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Rob Marris (Wolverhampton, South-West) (Lab): According to my understanding of the matter, the hon. Member for South-East Cornwall (Mr. Breed) is making exactly the same mistake as the hon. Member for Braintree (Mr. Newmark). The hon. Member for South-East Cornwall is talking about the capital limit, which is of course the subject of the amendments. But when he is talking about the restriction of relief, he seem to be overlooking that the relief for enterprise investment schemes will increase from £200,000 to £400,000 and that the reference by the hon. Member for Braintree to a rate of 30 per cent. involved a misunderstanding. The rate is currently 40 per cent. for a two-year period, which is expiring. If it expired and no provision were made in the Bill, the rate would go down to 20 per cent. In fact, under the Bill, the rate will go to 30 per cent., so tax reliefs are being increased.
Mr. Breed: I entirely accept that. We can look at those compensations and the way in which the provisions tinker about with the actual amount of tax relief and the allowable assets. That tinkering has been brought about to try to engineer a more focused approach to smaller companies and to try to address some of the issues in respect of the risks and rewards. The incentives in that respect have been drastically reduced and there will be a significant reduction in the amount of private equity that will be going into small businesses in relation either to start-up or to development capital.
That echoes what we were talking about yesterday afternoon in relation to small businesses. We are looking to try to provide a regime that gives businesses that have been started up the opportunity to move on, so that they become more successful, provide more opportunities in relation to the economy and employment and indeed provide corporation tax. We seem to have situations and regimes that are not connected to each other. The hon. Member for Braintree was talking about the gap between £5 million and £25 million, which may be termed development capital, rather than venture capital. There is certainly a gap there.
One of the problems that we face is that the private equity industry, which was alluded to, is, in effect, moving further up the food chain and the elements involved are getting bigger and bigger. The funding gap is indeed at the lower level, which is where business angels are needed and are playing a role. The
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point made by the hon. Member for Wolverhampton, South-West (Rob Marris) was irrelevant to the amendments; it had to do with taxation. We are concerned with gross asset values. By shrinking where we give the incentives for investors to go inby lowering that limitwe are going to make it far more risky and far less attractive for individuals to go into that part of the market.
Mr. Breed: I entirely agree with that. We will see that reduction in the figures next year if these proposals go through. The Government are trying to engineer a reduction because they are looking to try to save some money in relation to this scheme. That will be a false economy. Opportunities will be largely missed because private equity funds are not going to be as prevalent as they have been in the past few years. There is no suggestion that there is a shortage of businesses looking for such capital. Indeed, there is probably more demand than there is current supply. If it were the other way round, there could be an opportunity to say, "Well, we do not need so many incentives." However, significant numbers of businesseseven at that lower level; let alone the development levelare looking for the sort of private equity that they require to expand.
I also entirely agree that the 70 per cent. investment rule needs to be looked at, particularly in relation to those funds that regularly liquidate some of their investments and then hold them in some sort of interest-bearing account. It would make no sense whatsoever to force them into non-interest bearing ones. I am sure that there is an easieror perhaps more elegantway of dealing with that than is currently the case.
The Temporary Chairman (Sir John Butterfill): Order. The hon. Gentleman will be aware that this particular issue arises on a later group of amendments. I would be grateful if he confined his remarks to the present group of amendments.
I have tried to find out what the savings resulting from the measure will be, but the estimates are rather wide. When the Minister gives us the benefit of his information, will he tell us what sort of savings there will be? I have seen figures ranging from between £15 million and £400 million, so I do not know what the exact savings are likely to be. However, if the savings are anywhere between those figures, such tinkering seems to be unnecessary. The measure addresses a success, rather than a problem, and that success needs reinforcing, not restraining. The opportunities that are available to private companies will necessarily be reduced and investment will become less attractive. Overall, the measure is unnecessary, given the sort of savings that it will make.
If a reduction is absolutely necessary, the methods that the Government are choosing represent using a sledgehammer to crack a not especially difficult nut. A more sensible approach might be to focus on certain sectors, rather than going across the board. If the
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Government want to define the scheme so that it is less expensive to the Treasury, I am sure that there would be ways in which they could focus on the sectors for which they want to produce more help. As the hon. Member for Fareham (Mr. Hoban) said, the proposals will probably lead to gravitation towards technology-based businesses with intangible assets, rather than businesses with tangible assets.
Stephen Hesford (Wirral, West) (Lab): The hon. Gentleman says that the Government could approach the matter differently by focusing on sectors. If there was limitation in the way in which he suggests, how would he guide us? Which sector would he focus on and how would he do that?
