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John Bercow (Buckingham) (Con): The prognosis that my hon. Friend cited of a prospective reduction from £800 million to £300 million is both gloomy and alarming. For the avoidance of doubt, can he confirm that the person whom he has quoted, Mr. Chaplin, is suggesting that the reduction will be exclusively the consequence of the Budget and not in any way attributable to other unrelated factors? If that is so, it is a source of alarm.
Mr. Dunne: I have been quoting from Mr. Chaplin's website. I have not had a direct conversation with him. The implication is that venture capital trusts that were in the process of fundraising and have cancelled are doing so as a result of the specific Budget amendment that we are considering.
Mr. Newmark: It might be helpful to explain a little more the cause behind the statement to which my hon. Friend referred. It has to do with the fact that smaller investments are far more risky. Therefore, people are far less likely to invest in such companies. At the same time—this is the point that the hon. Member for Wolverhampton, South-West (Rob Marris) was making—if there are not the tax incentives that follow these investments, that will be another reason why people will not invest in the industry. There is a double whammy, which is what I was talking about earlier.
Mr. Dunne: I am grateful to my hon. Friend for supporting my contention that that will be a direct consequence of the Budget. Access to follow-on capital will therefore be severely restricted as a result of the proposed measure. It will be interesting to know whether that is part of the Government's intent.
The second issue that I want to raise is perhaps a slightly more detailed point, but it is a direct consequence of the proposals that are subject to the amendments. A number of VCTs, including the one that I chair, have a dividend reinvestment scheme under which investors are given the option to receive their dividends not in cash tax-free, but by reinvesting in new shares issued by the VCT. That has attractions for investors as they can increase their investment in a VCT with the accordant tax advantages. It is also attractive to managers of VCTs because they can raise modest capital on regularly without having to go through the costly exercise of marketing and producing a prospectus, for example.
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The problem is that as a result of the proposed changes from 6 April any new shares raised by a VCT will have to be invested in companies that meet the new criteria. That means that an existing VCT, which has an established portfolio of investments in companies that exceed the current criteria, will have to start managing an entirely separate portfolio. I believe that that is the case. I think that the Minister is nodding.
The Financial Secretary to the Treasury (John Healey) indicated dissent.
Mr. Dunne: That applies to every new investment that a VCT seeks to make using new capital raised by issuing shares in respect of dividends under a reinvestment scheme. This will increase the complexity to a point where this sort of dividend reinvestment is highly unlikely to be worth while for the manager, notwithstanding the tax benefits that it provides to investors. If the Minister can say whether that is something that he intends to catch by the proposed measures, I shall be most grateful.
John Healey: We have had a broad-ranging debate on this set of amendments. In a sense, it sets the scene for a wider range of issues connected with the package of reforms that we propose in clause 91 and schedule 14, which go beyond the five amendments in the group. I shall seek to deal specifically with the five amendments and the points that have been raised during the debate.
I turn first to amendments Nos. 6, 7 and 8, which deal essentially with the growth of assets test, as the hon. Member for Fareham (Mr. Hoban) made clear. The amendments seek to remove from the Bill the provisions that are designed to refocus venture capital schemes on those small firms that are most in need of improved access to finance. After all, this is the principal purpose of the policy framework and the principal justification of investing a significant amount of public money in terms of the tax forgone.
It may help the Committee if I explain why we have brought forward these proposals that bear on the gross assets test. The amendments, if they are pressed, should be rejected. Venture capital schemes are an important range of interventions contributing to the Government's wider policy to improve access to finance for small companies with growth ambitions. It is important that we build on the success of the schemes so far. It is important also that we ensure that the support that the schemes provide is effectively targeted to where it is needed most. That is what the provisions in the Bill are designed to do. Refocusing the growth assets test in this way will ensure that investment under these schemes is directed to those companies that most need it and to where there is most clearly a market failure. It is interesting that this purpose is recognised clearly by the industry.
Comments after the proposals were published included those from Paul Mumford of Cavendish Fund managers. He said:
"the changes bring things back to the true spirit of venture capital, which means investing in young companies and sticking with them as an investor until they have grown enough to merit further investment from institutional investors."
Julian Hickman, a partner of Longbow Capital, said:
"the Chancellor seems to be trying to guide venture capital schemes back to their original intended role; the support of small businesses in search of venture capital funding."
That is precisely the point and the purpose of the package set out in clause 91.
The change will ensure that money raised under the schemes does not drift towards lower-risk investment, where it would be less focused on driving growth and more devoted to simply maintaining value—the sort of investments that firms could and should be more capable of sourcing from other places.
Mr. Newmark: What analysis the Minister has undertaken to justify that comment and to show what size the market will become after the Bill is enacted? What analysis has he undertaken to show that there is not a funding gap above £7 million or £8 million? Why has he chosen £7 million or £8 million as opposed to £10 million? I am curious as to what analysis the Government have made to make the decision that they are about to make.
John Healey: The hon. Gentleman again poses the questions that he posed earlier. I have not yet come to the points that he and others made. I was about to turn to the specific points raised by the hon. Member for Fareham, then to those of the hon. Member for Braintree (Mr. Newmark) and then on to those of the hon. Member for Ludlow (Mr. Dunne).
The hon. Member for Fareham asked the same question, namely, what is the basis of the new gross assets test and the level at which we have set it. He, too, expressed concern that it will somehow lead to neglect of manufacturing industry, particularly relatively small business services companies. I will share with him some of the analysis that underpins the decision to set the new gross assets test at £8 million and £7 million. Analysis of the investments made in the VCT scheme and the enterprise investment scheme shows that investments in companies with total assets of less than £8 million are proportionately higher in technology, business services and manufacturing. All such companies are higher-risk sectors, which the Government therefore want to target. By way of contrast, VCT and EIS investment in companies with total assets of more than £8 million is proportionately higher in sectors that tend to be asset-backed and therefore less risky forms of investment, such as the hotel sector, bars and catering, wholesale and retail. Having assets clearly increases their ability to put up collateral against loans, so they are less likely to face the same problems that small firms in some other sectors face in accessing finance. The hon. Member for Fareham may be interested to know that the average size of a company invested in under a VCT is £3.8 million.
The hon. Gentleman also asked whether we will monitor the impact of these changes, and the short answer is that of course we will. We have done so since we took responsibility for the scheme and we will measure and monitor the impact on the funds raised, on the investments made, and on small and growing firms. We will also monitor evidence of change in terms of a finance gap.
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The hon. Members for Braintree and for Ludlow spoke from their own personal experience. I was interested to hear about that, but it has led them to draw conclusions rather different from our own and from many experts and specialists in the field. I point out to the hon. Member for Braintree in particular that riskier investments that have difficulty raising other forms of growth capital are precisely where the market failures lie and where the case for Government intervention and support is strongest. Our proposed change in the gross assets test is designed to ensure that significant Government support is well justified and well targeted.
The package in schedule 14 to which the hon. Member for Braintree referred will increase, rather than reduce, the incentives to invest, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said. I suspect that we will discuss this issue in more detail when we consider amendments Nos. 10 and 11, so I shall not stray there, except to point out to the hon. Member for Braintree—who mentioned the risk-reward balance—that the package includes setting the rate of income tax relief for investments in VCTs at a new and increased level of 30 per cent.
I appreciate the tribute that the hon. Member for South-East Cornwall (Mr. Breed) paid to—
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