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Session 1999-2000
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee H

Thursday 8 June 2000


[Dr. Michael Clark in the Chair]

Finance Bill

(except clauses 1, 12, 30, 31, 59, 102 and 113)

4.30 pm

The Chairman: In addition to the selection list that was distributed this morning there is a supplementary list, which is available in the Room. It shows the provisional selection of amendments up to the end of schedule 22.

The Economic Secretary to the Treasury (Miss Melanie Johnson): On a point of order, Dr. Clark. I wish to clarify what I said this morning when we were discussing amendments Nos. 198, 199 and 235. I said correctly that concerns about venture capital backing were considered during the consultation period, but that no practical suggestions had emerged. I am not disputing the accuracy of the record of our proceedings, but I may then have mistakenly said that such matters had not been raised during consultation. I should have said that an answer had not been found during the consultation process. The official way in which to put the record straight is to do so now.

The Chairman: As the Minister rightly said, she has now corrected the record and I thank her for doing so.

Schedule 14

Enterprise management incentives

Amendment proposed [this day], No. 216, in page 325, line 32, leave out ``ceasing to meet'' and insert

    `not meeting for a period of more than six months'.

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are taking the following amendments: No. 217, in page 325, leave out lines 43 to 45.

No. 221, in page 325, leave out lines 46 and 47.

No. 218, in page 326, leave out from line 29 to line 7 on page 327.

No. 222, in page 327, leave out lines 8 to 25.

Mr. Howard Flight (Arundel and South Downs): I welcome you to the Chair, Dr. Clark. The essence of the argument that I was making earlier was that disqualification is extremely draconian for those who have enterprise management incentive options and that no harm will be done by allowing a sensible grace period of six months to correct something that may have caused inadvertent disqualification. We consider that the immediate draconian disqualification if there are changes in the share capital structure will also cause trouble. We understand the tax avoidance motives behind the provisions, but such matters could be dealt with severely. Amendment No. 216 is the most important amendment in the group. It provides the period of grace.

Miss Melanie Johnson: I wish to confirm that there is a 40-day period of grace under the Bill, which is also the subject of the next amendment. The relaxation provision under the amendment goes too far. It would allow companies to undertake non-qualifying activities, including no activity at all-for a longer time than qualifying activities, in fact. For example, companies would be able to carry on qualifying activity for a month and a non-qualifying activity for six months and so on. I urge the Committee to reject the amendment.

Mr. Flight: A more serious point will arise when we discuss the next amendment, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 224, in page 328, line 28, leave out ``40 days'' and insert ``six months''.

The Chairman: With this it will be convenient to take amendment No. 225, in page 329, line 29, leave out ``40 days'' and insert ``six months''.

Mr. Flight: The provision in the Bill removes EMI benefits from those that have been awarded options when a disqualifying event takes place and the option is not exercised within 40 days of the event. We accept the need for a removal of benefit for a disqualifying event, albeit with sensible and adequate notice and subject to a discussion of what those events should be. However, 40 days is not an appropriate or sufficient period. Market practice incentive schemes invariably allow up to six months for an option to be exercised. An individual might be overseas on business for a period of three or four weeks and unjustly robbed as a result of the 40-day period. Using the more standard six-month period for existing options would not offer tax avoidance opportunities or cost the Revenue a material sum of money. That too brief period represents a practical flaw in the schedule, imposes a much tighter and potentially tricky deadline, and should be amended to reflect well-established market practice.

Amendment No. 224 relates to income tax and amendment No. 225 to capital gains tax. We urge the Government to accept the amendment.

Miss Melanie Johnson: EMI is a generous tax relief and needs to be carefully targeted. I return to a theme of this morning, as the hon. Gentleman returns to one of his themes. The EMI has been designed to help the higher-risk trading companies that are most in need of support in recruiting and retaining key people. If a company ceases to qualify, it no longer needs to use EMI options, so the special tax relief should cease. The option holder may have no control over the company's ceasing to qualify and I accept that, in such circumstances, it would be unfair for him to lose out on tax relief immediately, which is why the legislation allows him time to decide whether to exercise his option and retain the relief.

