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“specifically tailored to growing businesses”.
Many REITs are growing businesses—as a new product, they will probably grow larger—so it is appropriate to list them on AIM. The hon. Member for South-East Cornwall (Mr. Breed) said that the market provides an opportunity for regional REITs, as did the hon. Member for Dundee, East (Stewart Hosie). That is an important element which I, as a localist, would support.
The argument is about investors trusting the investment manager. If they want the security of a more highly regulated market, they should invest in REITs that are listed on the London stock exchange or their European equivalents. If that is what the market demands, there are unlikely to be many REITs listed on AIM. There could easily be REITs that are aimed more at institutional investors, which it would be more appropriate to list on AIM because it is less regulated and less expensive. I therefore do not find that argument entirely convincing. However, it is worth stressing that at almost every stage of the Bill, the Government said, and I hope the Economic Secretary will reiterate, that the matter will be kept under review.
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When we discussed AIM in Standing Committee, the flavour of the remarks made by the Economic Secretary was that AIM was part of a transitional process: a company lists on AIM for a while, then it grows and gets a full listing. Clearly, some companies do. The figures on the London stock exchange and AIM website that were quoted by my hon. Friend show that in total 1,528 companies are listed. The total number of admissions is 2,401. Many of the 900 or so companies that are no longer listed on AIM will no doubt have a full listing. Some may not. Some may have been merged, and others may be de-listed altogether. That still leaves a substantial number, 1,528, which remain on AIM, so we should be a little careful about characterising AIM as a stage that a company passes through. It does not always work like that. For many companies it is their final destination.
I turn to the second argument used by the former Economic Secretary, that the expression
“‘recognised stock exchange’ is a fundamental concept used in our tax legislation.”
That is true, but it should not be leading policy. Just because the expression “recognised stock exchange” is appropriate for qualifying for an ISA, that does not seem to be a persuasive argument for it to apply to REITs and for condition 3 to be drafted as it is.
The third argument, which my hon. Friend dealt with thoroughly, was set out by the former Economic Secretary when he said:
“Thirdly, and crucially . . . it would not be possible to allow companies with shares listed on AIM to be eligible for the regime without also extending the same position to companies listed on similar markets in the European Union.”—[ Official Report, 3 May 2006; Vol. 445, c. 1044.]
He made two arguments to support that. One was the cost to the Exchequer of allowing that to happen, which the former Economic Secretary said would be difficult to quantify at this point. The second was the risk for small investors.
The same points about caveat emptor, trusting the people and the reality of the risk can be made again, but I come back to what my hon. Friend said about condition 1, which states that a company must be UK resident in any event. If that is the case, it is unlikely to want to list in another EU jurisdiction. If it does, that is unlikely to be a commercial advantage in marketing it to the UK, particularly if it was listed on an EU version of the alternative investment market. That would be commercially unattractive, so companies are unlikely to do it. If it is attractive commercially, that is probably because those companies are able to overcome any reputational concerns about the particular market. If the company is able to overcome such reputational concerns, the second argument—the risk to small investors—is likely to fall away. The matter comes down to the issue of the cost to the Exchequer. I am sceptical that it would be extremely expensive, because, for the reasons that I have outlined, few companies will list on foreign exchanges. The leading exchange in Europe is the London stock exchange, and the leading alternative investment market in Europe is AIM.
I ask the Government to continue to review the matter. As one former member of Oxford University Conservative Association to another, I ask the Economic Secretary to look again at the policy. If the Government are not prepared to accept the amendment today, I hope that they will review the matter soon.
Mr. Philip Dunne (Ludlow) (Con): I do not want to disappoint hon. Members who were members of the Standing Committee, so I shall declare an interest: I am currently chairman of two fully listed companies, one of which is an investment vehicle and the other of which is a real business, although I will be in that position for a matter of days because the company has just been taken over.
Craving your indulgence for a moment, Madam Deputy Speaker, I was also at Oxford university, although I was not a member of OUCA. However, I was educated at the same college as the Economic Secretary, where we shared some of the same tutors, although I cannot recall reading any of Professor Davison’s texts.