Mr. Breed: First, I would prefer to leave the scheme as it is. However, if we were to examine certain sectors, we would have to look at those that find capital especially difficult to obtain. The situation is not difficult for a management buy-out that will be going to the market in two or three years' time because most people would be scrabbling to try to invest in something that would produce a great return in a short time. However, there are businesses that require a longer gestation periodthey are perhaps smaller and need to retain for a longer timeand they might be above the limit on eligible assets. Putting an arbitrary restriction on eligible assets, rather than considering each sector, is an across-the-board approach. A more elegant approach would be to introduce more targeted and focused support for the specific sectors and companies that we would like to support.
Rob Marris: I understood the hon. Gentleman to be saying that his preference would be to leave things the way that they are, which I assume to mean that he supports amendments Nos. 6 to 8. I understand that he has had difficulty getting the figures. However, in his methodology for approaching the question of encouraging investment, especially in some of the riskier areas, he is looking at only half the equation, as I suggested earlier. If he was to leave things as they are, the enterprise investment scheme tax relief would be capped at £200,000, not £400,000, and furthermore the tax relief would revert from the current rate of 40 per cent. to 20 per cent. If we could get the figures for the whole equationthe changes to both tax relief and the capital limitshe might find that he supported the Government.
I understand the hon. Gentleman's argument. He is right that a judgment can really be made only in retrospect. It is difficult to prejudge the exact outcomes. However, it is my judgment that for relatively little benefit, we are changing a successful scheme. Leaving aside the figures involved, the change sends the unhappy message to the industry as a whole that even when a scheme is successful and producing real benefits, the Government are prepared to tinker with it. For the sake of what I suspect will be a relatively modest saving, we could undermine some of the confidence that has been built up in recent years that the Government are behind the scheme. However, having seen the
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scheme's great success, they now seem to want to chop that away and retreat to the pre-2004 position, which would be a retrograde step.
Mr. Philip Dunne (Ludlow) (Con): I remind the Committee of my entry in the Register of Members' Interests. I am an investor in a venture capital trust: Baronsmead VCT 4. I am also honoured to chair its non-executive board.
I welcome the measures to improve access to capital, especially the increase in the EIS limits to which the hon. Member for Wolverhampton, South-West (Rob Marris) referred. Of course, investments in that category are not for the faint-hearted because they do not provide the portfolio risk diversification that is the attraction of a VCT. I also welcome the retention of tax relief for VCTs, albeit at a lower level, which we will discuss under a later group of amendments.
The reduction in the gross assets of a company in which VCTs may invest from £15 million to £7 million immediately before an investment and from £16 million to £8 million immediately after an investment will significantly reduce the scope of eligible companies. As my hon. Friend the Member for Braintree (Mr. Newmark), who is an expert on these matters, rightly said, that will raise the risk profile of investors in VCTs. The risk profile will be raised by definition because the portfolio effect of a mix of business sizes in a VCT helps both the underlying investors and the managers of the trust to have greater confidence because investment performance tends to be better when there is a greater spread of both risk and the size of investment in individual companies. The reason why the limits have been selected is unclear, so I urge the Minister to give an explanation to Opposition Members who are perplexed.
When VCTs were first introduced under the previous Government in 1995, the limit on the gross assets of eligible companies was £10 million. Over the following 10 years, that would, of course, have inflated to a much higher figure, but even £10 million is significantly more than the amount proposed. Many VCTs take advantage each year of the period prior to and immediately after the end of the tax year to undertake fundraising. Several VCTs pulled their fundraising following the Budget. I have read several of their websites and many have cited the halving of the maximum size of investee companies as the reason. I will name a couple of fundsnot my ownbecause they are peer funds that perform well: Northern VCT 2 and First State AIM VCT, which was the best performing AIM VCT that was launched last year.
Those who are involved in marketing such funds have a good sense of investor appetite for VCTs. I refer especially to Henry Chaplin, the chief executive of Noble Fund Managers, the website of which points out that he anticipates that the VCT market, having raised £800 million in the last tax year, will decline to only £300 million by 200708. That gives some idea of the impact of the changes that the industry is expecting.
That takes us to why are the Government so keen to introduce this change. As was said earlier, this may be purely a revenue limiting exercise. It may be to do with the gaping deficits in the public accounts. It appears that
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it has little to do with seeking to professionalise and encourage a stable VCT industry. One issue that it will give rise to for small companies has been touched on already. Those companies with gross assets of, for example, £6 millionjust under the limitcan now raise only £2 million compared with a £10 million subscription that they could have raised under the previous regime. That will have a significant impact on small and medium-sized companies that have a requirement for significant amounts of capital, and this avenue of raising that capital is likely to be shut to them. That could have an effect on higher risk and potentially higher return or high risk and nil-return companies in the pharmaceutical sector and other areas that are great consumers of capital.
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