Clause
48
Vaccine
research relief: amount of deduction for
SMEs
Question
proposed, that the clause stand part of the
Bill.
Adam
Afriyie (Windsor) (Con): I shall not speak for long. I
simply want to make two, related, observations on this clause and the
next about the vaccine research and development credit, or tax relief,
which is designed to encourage investment in research on vaccines. The
clause is welcome, because it corrects a loophole, and neither I nor, I
am sure, hon. Members on either side of the Committee, object to its
overall thrust.
My
main observation is that we in the United Kingdom have a currency
called sterling that is familiar to everyone. Everything that we do in
our everyday lives is denominated by it: company accounts are
denominated in sterling, and it is clear and overt. For small and
medium-sized businesses, accountants and
everyone else, turnover is clear and they can predict pretty well what
their turnover and profit will be. Consequently, they are able to
ascertain whether they qualify for certain reliefs and what size of
business they are classified as. Exchange rates fluctuate and
are uncertain, however. At times over the past five to 10 years, we
have seen sterling move quite dramatically against the dollar and the
euro, so businesses might be caught unawares. As I said, I do not
object to the clause in principle, but businesses might not know into
which category they fall. A business might be working on the basis that
it falls within the small or medium-sized category, which might be
clear from the staffing levels. However, it might not be clear whether
that business falls into that category in terms of either its balance
sheet value, which does not necessarily move dramatically during the
year—although the exchange rate might fluctuate—or its
turnover, which would enable it to qualify for the credits under
clauses 48 and
49.
Throughout the
Bill, pretty much everything is denominated in
sterling. Duties, corporation tax, grants, credits, the reliefs for
investment in the music industry and a lot of the capital and asset
transfers—they are all denominated in sterling. Therefore, why
is uncertainty being created in clause 48? I am sure that the Minister
can tidy the issue up fairly quickly. Is the answer that we are subject
to EU regulations? If so, which EU regulations tie the
Minister’s hands in that regard? Why are we denominating
turnover and balance sheet value in sterling, which creates an enormous
amount of uncertainty and makes it difficult to plan during the year,
as to whether a tax credit will be achieved? I urge the Minister to
make a small change and denominate those figures and values in
sterling.
John
Healey:
If the hon. Gentleman checks the record, he will
realise that he just asked me why we were denominating in sterling, but
then urged that we do denominate in
sterling.
Adam
Afriyie:
Excuse me, I meant
euros.
John
Healey:
I thought that that was what the hon. Gentleman
meant, but it was not quite what he
said.
In a sense, the
approach that we have taken is the established approach in the tax
system. Clause 48 makes a minor amendment. It does not seem sensible at
this point to make such a significant amendment as that which the hon.
Gentleman has
suggested.
Question
put and agreed to.
Clause 48 ordered to stand
part of the Bill.
Clause
49
Research
and development tax relief: definition of SME
etc
Question
proposed, That the clause stand part of the
Bill.
Adam
Afriyie:
I had not wished to speak on this occasion, but I
want to re-emphasise the point that we have a great opportunity in this
clause to denominate in sterling, not in euros. I did not find the
Financial
Secretary’s previous answer in any way satisfactory or
reassuring, given the hundreds and possibly thousands of businesses
that will be at those thresholds. I wonder whether he can reflect a
little longer and give a reasoned answer as to why we are denominating
in euros rather than in sterling, which seems to cover every other
aspect of the Bill. I understand tradition and convention, but will he
give a clear answer as to why he wants to perpetuate that uncertainty
for those
businesses?
John
Healey:
If the hon. Gentleman studies the provisions
covering the research and development tax reliefs and the vaccine
research relief, he will see that some of the qualifying criteria that
we use for companies are established at the European level. As he will
appreciate, not only do we have to take into account the size of a
company, based on the definitions of small or medium-sized companies
and large companies, but, where turnover or similar criteria or tests
apply, we have to use the European set standard, which is denominated
in euros.
The reason
we have to take account of those criteria is that, in order to put in
place a tax relief system such as the one that we have for research and
development, it must receive clearance under the state aid rules. In
other words, we are restricted in our ability to introduce direct
support to firms for particular activities and policy purposes in the
UK, in order to ensure that it is consistent with state aid rules. That
is the established process within the European Union, to which we
signed up as part of our membership of the Union and the single market.
Where the European Commission exercises its judgment in setting
criteria, it denominates in euros. We have transferred that approach
into our domestic legislation, and have done so from the
start.