The 40-day period allows a reasonable time for the option to be exercised, without allowing the benefit of those reliefs to continue after the company or option holder ceases to qualify. I see no reason for extending the period to six months, as it would only serve to give the benefit of a generious tax relief when it is not warranted. The hon. Gentleman's example of someone who is away on holiday for two or three weeks-

Mr. Flight: Or business.

Miss Johnson: Or on business. If a key member of staff were away for that period of time, I would imagine that he or she might be contacted and would then have 40 days in which do decide. That is a practical limit, and I ask the Committee to reject the amendment.

Mr. Flight: Exercising an option requires not only signing bits of paper but organising the money to subscribe. That is not something done lightly on the telephone from a business marketing trip in south-east Asia, for example. The Economic Secretary is being disingenuous in suggesting that it is something that can be easily done when one is abroad on business.

It would not be difficult to lengthen the period to one that would avoid unfairness. As it stands, there will be cases of great injustice that will become headline news. The Government will find out that all the bits of wire and pitfalls that lace what is in principle an excellent scheme will discredit it, and discredit the Government in the process.

We shall vote in favour of the amendment. It is a necessary and practical change. Like the significant venture capital committee that I have organised, I am surprised that the Government have proposed a good scheme but have seen fit to have thus laced it with all sorts of nasties.

Question put, That the amendment be made:-

The Committee divided: Ayes 6, Noes 21.

Division No. 31]

Burnett, Mr. John
Dorrell, Mr. Stephen
Faber, Mr. David
Flight, Mr. Howard
Jack, Mr. Michael
Ottaway, Mr. Richard

Allen, Mr. Graham
Best, Mr. Harold
Casale, Mr. Roger
Cawsey, Mr. Ian
Clapham, Mr. Michael
Colman, Mr. Tony
Gardiner, Mr. Barry
Healey, Mr. John
Johnson, Miss Melanie
Kemp, Mr. Fraser
Lawrence, Mrs Jackie
Leslie, Mr. Christopher
Mallaber, Judy
Mountford, Kali
Palmer, Dr. Nick
Pond, Mr. Chris
Primarolo, Dawn
Rammell, Mr. Bill
Ryan, Joan
Timms, Mr. Stephen
Tynan, Mr. Bill

Question accordingly negatived.

Schedule 14 agreed to.

Clause 62 ordered to stand part of the Bill.

Schedule 15

The corporate venturing scheme

Mr. Flight: I beg to move amendment No. 227, in page 33, line 26, and end insert-

    `2A. A company (``the new shareholder'') may be an investing company, and shares (``the sale shares'') acquired by it may be relevant shares in relation to it, where the new shareholder purchases those shares from another company (``the old shareholder'') and

    (a) immediately prior to that purchase the old shareholder was an investing company in relation to the sale shares;

    (b) the purchase takes place during the period of restriction which relates to the sale shares; and

    (c) the purchase has the consent of the company which, immediately prior to the purchase, was the issuing company in relation to the sale shares;

    for the purposes of this Schedule the new shareholder shall be deemed to have subscribed for the sale shares, and the sale shares shall be deemed to have been issued, on the date that the new shareholder purchased them; and nothing in this paragraph shall prevent the withdrawal of any relief granted to the old shareholder under any other provision of this Schedule.'.

This schedule sets out all the rules and regulations relating to the new corporate venturing investment scheme introduced by clause 62. We have already touched on several of those regulations, which echo the regulations for the enterprise investment scheme and the enterprise management incentive scheme, which we have already debated. Those that remain are separate points.

Amendment No. 227 focuses on the form in which corporate venturing investors may invest. The Bill will create an unnecessary constriction by confining the form to subscriptions. An investor will not be able to take over a holding from an existing investor who wanted or needed for his own financial reasons to leave the scheme. In such circumstances, it would surely be mechanically much simpler to allow the new shareholder to buy the existing shares than to force him to subscribe to new shares and give the issuing company a headache over what to do about the existing shares in issue.

It has been argued that there would be no relief as the issuing company had received no benefit, but it would have received a benefit. It would have acquired a new, willing shareholder and its consent would be needed for the sale. No ready opening for tax avoidance would be created by our proposal, as the old shareholder would have relief withdrawn, and the new shareholder's period of shareholding would start from scratch from the date of acquisition.

Again, we have a broad principle. Are these bona fide measures to get enterprise going, or are they spin tied up with string to stop people from acting in a common-sense fashion?

4.45 pm


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