I apologise to my hon. Friend the Member for Rayleigh (Mr. Francois) for missing his opening
remarks on amendment No. 130, because I was engaged in Select Committee. The Government are caught in an academic dilemma—the distinction between the full market and AIM—which may stem from the academic approach that the Economic Secretary has taken to many of the clauses in the Finance Bill, but I want to draw to his attention what is happening out there in the real world.
My hon. Friends have already referred to some of these statistics. If one casts one’s mind back to the beginning of this Government, one recalls that 2,704 companies were listed on the main market, and 252 companies were quoted on AIM at the beginning of 1997. As we have heard, the number of quoted companies on AIM had risen to 1,528 by the end of May, which is an increase of 1,276. Over the same period, companies were leaving the full market in droves, many as a result of takeovers and some as a result of migrating down from the main market to AIM. The numbers are revealing: there are currently 1,326 UK companies left on the main market, 29 per cent. of which are investment vehicles, which means that there are now only 939 UK trading companies on the main market. That significant reduction has been more than matched by the increase in the number of companies quoted on AIM.
It is also revealing to discover that there are 43 real estate, holdings and development companies on the main market, yet 70 real estate, holdings and development companies are currently quoted on AIM. I contend that companies that have the choice of whether to take advantage of full market listing or to list on AIM tend to list on AIM, because of the lower costs, lighter regulation and the fact that the market has matured. AIM is now regarded as an appropriate place to gain access to capital, whereas in the early days people had their doubts. When the company that I took to market was listed in 1998, we regarded it as appropriate to go direct to the main market, although it was a small company, because there were concerns about access to capital on AIM. Those concerns have been substantially overcome.
We therefore have to ask ourselves why the Government are not prepared, at the introduction of this new regime, to sanction quotation on AIM as perfectly legitimate and appropriate for new REITs. The arguments that they advanced have been thoroughly demolished by my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) and, I am sure, by my hon. Friend the Member for Rayleigh, whose comments I look forward to reading tomorrow in Hansard. The argument advanced by the Economic Secretary in Committee—that there would be a greater potential risk to investors should these shares be available on AIM—is palpable nonsense. I hope that he will reflect on this debate and on what was said in Committee and will be prepared to accept amendment No. 130 if it comes to a vote.
Ed Balls:
I have a wide range of speeches and points to respond to. The right hon. Member for North-West Hampshire (Sir George Young) accused me of taking him seriously, and criticised me for it. We had an interesting debate about the distinction between Schumpeter’s and Schumacher’s views on the concept of “small is beautiful”. The hon. Member for Ludlow
(Mr. Dunne) chided me for not understanding the real world, having just admitted in his declaration of interest that he runs an unreal company. It would be interesting to find out what that means in practice.
There have been several other references to the past, and I am happy to explain the position. Conservative Members might have heard of a writer called Geoffrey Trease, who wrote a series of books about Bannermere, a fictional lake in the Lake District. The hero of the books goes to Oxford university, the first of anybody in his family to do so. When he gets there he joins all the political societies so that he can go to hear all the speeches at all the political clubs. I did the same. I joined the Labour, Liberal and Conservative clubs and went to hear very many speeches. I heard the then Chancellor of the Exchequer discuss the economy and the then Trade and Industry Minister discuss industry and housing. That was very interesting, as both of them left the Government within months.
Mr. Francois: The hon. Gentleman says that at Oxford he even joined the Liberals, as they would then have been. If he was so liberal in deciding to join all those different markets at the same time, why cannot REITs list on AIM?
Madam Deputy Speaker: That is quite sufficient about student politics. May we return to the debate?
Ed Balls: Thank you, Madam Deputy Speaker.
We have also discussed, in passing, real estate investment trusts, which we debated at length in Standing Committee and in the Committee of the whole House. I am pleased that there is cross-party support for our aims for the REITs regime. We believe that it will be successful when it is introduced next January, that it will remove inefficiencies that currently persist in the commercial and residential property investment markets, and that it will support our wider housing policy and the implementation of the Barker review.