As I said on
clause 48, we are making what are, in essence, minor or technical
amendments to the operation of the tax reliefs. Therefore, it is not
appropriate to revisit questions about the integral design of the
approach that we have established for R and D tax relief since
2000.
Question put
and agreed to.
Clause
49
ordered to stand part of the Bill.
Clause
50
ordered to stand part of the
Bill.
Schedule
16
Venture
capital schemes
etc
Dr.
Vincent Cable (Twickenham) (LD): I beg to move amendment
No. 181, in schedule 16, page 200, line 4, leave out
‘50’ and insert
‘250’.
The
Chairman:
With this it will be convenient to discuss
amendment No. 182, in schedule 16, page 200, line 10, leave out
‘50’ and insert
‘250’.
Dr.
Cable:
This is my first contribution to the work of the
Committee. It is a tribute to the excellence and stamina of my hon.
Friend the Member for Falmouth and Camborne that we have not had to
make more use of those on the substitute’s bench.
These are probing amendments.
Our understanding is that there is at present a restriction on the size
of companies—from 250 to 500 employees—that can take
advantage of the reliefs, and that the Government are imposing this
restriction because of limitations set by the European state aid rules.
In essence, the purpose of the amendments is to try to establish the
Government’s thinking behind the
legislation.
The
state aid rules are summarised in a set of guidelines that were
produced last year, “Community guidelines on state aid to
promote risk capital investments in small and medium-sized
enterprises”. We understand that the Government must comply with
the rules, but we have some questions about
them.
A quick reading
of the European guidance suggests that Governments have a fair degree
of flexibility in interpreting the rules. The first question is why the
Government have interpreted the provision in such a restrictive way.
Many medium-sized companies will be removed from the provisions on
venture capital because of this legislation. Could the Minister explain
why he had to interpret the European rules in this
way?
It appears that
the Government have set the maximum restriction, with a number of
employees—50—that is below the present level. On the
other hand, it appears that the number of employees has increased for R
and D tax credits, which are also governed by European state aid rules.
We are trying to understand why the rules should be interpreted in a
particularly permissive way for R and D tax credits but in a more
restrictive way for venture
capital.
The Institute
of Chartered Accountants in England and Wales is particularly perturbed
by this measure because its judgment, which is based on its research,
is that venture capital measures are more helpful than the R and D tax
credit in encouraging innovation by this group of companies. The
institute cannot understand why the Government have apparently moved in
the opposite direction. They have reduced the range from 250, which is
the normal threshold for medium-sized companies, to 50, which is the
threshold for small companies. What in the guidelines required the
Government to make that shift for these provisions but not for the R
and D tax
credits?
There may be
perfectly good legal reasons for the wording in the schedule. We
understand that the Government have to comply with the guidelines, but,
given that the rules offer some flexibility, we wish to find out from
the Minister why he has interpreted them in this
way.
6
pm
Mr.
Hoban:
I want to echo the hon. Gentleman’s
comments. We see in the Red Book that the changes to various venture
capital schemes have been made in response to the new guidelines on
state aid that were published last year. Like him, I am rather
surprised that the Government have felt the need to make the changes,
as it appears from examining those rules that if a robust case has been
made and there is evidence to back it, the EU is prepared to grant
exemptions.
For
example, in paragraph 5.1(a) of the rules there is a safe harbour
whereby an investment below €1.5 million is not
deemed to be state aid, and if a
member state can produce evidence of a market failure affecting that
limit, state aid can be used in connection with stimulating small and
medium-sized enterprises. In paragraph 5.1(b) permission is given for
Governments to support schemes providing finance to medium-sized
companies. Does the Financial Secretary believe that firms employing 50
full-time equivalents are medium sized? I am not sure whether I would
see them as medium-sized
businesses. There are
other examples in the state aid rules that would create an exemption
allowing the Government to continue with venture capital trusts and
perhaps set a more generous level. Will the Financial Secretary clarify
whether the Commission has given approval to the VCT rules as set out
in the Bill? The Red Book is a little opaque as to whether that
permission has been received. It would be useful to know whether it
has, and to understand more about the case that the Government employed
for retaining the status quo prior to the schedule being introduced.
The hon. Member for Twickenham also highlighted, appropriately, the
contradiction between this schedule and schedule 15—a more
generous number of employees is set for R and D tax credits and a tight
number for venture capital
schemes.
