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Mr. Flight: I beg to move amendment No. 323, in
'PART 3 OTHER AMENDMENTS Definition of collective investment scheme (1) The Finance Act 1996 is amended as follows. (2) In section 103, in subsection (1) insert in the appropriate place:
section 87(5A); section 87A(3); paragraph 2(1B) of Schedule 9; paragraph 18(1)(c) of Schedule 9; paragraph 20(5) of Schedule 9; paragraph 20(6) of Schedule 9'.
Mr. Flight: The amendment is designed to put investee companies that are venture capital limited partnerships, which happen to be bodies corporate, in the same position as investee companies that are limited liability partnerships established under English law. Many people viewed the press release announcing schedule 37 as obscure, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) said. There were Column Number: 602 complaints, for better or worse, that it was not clearly understandable, especially in the venture capital industry. Under the Finance Act 2002, venture capital limited partnerships were not covered by the definition of collective investment schemes—for example, if they were established in the United States—and were excluded from the general arrangements. They benefited from the legislation only in obtaining some certainty of tax treatment of loans made to UK investee companies by making loans to a subsidiary of the company in which they held shares. Paragraphs 2 and 5 of schedule 37 close that arrangement. The amendment is therefore aimed at putting investee companies of VC partnerships that happen to be bodies corporate under the Finance Act—as it will be—in the same position as investee companies of limited partnerships established here in the UK. Surely, it cannot be wise to discourage US-based venture capital investment in the UK by putting them into a tax-disadvantaged position. The amendment also contains other measures that seek to address similar discrimination in other parts of the Finance Act 1997.
3.45 pmDawn Primarolo: I ask the Committee to reject amendment No. 323, which creates, for the purposes of loan relationship legislation, a new and potentially very wide definition of a collective investment scheme. The amendment primarily relates to the loan relationship avoidance measure that has already been discussed in the context of previous amendments. An exception already exists to that avoidance rule for limited partnerships that are also collective investment schemes within the definition of the Financial Services and Markets Act 2000. That exception was agreed with the British Venture Capital Association, in discussion with the Revenue, leading up to the changes to loan relationship rules introduced in the Finance Act 2002. The Finance Bill measure has exposed a degree of uncertainty among some venture capital funds. In some cases of foreign limited partnerships, funds are unsure whether the Revenue will apply an overly narrow interpretation of the definition of collective investment schemes. The Revenue is already in discussions with the BVCA, with a view to resolving the problem through revised guidance. More generally, the amendment goes much further than I consider reasonable in moving away from the more targeted Financial Services and Markets Act 2000 definition of a collective investment scheme. It creates a very wide definition, which would have the effect of treating most, if not all foreign limited partnerships as though they were collective investment schemes. It will take some time to consider all the possible implications of such a definition, and the consequent risk to the Exchequer. There is real concern that the amendment could lead to tax leakage. I hope that the hon. Gentleman will withdraw his amendment, but if he wishes to put it to a vote, I will ask my hon. Friends to oppose it, for the reasons that I have expressed. Mr. Flight: I think that I was comfortable with what the Paymaster General said. However, she did not say Column Number: 603 that it is the Government's intention that investee companies that are venture capital limited partners and bodies corporate will be put in the same position under loan relationship tax law as investee companies and limited partnerships established under UK law. That position is unclear. The point at the bottom of the heap is simple. Are they to be treated in the same way under the Government's measures?Dawn Primarolo: As I explained, we are in discussions with the British Venture Capital Association. I need to see how those discussions go. It would be quite inappropriate for me to give a blanket undertaking of such a wide-ranging commitment. Where the BCVA believes that there is uncertainty, discussions on revised guidance will take place. I think that that is the best way to proceed. Mr. Flight: I accept that that is the best way to proceed. However, there is a very simple point to be made. It is not in the interests of the economy to give tax-privileged positions to domestic limited liability partnerships, at the expense of US ones. If we wish to attract their business, the tax rules should be broadly the same. Dawn Primarolo: The relief is available for any kind of limited partnership that is a collective investment fund as defined in section 235 of the Financial Services and Markets Act 2000. The use of that definition to determine who qualified for the relief was agreed between the Inland Revenue and the venture capital industry during the consultation process on the reforms introduced in the Finance Act 2002. I cannot see why that does not satisfy the hon. Gentleman. Mr. Flight: Times move on. Dawn Primarolo: This is only 2003. Mr. Flight: Yes, but times move on. That was agreed because that there was another mechanism, which I described a few minutes ago, involving a subsidiary company, by which foreign corporate limited partnerships achieved parity with UK limited partnerships. Parity worked by a different mechanism. I repeat that there is no commercial logic, or economic self-interest logic, in having foreign bodies that happen to have a slightly different legal structure placed at an advantage in comparison with domestic bodies. The Paymaster General said that discussions are proceeding. I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. Schedule 37 agreed to. Clause 178 ordered to stand part of the Bill.
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