I will not go over all the points that were debated in Committee, but try to respond in detail to some of those raised today. I shall start by responding to the hon. Member for Rayleigh (Mr. Francois) on Government amendments Nos. 27 to 30. On 2 June, I made available to Committee members the draft excluded business regulations, which amended schedule 16. That followed a commitment made by my predecessor, my hon. Friend the Member for Bury, South (Mr. Lewis), which I was keen to honour not only in the spirit but the letter to give sufficient time for proper consideration. As the hon. Member for Rayleigh reminded us, we had a detailed discussion about car parks, phone masts and other matters. I hope that we provided clarity that will give the industry a basis on which to plan ahead. During that debate, I explained to hon. Members that a better way to effect these changes than the draft regulations would be by way of a Government amendment to the Bill as it passed through its parliamentary stages. As I explained to the Committee, the points that prompted the changes had been raised at a very late stage and it had not been possible fully to analyse the issues in time to table an amendment in Committee. Instead, we decided to expose the issues in draft regulations and to consult on the details, with the aim of making the necessary changes through amendments to be tabled on Report.
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Government amendments Nos. 27 to 30 are the outcome of that consultation. They deal with two sets of circumstances: owner-occupied property, and property held as trading stock. Amendment No. 28, which deals with trading stock, aligns the treatment of rental income from this kind of property with that already set out for rent incidental to a trade of property development. The amendment will keep trading stock property out of the ring fence, which will mean that the incidental rent will be taxable but the measure will remove the threat of double taxation that could otherwise follow from taxation of any increase in the value of the property at conversion and the levy of an entry charge on the same value. The industry was keen for us to clarify that position.
Amendments Nos. 27, 29 and 30, which deal with owner-occupied property, address two issues. The first is to ensure that rental income from owner-occupied property is excluded from the tax-exempt business of a UK REIT, as was our original policy intention. The second is to allow into the ring fence some properties that, despite be let to unconnected third-party tenants, fall to being accounted for as owner occupied. Their exclusion was an unforeseen consequence of the international accounting standards definition of “owner-occupied”—as the hon. Member for Rayleigh pointed out—and not in line with our original policy.
These changes are the result of points being brought to our notice by the industry, and I am sure that it will welcome them. They are fully consistent with the statements that I made in Standing Committee. On the definition of owner-occupied property, I can assure the hon. Member for Rayleigh and the House that we will continue to work with the industry and to listen to any issues arising on the matter. I hope that that will give him the reassurance that he seeks.
A number of issues have been raised today that pertain to the more general question of the balance between residential and commercial property. I will deal with the specific points first, and refer to the general issue at the end. I shall deal first with amendments Nos. 64 to 68, and then with amendment No. 130, which deals with the listing requirement.
Amendments Nos. 64 to 68 have been tabled by the hon. Member for Banff and Buchan (Mr. Salmond) and his colleagues, and were spoken to today by the hon. Member for Dundee, East (Stewart Hosie). Taken together, they would remove altogether the requirement that a company should have its shares listed on a recognised stock exchange before it can become a UK REIT. That would allow any company to enter the regime. We have estimated that the cost of the amendments, if passed, would run not into tens or hundreds of millions of pounds but into billions of pounds. It would therefore be quite wrong to accept them. I hope, however, that in explaining why we believe that a requirement for listing is important I shall be able to give some reassurance to the hon. Member for Dundee, East.
Amendment No. 130 also relates to the listing requirement. However, rather than removing it altogether, it seeks to extend the definition to include the alternative investment market—AIM—of the London stock exchange and its equivalent in the European Union. This issue was debated at length
during the Committee of the whole House, as well as in the Standing Committee. Following those Standing Committee debates, I looked again in detail at our requirement for a full stock exchange listing. As I explained to hon. Members at the time, I had come late to those debates—my hon. Friend the Member for Bury, South was the Minister during the Committee of the whole House—and I wanted to understand the difference between a full listing on the London stock exchange and a listing on AIM.