I
congratulate the Treasury, for a change, on other changes made in the
schedule. On Report of last year’s Finance Bill I discussed an
amendment on the 70 per cent. rule, and we also debated inadvertent
breaches. I am grateful to see, a year later, that the Minister has
listened to my representations and that those changes are in the
schedule.
John
Healey:
I welcome the hon. Member for Twickenham to the
Committee’s proceedings. If the Liberal Democrats have that sort
of quality on the substitutes’ bench, they match Chelsea. It is
a pleasure to see him reappear. [Interruption.]
Indeed—they did not actually win this year, but there we
are.
Why have we
interpreted the rules as we have? As we set out in the Budget text, we
are required to introduce the employee head count test, on which the
hon. Gentleman focused his questions, to meet the requirements of the
European state aid obligations. I shall be honest with the Committee:
we did not want to introduce the head count test or the new employee
limit. We are acting essentially to ensure that we can secure the
future of the venture capital schemes.
The corporate venturing scheme,
the enterprise investment scheme and the venture capital trusts are
important elements in helping to tackle the equity gap, but to continue
they need to meet the state aid requirements set out by the European
Commission, particularly the new state aid rules on risk capital that
were introduced last August. We have spent a good deal of time and
effort, particularly since then, on submitting strong evidence about UK
market failures in such investment.
Our situation is not
necessarily the same as that of other European states, particularly as
we have a mature market. Of course, the state aid risk capital rules,
with some flexibilities, are designed to apply across Europe. We argued
that we need national policy measures if we are to respond to the
structural problems affecting our national capital markets. The
Commission did not
accept our argument that the additional provision that
we wanted to make in all areas for mid-size
companies—the sort of provision that is set out in these
amendments—would be compatible with the Common
Market. If we were to persist with that
approach or, indeed, if we were to amend the Bill in the way that the
amendments suggest, it would bring the continuation of these schemes
into question. Therefore, we will continue to propose amendments and to
discuss the matter. I hope that, in conjunction with the industry, we
can collate further evidence that might encourage the Commission to
make greater use of the flexibilities that can be found within the
rules that it introduced last year. For the moment, our schemes need to
be judged as compliant by the Commission by August this year. Because
of our detailed discussions with the Commission, particularly in the
past 12 months, I am confident that we will get clearance. However, we
have not formally had it
yet.
Finally, I
welcome the comments of the hon. Member for Fareham on our amendments
about the inadvertent breaches and the 70 per cent. rule. He did indeed
raise those points in our discussions last year, and I took them
seriously. They were raised by others as well and we have had the
chance to examine them over the past 12 months. For that reason, I am
glad that we have able to cover them in the
Bill.
Dr.
Cable:
Will the Minister comment on the further point that
both the hon. Member for Fareham and I have raised, which is: if the
Commission was so tough on the 50-employee rule, why were the
Government allowed to move in the opposite direction on the R and D tax
credits scheme? Does a different set of principles apply, or is there
an inconsistency in the Commission?
John
Healey:
The rules that we are trying to meet in the three
schemes are set out in the state aid risk capital rules, which were
introduced by the Commission in August last year. They clearly apply to
this policy territory, but they do not apply in the same way to the R
and D tax credits. The changes that we are making to the R and D tax
relief scheme are being made not because we are required or encouraged
to do that by the Commission, but because we have established that
there is evidence of under-investment in innovation and research and
development by mid-size companies. It is an area of the economy that we
want to support, and in which we want to see greater activity. There is
clear evidence and a clear policy purpose for what we are proposing in
the R and D tax credits. The circumstances that apply there are
different from those that apply to venture capital and EIS
schemes.
Dr.
Cable:
I want to acknowledge that the Government have
confirmed on the record that they approached the Commission and pushed
as hard as they could on this point. We have accepted in this short
exchange the potential for damage to middle-level companies in the
industry, which is a particular problem for regional funds that are
struggling to establish themselves. However, I accept what the
Government say. It was pointed out to me that the Chartered Institute
of Taxation has accepted that the Government have done the best that
they can. The Institute of Chartered Accountants in England and Wales
was a little more sceptical, but I accept the
Minister’s word that he has tried and that this is the most that
can be done within the rules. I beg to ask leave to withdraw the
amendment.
Amendment, by leave,
withdrawn.
