Finance Bill

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Mr. Jack: I rise to underscore the remarks made by my hon. Friends. The Economic Secretary will have had the very helpful briefing, which deals with some of those matters, from the Chartered Institute of Taxation drawn to her attention. It is probably as well to point out that all such matters are drawn to the attention of Treasury Ministers, who have copious briefings on how to deal with them. I look forward with great interest to what she has to say on those points.

I should like to take our discussion of clause 45 a little further. Although I welcome the fact that the tapered arrangements for the lowest rate of capital gains tax now apply after two years rather than after four, as they did previously—it is a pleasure to see when a sinner repenteth—I should like the Economy Secretary to spend a few moments explaining the rationale for that move.

When tapered tax was introduced, the Government told us that it was good and virtuous. They told us that it would aid investment in British industry. They told us that short-termism was a bad thing, and therefore a taper over a much longer period was entirely to be applauded irrespective of the questions about complexity that Conservative Members raised. On page 49 of the Red Book, clause 45 is justified by reference to

    ''simplification of the CGT regime to reduce compliance costs, in particular for those who invest in business and for employees.''

What a turnaround by the Government. They introduced the complexity that capital gains tax represents and we now have to unpick it. I should be interested to know the reasoning behind that gradual move.

Will the Economic Secretary tell us why tapered tax has to be applied at two years, rather than at three years, one year or zero years? She is shrugging her shoulders and smiling in her delightful way, but there must be a reason why the Government took that decision, about which it would be helpful for both Parliament and the world of business to know more. She is well versed in economic analysis and is a highly intelligent person who should have no difficulty in providing information on economic gains under the previous regime of longer tapered arrangements. Can she say how much more investment took place as a result of the arrangements that the clause will reverse? How did British productivity gain from such complexity, and what will be the gains from the change to a two-year regime? Can she expand on the Government's policy, philosophy and approach to capital gains tax?

12.30 pm

The clause makes a clear distinction between business and non-business assets. Discussions on previous clauses have illustrated that an economic effect can be achieved in the economy through investment in non-business assets. It is about time that the Government outlined their philosophy on capital gains tax, because in successive Finance Bills we have seen a piecemeal unpicking of tapered tax arrangements. The Economic Secretary and the

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Government owe it to the House and the country to lift the lid a little on their approach to that tax.

Mr. Burnett: I endorse the point made by Conservative Members about people owning disqualifying business assets pre-April 2000. It is preposterous that they must wait until April 2010 to receive full capital gains tax relief, whereas those who acquired an asset after the change in rules receive that relief significantly earlier.

During the Finance Bill a year ago, the right hon. Member for Fylde and I took that up with the Economic Secretary, but we were never given a satisfactory explanation for that preposterous state of affairs. I am indebted to the Chartered Institute of Taxation for its remarkably lucid parable about Fred and Jim, who both worked for Successful plc. Because poor old Fred held shares prior to April 2000, he would qualify for the 10 per cent. rate of tax only if he were to sell them in April 2010; Jim would get the tax advantage because he held shares after April 2000. That is unsatisfactory because it will not reward individuals who have worked hard, and risked their assets and money, for longer. Those people need rewarding. I look forward to the Economic Secretary's endeavour to defend what many people consider to be indefensible.

Ruth Kelly: I, too, am indebted to the Chartered Institute of Taxation for providing the Opposition Benches with such valuable ammunition, amusing anecdotes and illuminating examples. I intend to deal with them all in my response.

First, I shall address the point of principle raised by the right hon. Member for Fylde. He referred to what we have said about previous Finance Bills, such as that introducing greater relief for business assets was good and virtuous, and that short-termism was bad. What we did then, and are continuing to do, is introduce a taper relief that means that a tax bill diminishes the longer an asset is held. That is the fundamental principle; it is key to our agenda to reward enterprise, encourage work and increase productivity. I do not accept that our fundamental motive in making the changes has changed in any respect.

Mr. Burnett: Fred would disagree with what the Economic Secretary has said because he has held the asset for a long time and is not getting the reward to which she rightly said he is entitled.

Ruth Kelly: I hope that, in dealing with the point about what the relief is designed to do, I shall also answer the point raised by the hon. Gentleman.

Why do we have the taper relief? What is its purpose and what is it designed for? I would argue strongly that the Government are not in the business of cutting taxes for no purpose. We are in the business of promoting enterprise and rewarding entrepreneurship, to make commercial decisions more valuable and, hopefully, to promote the direction of investment.

Mr. Flight: Surely the Government are also in the business of increasing productivity and economic

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growth, which require the most efficient use of capital. The argument on tapering rates is about locking money into assets that are not ideally allocated. We are all in full agreement on enterprise, motherhood and apple pie, but there is a much bigger second issue relating to capital taxation, which is the efficient use of capital.

Ruth Kelly: I completely agree with the hon. Gentleman, but as he and other hon. Members will understand, we believe that there is actually a market failure concerning start-up and growth companies. We can take action and encourage productivity by the use of the tax system and other policy levers at our disposal. We continue to use the tax system to promote long-term investment and to discourage short-termism.

Mr. Hoban: The Economic Secretary is about to launch into a discussion on why long-term investment is good. If long-term investment is good and short-term bad, why are the Government shortening the taper?

Ruth Kelly: The hon. Gentleman interrupted me in mid-flow. If only he had waited, he might have heard the answer. The change that we are making this year will specifically build on the success of earlier reforms and, in particular, encourage investment in start-up and growing companies. For such companies, equity investments are a vital source of finance. However, venture capitalists and other early-stage investors frequently invest with a view to realising their capital in less than two years, so we have designed the taper specifically to take into account the natural mode of operation and interests of venture capitalists, and their investments in start-up businesses. We are doing that to promote the productive potential of this country, to encourage business start-ups and to encourage the right sort of investment to take place.

Several hon. Members rose—

Ruth Kelly: I shall take a couple of interventions, and then I must deal with some of the more specific points raised.

Chris Grayling: Surely we want the venture capital industry to consider the long-term support of businesses, rather than making a short-term buck. A tax system that encourages them to get in and out within two years does nothing to encourage the long-term support of businesses by venture capital firms.

Ruth Kelly: I do not think that the hon. Gentleman's point is realistic. We have a system in which investment in entrepreneurs and start-up companies is usually short term. We do not want to cut out from all the potential gains that we are offering all the companies that make a very valuable investment in start-up companies. It is only right to recognise that their period of investment is usually shorter than that of other companies where investment is held for long periods.

Mr. Field: I am happy to give the Economic Secretary the benefit of the doubt in this matter. I suspect that it is just unintended consequences rather than anything malign that she has in mind. I must confess, as someone who benefited from the old system

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of taper relief when it came to selling my business on entering the House, that I should tread carefully in this regard.

I am concerned that the two-year arrangements effectively make it easier for hit-and-run merchants constantly to set up businesses during a short period of time. Instead of encouraging enterprise and entrepreneurship, they will encourage the worst aspects of the process. Companies will be set up quickly and individuals will move from company to company to take advantage of the very favourable regime for capital gains tax taper relief.

Ruth Kelly: I do not accept that. Holding an asset for 12 months or two years by investing in a company for 12 months or two years is a very valuable benefit to start-up companies, which is what we are specifically trying to encourage. A 12-month or two-year period will not encourage a hit-and-run exercise by investors. The measure will have a huge beneficial effect.

Rob Marris: Will my hon. Friend the Economic Secretary refer to chart 3.1 on page 49 of the Red Book and tell us what the hit-and-run rate of capital gains tax is in the United States and Ireland, where entrepreneurship seems to be much better after 42 months?

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