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Amendment, by leave, withdrawn.

Mr. Mark Field: I beg to move amendment No. 20, in page 126, line 25, leave out paragraph 2.

The Second Deputy Chairman: With this it will be convenient to discuss the following amendments: No. 27, in page 127, line 26, leave out paragraph 3.

No. 30, in page 128, line 39, leave out sub-paragraph (3).

No. 34, in page 129, line 3, leave out 'or (3)'.

No. 33, in page 129, line 11, leave out 'or (3)'.

No. 31, in page 129, line 14, leave out sub-paragraph (6).

No. 32, in page 129, line 36, leave out 'or (3)'.

Mr. Field: Amendment No. 20 would render the entire previous debate redundant, as it seeks not to make any amendments at all to schedule 9 of the Finance Act 1996. It might have been easier had we had that debate initially.

Sufficient complications still surround collective investment schemes and plague the venture capital industry. We accept that changes to their tax treatment have largely come about as a result of fierce lobbying by those involved in the industry and many of those are to be welcomed. However, there is a strong view in the marketplace that some of the proposals concerning transfer pricing and loan relationships may reduce the number of private equity deals being done in the UK. As my hon. Friends the Members for Runnymede and Weybridge (Mr. Hammond) and for Chipping Barnet (Mrs. Villiers) said during the debate on the whole issue of transfer pricing, innovation, flexibility and commercial certainty must be the imperatives, and we fear that the Treasury's real motivation is to increase tax take to overcome an increasingly unmanageable black hole in finances.

As ever, it is the unintended consequences that we must ward against. In particular, the proposal to collect an increased share of tax, sooner rather than later, on a crude interest may reduce the volume of private equity deals in the UK. Ultimately, as is the difficulty with all such matters, we will not know the truth until it is too late. However, we are also convinced that there is a fear that the proposal will reduce the UK tax take and we need to remember that the venture capital industry does not invest only in tremendously successful industries and that its returns are by no means always the sure thing of tabloid legend. Indeed, private equity plays an important and full part in resuscitating—or at least attempting to resuscitate—ailing businesses. There is a genuine sense of foreboding that the plans might inadvertently boost the rate of business failures in the UK.

We support the current arrangement whereby tax is deductible from interest payments that are payable when the private equity investor sells the investment on. Such schemes will typically last four or five years. Some last for a shorter time but, as a rule of thumb, four or five years is a useful benchmark. The tax deductions for the
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interest charge arise when it accrues in the accounts, not when such interest is paid. It is clear from the Government's proposals that they regard that as something of a loophole, notwithstanding the established agreement between the venture capital industry and the Inland Revenue, which was brokered as recently as the Finance Act 2004. It covers a wider range of investment vehicles, which could lend to borrowers, and the borrower could still obtain a tax deduction for late paid interest.

Our concern is that the risk will have an adverse impact on the pricing of many private equity transactions, to the potential detriment of UK business. As the Financial Secretary understands, the private equity business is still, even by British standards, a fledgling business, but is emerging strongly in many other parts of the world. Ten years ago, Australia had no private equity business to speak of but is now a significant competitor.

It is very much a global market and we fear that the Government's proposal would restrict the borrowing company to claiming group relief against the profits of only a single year—the final year of the scheme. That may cause difficulties. If the interest deductions are all delayed until the interest is paid rather than eked out over the period of a scheme, there will be only one substantial tax deduction. Clearly, there is then a risk that the aggregate interest would be more than the overall profit in that final year.

We must always remember that the profitability of any company may be cyclical for a host of reasons for the duration of the scheme. Those reasons may go to the heart of the nature of the business. Perhaps the business is growing and looking to grow more, thus having less of a profit in the final year under venture capitalists. Profitability may also be cyclical simply for general economic reasons. If total interest exceeds profits in the final year, the borrowing company runs the risk of some its accrued interest payments having zero economic value, even when there can be no reasonable suggestion of the scheme having been created deliberately or artificially to avoid tax.

In practice, the excess interest deduction may prove hard to use and undermine the profitability of the proposed scheme. Our difficulty is that, if the profitability of a proposed scheme is undermined, in a global market for private equity, more deals will leave these shores. The probable result of that is a lower tax take. Nothing would be worse than trying to ensure a bigger slice of a much smaller cake. I appreciate that that is the perennial problem of Treasuries through the years.

The other amendments in the group are all consequential. I hope that the Financial Secretary will provide at least some guidance about our proposals and whether there is any way in which we can try to ensure that some of the more negative consequences to which I referred are put to bed.

John Healey: The hon. Gentleman is right to say that the private equity business is strong in the UK. Indeed, it is second only to that of the United States, but it is competing increasingly in a global market. We are clearly concerned about its health in the UK because it is an important part of funding, especially for many of our small and rapidly growing companies. However, I
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believe that some of the wider and dramatic impacts that some hon. Members claim that the schedule will have are hugely overstated.

To set the scene for discussion of the amendments, it is important that the Committee remember that the loan relationship rules, which are the corporation tax rules that tax interest paid and received by companies, operate by reference not to the interest paid or received in cash but to the amounts of interest shown as accrued in the company accounts. It has always been necessary, as I think the hon. Gentleman will well know, to have special rules to deal with cases where a company is deducting interest in its accounts in respect of loans from connected parties where there is a potential for the manipulation of lending and borrowing to shelter company profits from UK tax.

At the same time, it has always been recognised that such rules could bite harshly on smaller companies and on start-ups, particularly where there are close relationships with a relatively few venture capital providers. It is common for a lender in those circumstances also to take a small equity stake.

Adam Afriyie: Earlier today, I asked for quantitative evidence of some of the items that are being discussed. I ask for a rough idea of how many businesses will be affected by the measures contained in the provisions that we are discussing.

John Healey: I do not want to return to clause 11, which was being discussed when the hon. Gentleman asked his question. I do not know whether he will find my answer satisfactory. The principal purpose of clause 14 and schedule 8 is to anticipate the development of new avoidance arrangements. This is the answer to the hon.   Member for Cities of London and Westminster (Mr. Field). By the scored amount in the current year for the revenue gain of the whole schedule, we are talking of only £5 million. Knowing what professional advisers are beginning to advise their clients, the point is to anticipate potential avoidance arrangements. Therefore, it is impossible to give the precise answer that hon. Members might wish for.

The loan relationship connected party rules have included exemptions to protect venture capital investment in company start-ups and in early stage expansion. The changes made in the Finance Act 2004 clarified how the exemption applied in the case of certain sorts of foreign venture capital providers but did not otherwise affect the scope of the exemption. However, it has become clear that the exemption can be used not only for venture capital investments in start-ups and in growth companies but also to facilitate private equity investment in management buy-outs of large, long-established and profitable companies, and not only the ailing companies that the hon. Member for Cities of London and Westminster was concerned about.

Amendments Nos. 20 and 27 would therefore undo the very purpose of the changes that we are introducing. They would mean that the exemption was not targeted on the growth companies and the start-ups for which it is intended. The benefits of the venture capital
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exemption would continue to be available for all private equity deals, management buy-outs and mature low-risk businesses with a steady and well-established cash flow, and would certainly be less risky than the growth businesses that we want to encourage.

The amendments would also allow the other avoidance opportunities that are closed down by paragraphs (2) and (3). I hope that on that basis the hon. Gentleman will consider withdrawing his amendments.

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