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Adam Afriyie: My background is in business. There are many small and medium-sized businesses in the UK, including investment banking companies, private equity firms and so on. In business, one wants certainty. Throughout the ups and downs of the business cycle and currency fluctuations one needs certainty about the nature of one's business and the nature of the legislation and the way in which it affects one's company. I am glad that the Opposition have raised the issue of definition, because if the size of a business is based on euros, rather than sterling, that is a profoundly unstable way for businesses to try—

The Second Deputy Chairman: Order. The hon. Gentleman must take his seat when the Chair rises to speak. May I just tell him gently that it sounds as if he is going to make rather more than an intervention? It may be a good idea to keep his powder dry and make a proper speech in due course.

Mr. Field: Thank you for your indulgence, Sir Michael. I thank my hon. Friend the Member for
 
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Windsor (Adam Afriyie), who took the words out of my mouth. I shall, however, come on to the point that he was making in a moment.

As I was pointing out, our proposal would calculate the threshold with reference to sterling. I noted the amusement on the face of the Economic Secretary when mention of the word "euros" brought one of my colleagues to his feet. Many more would have done so, had they been here to play a part in our debate. [Interruption.] That is right—where are they all when one needs them? Doubtless, the proposal would appeal as a matter of principle to some of my hon. Friends who are not here today. I stress, however, that there is no Eurosceptic agenda, although the events of the past week may mean that we are all Eurosceptics now. We all recognise that in the relatively calm currency waters of the past three or four years there have been periods of turbulence that would create unacceptable uncertainty for the most susceptible businesses. That is very much the point that my hon. Friend was making.

I accept that all thresholds are to some extent arbitrary, but at least if currency risk is eliminated from the equation, a company can expand at a controlled rate from year to year and thereby qualify or stand outside the provisions. It is important to remember that small and medium-sized enterprises are often the very businesses that have least exposure to the foreign currency market, so they might find the idea of couching their definition in euros least relevant. Furthermore, such companies are least able to afford uncertainty and are without the internal back-up that would be needed to monitor the currency markets and act accordingly if they were getting near the thresholds. I hope that the Financial Secretary will be able to give us some guidance about why euros are being used, especially at a time when this country has little prospect of joining the single European currency, which may not have been the case when the initial definition was put in place.

Amendments Nos. 24, 25, 28 and 29 seek simply to promote commercial certainty. The Government's current rules for the relevant accounting period mean that a business may discover that it is not an SME after the relevant period has come to an end. Surely, that cannot be a sensible way to proceed. I accept that we are talking not about an enormous mass of businesses, but about a small number of companies that are getting near the threshold. Inevitably, there are always concerns about thresholds. In relation to certainty, surely it is better to adopt our proposal to refer to the previous accounting period rather than the current one. Let me give as an example a company that is not only worried about the vagaries of the currency market, but potentially reluctant to acquire new business that might take it above the threshold unknowingly in the last few months of its financial year. We always have to keep an eye on the collateral impact of any such proposals.

In conclusion, three factors are at stake. First, there is the question whether the base is in euros or sterling. Secondly, on the notion of a current year valuation, we propose returning to levels in the near past, for certainty's sake. Finally, we query whether an SME is an appropriate part of the entire criterion. I hope that we can have a sensible discussion on these matters. I know that we will discuss another set of amendments that propose to do something slightly different at a later
 
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stage, but I hope that the Financial Secretary will give us at least some guidance about re-adopting a provision in the Finance Act 1996, which is now nine years old.

Adam Afriyie: My apologies, Sir Michael, for making an incorrect intervention earlier. I am beginning to find my feet, and when I hear the words "currency" and "euros", my blood boils and off I go.

I speak as a former business man. There are many businesses of all different sizes throughout the country, and a significant minority will be affected. What one craves in business is a sense of certainty. There are enough uncertainties in day-to-day trading and business decisions to keep one occupied and cause concern for the future, without the added uncertainty of currency fluctuations, which will also be used in a retrospective fashion in defining a company's size. I ask the Financial Secretary to take a look at the definitions and to anchor the definition of a company's size in sterling, which British companies can be certain of month to month and quarter to quarter, rather than make it subject to financial fluctuations. Indeed, given the current uncertainty surrounding the euro, I wonder whether such uncertainties and fluctuations will grow in months and years to come.

