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Mr. Dunne: I should like to make a couple of brief observations. The industry has been almost silent on the issue since the Budget. The explanation is that it has breathed an enormous collective sigh of relief that the relief rate has gone from 20 per cent. up to 40 per cent., and now down to 30 per cent. rather than 20 per cent., which was the anticipated level after the announcement in the Budget two years ago to which the hon. Member for Wirral, West (Stephen Hesford) referred. As a result, it seems that the Treasury has listened to the industry's explanation that reverting back to the 20 per cent. level would risk cutting off the flow of capital to help bridge the vital equity gap.
As I said earlier, I am pleased that the Treasury team has not sought to restrict the rate to its original 20 per cent. level. I remain perplexed, however, why it has not kept it at 40 per cent., particularly if the policy objective, to which the Financial Secretary referred earlier, is to help companies gain access to capital that will allow them to grow, to compete to become larger businesses and to compete internationally in the increasingly global marketplace, on which the Chancellor is constantly lecturing us. It is well understood on these Benches that we are competing on a global scale. Why on earth introduce a measure with relatively little financial cost, as was made clear in the response to the hon. Member for South-East Cornwall (Mr. Breed), in this manner? It will have the undoubted consequence of reducing the capital available to such companies. Why not leave it alone at 40 per cent., where it is working so effectively?
I would like to reinforce what has already been said from the Opposition Benches. I am sure that the Minister is right in saying that the average investment to date has been £3.8 million, based on the 40 per cent. tax allowance. I suspect that it is more likely to have been the 40 per cent. rate than the eligible assets test that encouraged the greater investment. There is general agreement that the investments eligible under the new rules are likely to bealthough they will not always bemore risky in profile than they were, so there may be more justification for maintaining the 40 per cent. rate. At least if it were temporary, it could be
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extended for one more year and we could see how much more effective the eligible assets test will be. I am concerned that we may face a stop-go problem, irrespective of how much money is invested in the market. Obviously, 30 per cent. is better than 20 per cent., but it seems rather arbitrary. I believe that we could have retained the 40 per cent. rate for one further year while we assessed the effect of the eligible assets test, which would have provided a stronger basis of information on which to judge the success of the scheme.
I therefore broadly support retention of the 40 per cent. rate, but I accept that the Government have made a judgmentthat is what it is, a judgmentabout whether changes to the rules will focus down on the particular companies that are investing. I accept what the Minister said about going back to the original aims of helping younger and growing companies, but because of the reduction in the incentive, it remains to be seen whether there will be enough money to do so. That remains to be proved.
John Healey: Amendments Nos. 10 and 11 would renew and make permanent the temporary rate of 40 per cent. income tax relief for investments in venture capital trusts. When the Government announced in the 2004 Budget a two-year temporary rate set at 40 per cent. to boost investments in venture capital trusts, it could not have been made clearer that it would expire on 5 April 2006. I made those points very clear in our Committee debates on the Finance Bill that year. It was intended as a stimulus to VCT investments and I am glad that the hon. Member for Fareham (Mr. Hoban) recognised how successful it has been over the past couple of years.
We have seen record investment in these two years with fundraising of £520 million in 200405 and more than £700 million in 200506. That record fundraising investment led to substantial growth in the VCT industry, in the number of venture capital trusts and in the number of fund managers. I am sure that the hon. Member for Fareham would accept that it is unreasonable to expect the industry to continue this exponential growth and record fundraising increases every year. What it requires now is stability and our proposals are intended to provide just that.
Mr. Newmark: I am sure that the Financial Secretary will go on to deal with some of the points that I made earlier, but I am concerned about his perverse logic. The Government should rightly be congratulated on providing a stimulus for the venture capital trust industry by increasing the tax relief from 20 to 40 per cent. That resulted in clear success, with growth in the sector increasing from £500 million to £700 million. I do not understand why changing the rules will mean the continuance of success, particularly when it was the tax stimulus that helped the industry become a success in the first place.
It was just that. It was set at 40 per cent. for two years; it was due to revert at the beginning of April to 20 per cent.; and our judgment now, backed up with a proposal, is that a 30 per cent. rate of income tax relief for VCT investments is appropriate. It represents an increase of 10 percentage points on the original relief rate. As the hon. Member for South-East Cornwall
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(Mr. Breed) said, that is our judgment in the circumstances. We believe that it will help to ensure a sufficient and stable level of fundraising in the years to come and that it will therefore help to support a sustainable VCT sector in the years to come. It is designed, in response to the issues raised by the hon. Member for Fareham, to be a settled rate. As we discussed in the last group of amendments, it is also important carefully to monitor the application of the VCT schemes and the impact of the package of changes that we are introducing. It is right to keep under review, as we do with all taxes, the operation and impact of the scheme.
Mr. Hoban: I hope that I am not about to pre-empt the Minister's next comment, but will he reiterate the Chief Secretary's commitment last week on Second Reading that the rate is designed to last the life of this Parliament?
John Healey: I am explaining that it is designed to be a new, settled and more generous rate than existed in the scheme previously when it was set at 20 per cent. The hon. Member for Braintree (Mr. Newmark) believes that that is not generous enough, but let me put it to him again that this package of reforms related to clause 91 is costing the Exchequer more, not less, in respect of the support it gives to venture capital schemes. It is an additional annual cost of £15 million, amounting to a total annual cost from this year of £220 million of support for venture capital schemes.
John Thurso (Caithness, Sutherland and Easter Ross) (LD): Hon. Members of all parties agree on the importance and desirability of investment in venture companies. Clearly, the ultimate measure of success will be the return that the Exchequer gets on its own investment when the companies come to maturity and are able to pay back to the Treasury in tax. Has any estimate been madeI understand that it is early daysalong those lines about what sort of return can be expected from the Government's investment when these companies mature?
John Healey: The hon. Gentleman would not expect the Treasury to micro-monitor the performance of investments by VCTs at that level, but we assess the overall impact of such schemes. That is an important feature of Government accountability, to which I expect hon. Members to hold us.
The amendments would introduce a permanent 40 per cent. rate of income tax relief, which does not offer a sustainable position for VCTs or a cost-effective position for UK taxpayers. On that basis, I hope that the hon. Gentleman will withdraw the amendment. If not, I must ask my hon. Friends to vote against it.
I thank the Financial Secretary for his response to the debate. I am concerned whether the move from a 40 to a 30 per cent. rate will create a stop-go environment within the VCT sector. Other hon. Members have already referred to boom and bust,
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because the sector has gone from bust to boom, and we cannot know what will happen next until the end of this financial year.
I have taken on board the Financial Secretary's comments about keeping the matter under review. However, I do not think that his reassurances about the 30 per cent. rate were as copper-bottomed as those provided by the Chief Secretary on Second Reading, and it is important that reassurance is provided. I do not know whether there will be an opportunity on Report for the Financial Secretary to introduce amendments to make it clear in the Bill that the 30 per cent. rate will see us through until the end of this Parliament, because the sector expects the 30 per cent. rate to hold throughout this Parliament. However, given the Financial Secretary's comments, I beg to ask leave to withdraw the amendment.
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