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Mr. Dunne: I am grateful to the Financial Secretary. The HMRC guidance on inadvertent breaches is welcome, as it may deal with the issue mentioned by my hon. Friend the Member for Fareham (Mr. Hoban) concerning a realisation generating a substantial amount of cash at an inopportune point in the year, when a test might be about to be met, for example. It would be helpful to the Committee if the Minister would confirm whether that would be addressed by the guidance from HMRC. If it would not, ought there not be provision in the Bill?
To put the matter in perspective, the cases of inadvertent breaches of the rule that have come to our attention number fewer than a dozen. It is a small-scale problem in a minority of VCTs. HMRC will shortly issue guidance that will help cover important aspects of inadvertent breaches. I shall make sure that the hon. Gentleman receives a copy directly.
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The amendments would prevent us from improving the scheme as we intend. I hope the Opposition will see fit to withdraw them, having had this useful and extended debate. If not, I shall have to ask my hon. Friends to vote them down.
Mr. Hoban: I thank the Minister for the effectiveness of his reply. I shall comment first on amendments Nos. 6, 7 and 8. He makes a persuasive case for the reduction in the asset limits. I am grateful, as I am sure is the VCT industry, for his reassurances that the situation will be kept under review and action taken where necessary. The House would welcome regular updates on the monitoring of the nature of the investments undertaken by VCTs working under the new asset limits.
On amendment No. 9 on accounting practices and the differential treatment that there can be under UK and international standards for the capitalisation of developmentthe right hon. Gentleman was right to distinguish between research and developmentthe issue is not so much that one group of businesses would get a double benefit for R and D, as that a business that applied international financial reporting standards could go over the gross asset test, whereas the same business using generally accepted UK accounting practice could fall below the gross asset test.
Given the difference in accounting practice for the treatment of capitalised development costs under the UK and international financial reporting standards, a company could benefit from VCT investment while another does not. I hope that the Financial Secretary will reflect on that as we consider unlisted companies' take-up of international financial reporting standards, and whether that causes some businesses to lose out on VCT relief because they adopt one method of accounting rather than another.
On amendment No. 13, I also welcome the Financial Secretary's reassurance on inadvertent breaches of the 70 per cent. rule and his comments on the associated guidance that HMRC will issue. Although his remarks are absolutely right about the importance of such money being investedthat is what investors in VCTs would seekit is important that the guidance on inadvertent breaches should consider situations where investments might well be realised and the trust might breach the 70 per cent. rule, pending a further investment or the return of cash to its shareholders.
John Bercow: The Financial Secretary referred to the issue of guidance by the Inland Revenue. Although we are not discussing regulations that will be the subject of a statutory instrument, and therefore subject to either the negative or the affirmative procedure, does my hon. Friend agree nevertheless that it would be helpful to the House if we could have sight of that guidance, if only in draft form, before the final passage of the Bill? It would aid and support our deliberations to get that before rather after the event.
As ever, my hon. Friend makes an important point about the parliamentary scrutiny of such issues and the way in which we can address them before consideration of the Bill has been completed, and I am sure that the Financial Secretary will take that
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point on board. I hope that the industry and its advisers are fully consulted on the guidance, to ensure that it tackles inadvertent breaches. With that, and the Financial Secretary's assurances, I beg to ask leave to withdraw the amendment.
Mr. Hoban: I am sure, Sir John, that we will have a fuller airing in this debate of some of the issues that were raised in the debate on the previous group of amendments. Under the amendments now before us, we seek to make permanent the temporary increase in income tax relief that applies to VCTs and enterprise investment schemes. The Financial Secretary and I have different views of what a move to 30 per cent. means. He seems to think that it is an increase; I might suggest that it is a decreasebut I am sure that we will return to that topic in a minute.
It is worth remembering why the 40 per cent. rate was introduced in 2002. It was intended to stimulate the VCT market, and in the words of the British Venture Capital Association's pre-Budget submission,
Indeed, it has had the benefit of stimulating the VCT market and raising more funds for investment in unlisted companies. In 200405, VCTs raised more than £500 million in funds; press comment around the end of the financial year suggests that they had raised about £730 million. Of course it is worth bearing in mind the fact that in the year before the relief was increased from 20 to 40 per cent., the sales of VCTs were worth less than £100 million.
Stephen Hesford: In simple terms, as I understand the matter, before the change took place in 2004 the rate was 20 per cent. That rate was introduced as a temporary two-year measure to increase VCTs, which it has done. I understand that the hon. Gentleman is making that point. The Government are now regularising the situation consonant with that prior to 2004, to a higher rate30 per cent. What is wrong with that?
I will address the hon. Gentleman's question about why that might be wrong, but the point, which was touched on in the last debate, is that both the Financial Secretary and the hon. Gentleman talk about the rate increasing from 20 to 30 per cent. Some people would argue that there is really a decrease, from 40 to 30 per cent. It depends on one's starting point, in judging what the measure is trying to change. With amendments Nos. 10 and 11, I seek to retain the 40 per cent. tax relief rate, rather than to reduce it to 30 per cent.
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Before the changes took place in 2004, VCTs were running out of steamtheir sales were lowand the temporary increase in tax relief to 40 per cent. stimulated that market. There is concern in the VCT market about the impact that the reduction in tax relief to 30 per cent. might have on the sales of VCT funds, and I shall quote some of the press comment around the time of the Budget. Bestinvest suggested that sales of VCTs in 200607 might be about £100 million to £150 millionquite a significant decrease on the amount achieved in 200506. Martin Churchill of Tax Efficient Review forecast sales of £250 million to £300 million. My hon. Friend the Member for Ludlow (Mr. Dunne) quoted the views of Henry Chaplin, suggesting that sales would be about £300 million. Clearly, we will not know the outcome until the end of the financial year, and there is uncertainty about the funds that VCTs will raise, and therefore the money that will be available to trusts to invest in small and growing businesses.
Stephen Hesford: The hon. Gentleman would not have intended to conflate two arguments, but I understand that when the hon. Member for Ludlow (Mr. Dunne) gave us figures about the differential sales of VCTs, he was talking about the previous set of amendments, and the sales differential that resulted from what the Government were doing with those amendments. We are now talking about a different set of regimes, and the hon. Gentleman is conflating the previous figures with these. Which sales drop does he think results from these changesor is he quoting another set of drops that was put before the House on a different set of amendments?
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