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Mr. Newmark: Will the Financial Secretary give way?
John Healey: I suspect that the point that the hon. Gentleman is about to raise is one that he will have ample opportunity to discuss when we consider the next group of amendments; however, I give way.
Mr. Newmark: I am curious as to the Financial Secretary's logic. How can reducing the tax incentive from 40 per cent. to 30 per cent. and lowering the gross assets reduce risk? By definition, doing so tends to lead to riskier investments.
The Temporary Chairman: Order. The hon. Gentleman knows very well that that point will be dealt with in the next group of amendments; it is not particularly relevant to this one.
John Healey: My suspicions, Sir John, were precisely confirmed by the hon. Gentleman's intervention.
Perhaps I may turn, as I had started to do, to the contribution of the hon. Member for South-East Cornwall, whose tribute to the success of the economy under this Government—and particularly the ongoing success of the venture capital schemes—I appreciate. He was right to say that the UK is one of the leading economies; in fact, a recent US report described the UK as the best business environment for small firms to access investment finance in. On the particular set of arguments that he laboured, I should point out that the package of changes in clause 91 is not about reducing cost or reducing support for this form of business investment. It is about focusing such support first, where it is most needed; secondly, where the greatest value to the taxpayer lies; and thirdly, where it is likely to make the greatest contribution to the growth and productivity of the UK economy.
I stress that this package of reforms is not about looking for savings. If the hon. Gentleman consults the Red Book, he will see that the scorecard cost of these
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proposals, which were announced in the Budget, for the next financial year is minus £15 million. In other words, for that and the following year, the additional cost of the proposals to the Exchequer is £15 million. He may also be interested to know that the cost of such schemes this year is £220 million.
2.45 pm
Mr. Breed: I am grateful to the Financial Secretary for that information, which reinforces my view. Given that there will to be no visible change in the cost to the Treasury in forgone tax—if anything, the cost might even increase slightly—is the proposed across-the-board test on eligible assets the most elegant way of ensuring that the limited sums available are focused on the right area? As the Financial Secretary knows, certain sectors of the small business world are perhaps more demanding than others, and some are more deserving. Applying seemingly arbitrary figures across the board—he has yet to explain how he arrived at the figures of £8 million and £7 million, rather than, say, £10 million—will not enable us to focus on the companies and sectors that need support.
John Healey: We are looking for effectiveness, not elegance. The package of measures, including the reduction in the gross assets test, will help us to build on the success of the scheme and ensure that it is properly targeted and good value, therefore, for the substantial sums of taxpayers' money that such support entails. The hon. Gentleman expressed concern at our setting the gross assets test at £8 million and £7 million respectively, but I should point out that the average size of a company invested in under a VCT is £3.8 million. The test should not be a concern to him if he is genuinely interested, as we are, in achieving greater levels of investment and easier access to finance for firms that are riskier investments. Such firms tend to be smaller firms, and they always find it more difficult to access the investment and growth capital that they need from other sources.
John Bercow: Precisely in the light of what the hon. Gentleman just said about the net cost to public funds of his overall package, and of the widespread uncertainty about whether the effects of his scheme will be exactly as he envisages, does he think this a very good test case of the appropriateness of the Government's introducing a sunset clause? The provision would therefore automatically expire after a given period, whereupon we could judge who was right and what action did or did not need to be taken.
John Healey: I know that the hon. Gentleman is keen on sunset clauses, but in this instance the short answer to his question is no. I think that he was on the Finance Bill Committee, and he almost certainly participated in proceedings on the Finance Bill 2004, when we introduced the temporary two-year uplift of the rate of income tax relief available on VCTs from 20 per cent.—the ongoing rate—to 40 per cent. Although I did not refer to the concept of a sunset clause in moving that provision, it was time-limited, so I am sure that it meets with his approval at least in retrospect, even if he did not support it at the time.
