suggested by Opposition Members, but which would ensure that assistance was provided to a wider range of companies.

Mr. Fallon: Mrs. Dunwoody, I fear that you have been put at a disadvantage. You were not present this morning when, on a point of order, a colleague referred to a special coaching lesson that had been arranged by the Paymaster General. The hon. Gentleman moved from the Front Bench a practice that you may wish to draw to the attention of the Committee on Modernisation of the House to the Back Benches until we drew attention to that fact. He somewhat shamefacedly withdrew and we have been puzzled all day about the purpose of that visit to the Back Benches.

It now transpires that the hon. Member for Paisley, South (Mr. Alexander) was coached to draw attention to various technical deficiencies in our amendment and then, by some dint of special pleading, to encourage his hon. Friend the Economic Secretary to concede the principle at stake. Let us be clear. There are several ways in which schedule 13 will damage the secondary market andthe whole principle of reinvestment relief. Several amendments have been tabled that try to mitigate that damage.

Amendment No. 137 attempts to limit that damage by raising the limit from 10 million to 20 million. I shall deal now with the defects of that specific 10 million limit. It is faulty for three reasons. First, it is entirely arbitrary. It has been conjured out of the air; it does not exist anywhere else in the Bill. The parallel with venture capital trusts cannot be justified. Secondly, it is extremely poorly defined: the gross asset tests discriminate against companies that are involved in manufacturing and are in favour of companies that are involved in services. The definition of "relevant assets" is left completely vague. I cannot find it in the schedule. I have read to the end of the schedule and ploughed through the various definitions. Relevant period and relevant shares are defined, but I cannot find a new definition of the phrase "relevant assets" . Perhaps the Economic Secretary can help the Committee. The problem is that this definition of the gross asset test will discriminate against manufacturing companies that have substantial assets such as capital equipment and in favour of service companies that can be floated on the alternative investment market with virtually no assets at all.

The third problem with the 10 million limit is that it is too low. As my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) explained, a limit of 10 million leaves a huge funding gap for companies that have asset values of 20 million, 30 million, 40 million or 50 million. They, too, urgently need investment and have high risk stocks, which were the original purpose of reinvestment relief. It was designed to compensate investors because of the risky nature of the investment involved. Such risks apply to companies with assets of 20 million or 30 million just as they do to those with assets of 10 million. If the limit is fixed at only 10 million, that leaves a huge funding gap for companies with asset values of more than 10 million but less than 75 million.

Mr. Geraint Davies (Croydon, Central): Is the hon. Gentleman suggesting that the limit should be 50 million? Does he agree with the hon. Member for Guildford that the Opposition and the Government should encourage companies to understate their asset value in order to gain relief? It was suggested that they should.

Mr. Fallon: There are two points there. The first is the preferable increase of the limit. My hon. Friend the Member for Guildford tabled an amendment suggesting that the limit should be increased from 10 million to 20 million. That is a reasonable level. There is no particular magic attached to the figure of 20 million, as I am sure my hon. Friend will agree. The key point is to raise it above 10 million, which is itself an arbitrary figure. In a few minutes, I suspect that we shall hear that the figure might magically be raised from 10 million. We shall see what figure the Treasury proposes after its extensive consultations with the secondary market.

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

Mr. Fallon: I will give way, but I want to deal with the second point made by the hon. Member for Croydon, Central (Mr. Davies). He suggested that companies might like to fiddle the definition of assets. That is precisely my point. There is no definition in the schedule of "relevant assets" . We need to establish one. There is no definition because, if there were, it would become much clearer that the limit of 10 million discriminates against manufacturing companies and in favour of service companies. That is the weakness of the Government's proposals.

Mr. St. Aubyn rose

Mr. Fallon: I will give way.

The Chairman: Order. Will the hon. Gentleman indicate to whom he is giving way?

Mr. Fallon: I am being bombarded with advice, but I shall give way to my hon. Friend first.

Mr. St. Aubyn: The hon. Member for Croydon, Central did not understand what was said. Before Labour Members make any further points, which I fear may be equally ill-informed, I should explain that book value which is a perfectly legitimate accounting notion may be different from market value. The terms do not involve companies misleading the public or anyone else about the true value of their assets. They are both perfectly acceptable ways of measuring value. However, as my hon. Friends have pointed out, the clause does not make that clear.

Mr. Fallon: My hon. Friend has assisted the Committee. The Economic Secretary may have found a definition of relevant assets at the back of the schedule that may help the Committee to define how the gross asset test is to be applied. However, I cannot find that definition in the schedule.

Mr. Geoffrey Clifton-Brown (Cotswold): Perhaps I may assist my hon. Friend. The definition is in paragraph 9(3)(6A) of schedule 9.

Mr. Fallon: I am always grateful to my hon. Friend. However, that sub-paragraph does not define relevant assets. It gives the context for relevant assets and excludes certain assets from the definition.

I do not want to be unfair, as I promised to give way to the hon. Member for paisley, South (Mr. Alexander). I will now do so.

Mr. Alexander: I wish to comment on that paragraph and the hon. Gentleman's confirmation that he is committed to the figure of 20 million. Will he explain why the amendment leaves untouched the figure of 11 million, which appears in paragraph 9?

Mr. Fallon: It is not for my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) to advocate the amendment that he has tabled. He will do that when he winds up. I am making the point that the 10 million limit is entirely arbitrary. It has been fixed far too low, leaving a considerable funding gap for small companies that have been successful in attracting initial investment, but find it difficult to attract institutional investment because of the junior market's problems. Those problems include the lack of liquidity and the extent to which company founders wish to hand on to their shares. The original reinvestment relief was designed to tackle such weaknesses.

The Government are curtailing that relief in an arbitrary way through the 10 million limit and by removing the relief from new shares and confining it to new shares. We shall return to that point when we debate a subsequent amendment.

In the meantime I wish to make it clear that we support my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) in his attempt to drive up the limit to 20 million and who knows? even beyond that. Some kind of concession may result from the conversations between Treasury officials and the Stock Exchange that have been alluded to in our debate. I am sure that we are all eager to hear about that.

Mrs. Liddell: We have heard a number of speeches. The hon. Member for East Worthing and Shoreham gave a reasoned argument for the position that he has adopted. The hon. Member for Bury St. Edmunds made a stand, but was unable to resist playing to gallery. The hon. Member for Guildford blew the argument of his two hon. Friends by over-egging the pudding. He may have gone some way down the road of convincing me if he had been a little more considered in his approach and more rational in his arguments.

I must tell the hon. Member for Guildford that we go in for a better class of insult where I come from. [Interruption.] I am not referring to you, Mrs. Dunwoody you would never practise insults. If Opposition Members want to be in the top league of insulting, I commend them to some of my constituents, who would show them how to insult with panache.

My hon. Friend for Paisley, South made the most succinct point this evening. The amendment is a dog's breakfast. I am grateful to him and to other hon. Members for trying to explain the feeling behind the amendment. It was almost as bad as some of the amendments tabled by the hon. Member for Kingston and Surbiton (Mr. Davey), who told us that we must understand the spirit of an amendment, not necessarily its words.

I am grateful to those who have told us that the amendment would enable companies with gross assets of between 10 million and 20 million to benefit from investments through the EIS. However, that is not what the amendment says. It would leave the second leg of the test in place. The hon. Member for Sevenoaks completely failed to grasp that point. He might have read the Bill in great detail, but he should also read the amendments tabled by his hon. Friends. They have got themselves into a fankle.

8.45 pm


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