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Mr. Hoban: The hon. Gentleman needs to remember that there is a series of three changes in schedule 14 that impact on the sales of VCTs, and it is very difficult to pull apart the impact that each one will have on sales. My hon. Friend the Member for Ludlow referred to Henry Chaplin in the context of the impact of the reduction in gross asset values. Some people will point to a later amendment on the holding period as being the driver behind this; others will look at the change in tax relief. The complexity arises in part because of the way in which the amendments have been selected for debate, but also because of the complex interaction between holding periods, gross asset tests and tax relief.
Stephen Hesford: Does the hon. Gentleman accept that there is an element of double counting? The House needs to be sure which figures we are relying on—those for the specific amendments that we have under review, not those for the other amendments.
Mr. Hoban:
The hon. Gentleman is about to make a mountain out of a molehill. There are differing effects, and it is difficult to unpick the precise effect that each one has. The point that I am making is that in 2004–05 and 2005–06 sales of VCTs were strong, and had increased significantly during 2003–04, during which time the income tax relief was 40 per cent. If the Government say that the 40 per cent. rate led to that increase in sales, the hon. Gentleman must conclude from that that the reduction in income tax relief could, as has been suggested by some in the industry, lead to a reduction in sales in 2006–07 and subsequent years.
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The concern in the sector about the change in the rate of relief boils down to a relatively simple but fundamental point that my hon. Friend the Member for Braintree (Mr. Newmark) referred to in his intervention on me during our debate on the previous group of amendments. There is a relationship between the level of risk that an investor will take on board and the return. The concern is that the overall effect of reducing the rate of relief, and allied to that the increase in the rate of investment that we dealt with in the previous group of amendments, will be a reduction in the return from VCTs, making them less attractive to investors. Will investors be prepared to accept the greater risk attached to smaller companies with fewer assets given the reduction in tax relief on their investments in VCT and EIS schemes?
Martin Churchill, to whom I referred earlier, from Tax Efficient Review, suggests that there might be a flight from higher-risk investments within VCTs to lower-risk investments. Robert Drummond, a former chairman of the British Venture Capital Association, has said:
"With the 30 per cent. income-tax relief rate the Chancellor has found a compromise between maintaining the current level and returning to 20 per cent., but this change, together with the increase in the minimum holding period from three to five years"—
we will deal with that in the next group of amendments—
I appreciate that many in the VCT sector were relieved when the Chancellor announced that the rate of relief was to be 30 per cent. A number were concerned that it would be reduced further to 20 per cent. But I think that even the hon. Member for Wirral, West (Stephen Hesford) will agree that it is clear that VCT investment levels are sensitive to changes in tax relief, as the sales figures over the course of the past three years show. It is difficult to build a viable VCT sector and facilitate investment in smaller companies if flows are volatile.
I want to pick up on a commitment made by the Chief Secretary to the Treasury on Second Reading last week in relation to the change in the rate of tax relief. He said:
"To ensure that the industry has a solid foundation for stable fundraising and continued growth, the Bill guarantees the rate of income tax relief for investments in venture capital trusts at 30 per cent. for the rest of this Parliament."—[Official Report, 24 April 2006; Vol. 445, c. 365–66.]
I should be grateful if the Financial Secretary would elaborate on that commitment. It is rare for a Treasury Minister to commit to fixing rates so long in advance. In election campaigns, despite the efforts of interviewers, the Chancellor and the Prime Minister have always been evasive about giving any long-term commitment to rates. Will the Financial Secretary explain why that commitment has been give to VCTs in this Budget?
When the Financial Secretary replies, will he answer three questions? Can he confirm that the Chief Secretary's statement to the House last Monday will hold? What steps can he take to ensure that that will be enshrined in legislation so that investors can plan with confidence for the rest of this Parliament? Is this a
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symmetrical commitment? That is, will the relief remain unchanged, either up or down, regardless of events? Those are important clarifications that the Financial Secretary should give today to provide the industry with some comfort about the Chief Secretary's commitment. Regardless of whether 30 per cent. is the right or the wrong rate, stability and consistency are vital to the sector if it is to build.
I end on this note of caution. As I said earlier, the rate of sales of VCTs has been sensitive to changes in the tax rate, and, following the Financial Secretary's reassurances on a previous group of amendments, I would not like to see the small businesses that are meant to be helped by such schemes lose out because investors turn off the flow of funds into VCTs.
3.15 pm
Mr. Newmark: The Government's desire to refocus VCT investment is a simple excuse for dealing with the unforeseen cost to the Exchequer of the tax relief currently offered to investors. The cost to the Exchequer of 40 per cent. income tax relief has risen from £220 million to £315 million, nothwithstanding the caveat that those figures are
Treasury Ministers have perhaps got into the habit of not expecting their market interventions to be successful, and when they are, they are caught short. That is the real justification for part 2 of schedule 14.
The Treasury Committee had the benefit of a simple warning in March 2004 when it heard:
"I think that the Chancellor has to be careful that the history of an awful lot of tax reliefs is that they are set up with very tight restrictions, they have little effect, progressively Chancellors relax the effect, increase the benefits, and then the thing takes off in a completely unexpected direction and has to be stopped."
The Chancellor lectures that there should be no return to boom and bust—it is his favourite stick with which to beat the Opposition—but what is the result of all these changes if not boom and bust for the venture capital trusts and their investors?
The Chief Secretary has committed the Government to maintaining the 30 per cent. income tax relief for the life of this Parliament.
Stephen Hesford: Which part of "temporary" does the hon. Gentleman think that the industry did not understand in 2004?
Mr. Newmark: The hon. Gentleman is absolutely right; the point was made that the relief was temporary. But, as we saw, the industry was flat on its back, at a size of £50 million or £70 million, and it is now successful and has grown. But that has been primarily because of the stimulus that the Government gave by increasing the tax relief from 20 per cent. to 40 per cent., and that is my argument here.
The fact remains that repetitive changes in the tax relief scheme and, concurrently, the risk profile of VCTs, will undermine investor confidence and prevent legitimate tax planning. Is that really the solid foundation to investment that the Chief Secretary would have us all believe it to be? The justification for the 40 per cent. income tax relief was always couched, as the hon. Gentleman said, in terms of a temporary
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stimulus that would be the subject of continued review. But it is questionable whether that approach is helpful to investors who are looking to plan their long-term financial affairs. It has denied them the reasonable level of certainty that should be their right.
My concern as a past practitioner is that there is a high probability that the market will begin to shrink back—the point made by my hon. Friend the Member for Ludlow (Mr. Dunne)—notwithstanding the preservation now of a proposed 30 per cent. income tax relief.
I also question the assumptions that underpin the figure of 30 per cent. Was it chosen simply because it is a midway point between the old 20 per cent. relief and the two-year period of uprating to 40 per cent., or is there a more substantial justification for the compromise? Venture capital trusts are working, and working well, because there is sufficient incentive to stimulate uptake by investors operating in an inherently risky market. We should not arbitrarily change incentives, even for the lifetime of the Parliament, without subjecting them to regular review.
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