Amendment No. 9 seeks to exclude any capitalised research and development expenditure from the calculation of a company's gross assets for the purposes
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of the qualifying test. The hon. Member for Fareham said that it is a probing amendment, and I hope that he will be convinced of my view that it is neither necessary nor desirable. Let me try and explain why.
The gross assets test, as I said, is designed to target smaller high-risk companies for investment under the schemes by focusing on the level of assets on the balance sheet. The legislation deliberately does not define the assets to be taken into account, but as is our approach in general, it follows accountancy practice. If the tests were to diverge from accepted commercial accounting rules, more complex legislation would be required, which neither the hon. Gentleman nor I generally advocate. It could lead to additional burdens on the conduct of VCT businesses. However, the international accounting standards, IAS 38, have introduced a requirement to capitalise research and development expenditure in certain circumstances, whereas the UK standard to which the hon. Gentleman referred, SSAP 13, states that that treatment is optional. In either case, the range of circumstances in which R and D must or can be capitalised remains limited to certain development costs, not research costs.
Expenditure, therefore, will be capitalised only where it is already established that the outcome will be a marketable product—in other words, cases where the company has a genuine asset that can be valued on the balance sheet. The effect of the amendment would be to open up the scheme to companies that have already developed valuable assets with a balance sheet value above the threshold of the scheme.
We have already introduced the research and development tax relief, which is widely recognised as an effective, generous and appropriate policy measure. We announced in the Budget that it would be extended to provide additional support for mid-sized companies with up to 500 employees. The Opposition are effectively asking us for another form of indirect support for research and development. The right mechanism for that support, I suggest, is the R and D tax credit. It targets R and D expenditure directly, and does so in a way that is widely accepted to be an effective form of incentive for research and development.
Finally, amendment No. 13 seeks to exempt money raised from venture capital trusts prior to the current tax year from the requirement that it is invested in line with the objectives of the scheme. The 70 per cent. rule for venture capital trust investments, as the hon. Gentleman explained, already allows flexibility on up to 30 per cent. of the value of a VCT's fund. That is generous enough to allow VCTs the flexibility that they need to operate, and the Government's proposed change simply closes a loophole that makes it possible to get round the test.
Let me dwell on the rule change and the accusation of retrospection, which I do not accept. What we are proposing will help to ensure that the scheme meets the policy purposes for which it was introduced, and makes a contribution to the growth and productivity of this country and our small firms, as intended. The 70 per cent. rule about the funds from the VCT being invested in qualifying investments was the original intention of the scheme. Rules were drawn up to achieve that, and it is the basis on which approvals have been sought by VCTs and given by the Government.
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It cannot be right that funds raised with a significant tax relief are not used for the purpose for which the tax support was intended. It cannot be right that fund managers have a get-out if they fail to make the level of qualifying investments that are often in their prospectus. It cannot be right also that investors' expectations that their money will be invested in small companies with high growth potential are thwarted by the funds instead being kept in cash or non-interest-bearing accounts.
I urge the hon. Gentleman to bear it in mind that the measure will not apply to funds raised before 6 April this year. It is not designed to catch inadvertent breaches. If there are inadvertent breaches of the 70 per cent. rule, they should be reported, together with a plan to correct them, to HMRC, which will not take the enforcement action that would otherwise be required. The measure is not a device that the majority of VCTs use or need to use in order to maintain their adherence to the 70 per cent. qualifying rule.
When those considerations are added to the fact that we are not removing the essential generous flexibility of the 30 per cent., it is clear that the amendment is not appropriate. The hon. Gentleman, the hon. Member for Braintree or the hon. Member for Ludlow may know that one of the leading VCT advisers advises all its clients that they should aim not for 70 per cent., but for 80 per cent., so that they have sufficient flexibility to deal with the peaks and troughs of the cycle.
Clause 91 ensures that the legislation operates effectively in requiring that the funds raised by VCTs are directed towards qualifying companies. I say to the hon. Member for Ludlow that we see no reason why the VCTs should have difficulty adapting to the change by next year, when it comes into force. The provisions of schedule 14 are designed to increase the effectiveness of the venture capital schemes—
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