If one's company's size is defined by the current accounting period, one is left in uncertainty, because one never knows how the current trading period will be considered in the future. We are against retrospective legislation, which creates stress and uncertainties in the business environment and for individuals. If the Financial Secretary were to examine historical accounting periods, I am sure that the business community, and especially those involved in the relevant section of the industry, would be pleased.

John Healey: I shall try to explain why we have drafted schedule 8 in this way and, by extension, why the Opposition amendments are unacceptable.

Amendment No. 26 is the key amendment. It changes the definition of an SME for the purposes of the exemption from the transfer-pricing rules in the Finance Act 2004. The same definition is also used in the new loan relationship party rules introduced by schedule 8. The exemption removes most SMEs from the requirement to apply transfer-pricing rules, including the relevant documentation requirements.

The definition is used in existing legislation, and it is a standard European Commission definition that is used for many purposes, including for tax purposes. One of its features is that it groups an enterprise with other enterprises with which it is linked. That means that a company with a small turnover or a small number of employees that is a member of a group of companies with a large turnover or a large work force is not treated as a small enterprise and does not qualify for the exemption, which is the result that we want to achieve. Amendment No. 26 does not include any such grouping rule, which is a serious flaw that would allow a small UK subsidiary company within a giant multinational group to benefit from the exemption from transfer pricing rules, which would not be appropriate.

The hon. Member for Cities of London and Westminster (Mr. Field) asked whether small companies controlled by private equity limited partnerships are
 
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eligible for the SME exemption. The principle is consistent, and I hope that it is clear: a business controlled by a private equity limited partnership will be treated in the same way as a business controlled by a company or by an individual, and the SME exemption will operate in exactly the same way as it does under existing transfer pricing rules, using a standard European definition to determine whether a company qualifies as a small enterprise or as a medium-sized enterprise. I must tell the hon. Members for Cities of London and Westminster and for Windsor (Adam Afriyie) that that definition is calibrated in euros and that it will continue to be calibrated in euros, although it makes the blood of the hon. Member for Windsor boil.

The hon. Member for Cities of London and Westminster also asked what happens when debtors are no longer small or medium-sized enterprises. In that case, such enterprises lose their exemption from late-paid interest or discount rules. The exemption exists to encourage funding in SMEs, which are the businesses that are most likely to grow and to create jobs. The Government put a great deal of policy attention and support behind those businesses, often with the support of the Opposition. When such businesses are no longer SMEs, however, it is difficult to justify the continuation of that protection at the taxpayer's expense. Those are the key reasons why I ask the hon. Member for Cities of London and Westminster to withdraw the amendment.

Mr. Mark Field: Again, I thank my hon. Friend the Member for Windsor (Adam Afriyie) for his brief contribution. He added some interesting observations about likely fluctuations in the currency market that applied to part of the amendment.

9 pm

The Minister rightly notes that amendment No. 26 is at the crux of the concerns that we have tried to address. As he says, the exemption of SMEs from a requirement to apply transfer pricing should not be applied across the board where there is an issue of international control. Equally, it is fair to say that in some small subsidiaries of large international groups the issue of control may not be entirely straightforward. We could not necessarily deal with that in an amendment, but it will perhaps be explored in future years, as clearly much of the work that relates to the venture capital industry in various Finance Acts will be subject to continual change as that market matures.

We are concerned, for the reasons that we have set out, about the notion of the standard definition as produced by the European Commission. I accept, from the Minister's perspective, that there has to be some sort of threshold and that there are rightly tax treatments that make life easier for SMEs but perhaps not for all companies. None the less, it is a somewhat stark distinction, and the uncertainty that we have identified will need to be examined in future years.

There has been significant lobbying by the venture capital industry, which has expressed certain concerns, but we have had a chance to articulate them during the debate. On the basis of the replies that we have had, I hope that we will be able to return to this in due course, particularly if it is found that there are ongoing problems in the venture capital and private equity industries, which are so important to this country, and
 
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that the Minister will be open-minded about that. With that in mind, I am happy at this juncture to beg to ask leave to withdraw the amendment.


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