In passing, I want to say that I completely associate myself with what the hon. Member for Rayleigh said about the success of AIM, and its importance not only as a liquid market but a tax advantage market, compared with a full listing. Capital gains tax, inheritance tax and loss relief are all reasons why we tax advantage an AIM listing in order to bring new companies into listing. The success of London as a market that attracts listings from around the world has increased substantially over the past few years, and I am sure that the success of AIM is part of the broader success of London as a centre for listing. Therefore, I fully support the continuance and strength of AIM.
We always aimed to ensure that the UK REIT regime would make property investment accessible to small investors in a way that was revenue neutral in tax terms while providing proper protection. The requirement for a listing on a recognised stock exchange assures investors, especially small investors, that their investments are covered by the full protection of direct regulation by the Financial Services Authority. That has a direct bearing on companies, through rules on dispersion of the share base and share approval for major transactions. An AIM listing has several tax advantages, while a full listing on the stock exchange has several more onerous requirements, ensuring proper protection for the smaller investor through direct FSA regulation, but also ensuring that the tax advantages that I set out are used for the intended purpose. We argued consistently that the right approach was to restrict the REIT regime to a full listing, partly to protect the revenue base and to ensure that it is revenue neutral, and partly to protect the small investor. We made that point consistently in consultation and in discussions with several interested parties, including the Investment Property Forum, the British Property Federation and the Royal Institution of Chartered Surveyors, and our objective has always been understood.
Aside from the regulatory aspects, it is important to take account of suggested changes to the rules in the context of the regime as a whole. We are considering a package of legislation and conditions that combine substantial tax advantages with substantial restrictions and protections to ensure that we achieve our objective, but in a way that does not run to substantial cost. While the costs of the Scottish National party amendments would run into billions of pounds, there is no doubt that these amendments would cost hundreds of millions of pounds, not least because allowing such listings to qualify for other European markets would run not only a regulatory risk but a financial one. As I said to the hon. Member for Rayleigh, I have considered the matter again, as I wanted to understand exactly what was happening, and we still believe that
we have the right balance of regulation and protection to achieve a revenue neutral package and encourage the establishment of a REIT regime.
Mr. Francois: If more companies were allowed to list as REITs on AIM, they would put their property portfolios into the REIT regime, on which a 2 per cent. entry charge would be levied, which would be revenue raising. The Economic Secretary said that part of the Government’s rationale in not allowing REITs to list on AIM was to protect small investors. What is the difference in principle between small investors investing in lots of other companies listed on AIM but not in property companies listed on it?
Ed Balls: We are trying to combine those protections with the revenue neutrality that I talked about. On the basis of our calculations and estimates, a substantial increase in the entry charge, above 2 per cent., would be necessary to make the proposal revenue neutral. As a whole, the package has been put together to allow substantial tax advantages while at the same time ensuring that such investments will be genuine and not for tax purposes. Removing any one of those conditions—especially one as important as listing on a recognised stock exchange, which brings with it a wide range of regulatory and market-driven protections—would, I fear, result in the imposition of detailed rules and potential increases in costs elsewhere, and would undermine the regime that we have put together.
We consulted for a long time on that regime, and responded in detail to a number of points. We have discussed today whether the Government have been willing to respond to points made in consultation during the Bill’s passage so far. I do not think any Opposition Front Bencher could disagree with the proposition that we have not only consulted extensively on the REITs regime but, in very material ways, responded to what has been said. In the same spirit I took advice on not just cost, but the protection that we could give investors to ensure that their investments would genuinely fulfil their intention of investing in residential property, as opposed to merely benefiting from a tax advantage. Our judgment was that we had got things right.
Stewart Hosie: The Economic Secretary has said a number of times that the Government believe they have got the balance about right, ensuring both that the revenue base is protected and that there is enough regulation to protect investors. That would still leave us with very large REITs, probably worth more than £100 million. What will the Government do to encourage smaller trusts with a local residential focus, if the Economic Secretary is not prepared to liberalise in the way that has been suggested today?
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