John
Healey:
I beg to move amendment No. 165, in
schedule 16, page 205, line 39, leave
out from beginning to ‘for’ and
insert—
‘(1) Paragraph 29 of
Schedule 15 to FA 2000 is amended as
follows.
(2) In sub-paragraph
(3),’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 166 to 174 and 159 to
164.
John
Healey:
I shall be brief, unless members of the Committee
want to dwell in detail on any of these measures. Government amendments
Nos. 166 to 174 concern paragraphs 9 to 11 to schedule 16 and are
designed to bring two improvements that will benefit companies seeking
to raise finance under the enterprise investment scheme, the corporate
venturing scheme and the venture capital trust
scheme.
Government
amendments Nos. 159 to 164 attempt to achieve the same thing in
relation to the enterprise management incentives legislation. They
provide first for the transfer of relevant intangible assets within a
corporate group structure to newly incorporated subsidiaries, thus
providing a greater flexibility for the venture capital schemes. Clause
60 makes the equivalent changes to the enterprise management incentives
legislation. The changes have been welcomed by the Enterprise
Investment Scheme Association—Opposition Members will be
familiar with its chairman, who is doing a good job—and respond
to a good dialogue that we have with the sector in recent
months.
We have also
had good discussions with interest groups that have raised further
technical points, so we have tabled amendments to ensure that some
technical changes to the legislation mean that it achieves its
objectives. I commend these amendments to the
Committee.
Amendment
agreed to.
Amendments
made: No. 166, in schedule 16, page 206, line
2, leave out from ‘company’ to end of line 3 and
insert
‘throughout a
period during which it created the whole or greater part (in terms of
value) of the intangible
asset.”
(3) After sub-paragraph (6)
insert—
“(7)
If—
(a) the issuing
company acquired all the shares (“old shares”) in another
company (“the old company”) at a time when the only
shares issued in the issuing company were subscriber shares,
and
(b) the consideration for
the old shares consisted wholly of the issue of shares in the issuing
company,
references in
sub-paragraph (3) to the issuing company include the old
company.”
9A
In paragraph 86(2) (substitution of new shares for old shares), after
“Schedule”, in the first place it occurs, insert
“(except paragraph 29(7))”.’.
No. 167, in
schedule 16, page 206, line 9, leave
out from ‘company’ to end of line 10 and insert
‘throughout a period
during which it created the whole or greater part (in terms of value)
of the intangible
asset.”,’.
No.
168, in
schedule 16, page 206, line 12, at
end insert ‘, and
(c) after
subsection (5C)
insert—
“(5D)
If—
(a) the company
mentioned in section 293(1) (“the issuing company”)
acquired all the shares (“old shares”) in another company
(“the old company”) at a time when the only shares issued
in the issuing company were subscriber shares,
and
(b) the consideration for
the old shares consisted wholly of the issue of shares in the issuing
company,
references in
subsection (5) above to the company mentioned in section 293(1) include
the old company.”
(1A)
In section 304A of that Act (acquisition of share capital by new
company)—
(a) in
subsection (3), after “Chapter” insert “(except
section 297(5D))”,
and
(b) in subsection (4),
after “Chapter” insert “(except section
297(5D))”.’.
No.
169, in
schedule 16, page 206, line 18, at
end insert—
‘(2A) In section
576K of that Act (share loss relief: substitution of new shares for
old), after subsection (3)
insert—
“(4)
Nothing in subsection (2) applies in relation to section 195(7) of ITA
2007 as applied by section 576B(7) above for the purposes mentioned in
section
576B(8).”’.
No.
170, in
schedule 16, page 206, line 23, at
end insert—
‘(3A) In section
146 of that Act (share loss relief: substitution of new shares for
old), after subsection (2)
insert—
“(3)
Nothing in subsection (2) applies in relation to section 195(7) as
applied by section 137(7) for the purposes mentioned in section
137(8).”’.
No.
171, in
schedule 16, page 206, line 29, leave
out from ‘company’ to end of line 30 and insert
‘throughout a period during which
it created the whole or greater part (in terms of value) of the
intangible
asset.”,’.
No.
172, in
schedule 16, page 206, line 31, at
end insert ‘, and
(c) after that
subsection
insert—
“(7)
If—
(a) the issuing
company acquired all the shares (“old shares”) in another
company (“the old company”) at a time when the only
shares issued in the issuing company were subscriber shares,
and
(b) the consideration for
the old shares consisted wholly of the issue of shares in the issuing
company,
references in
subsection (4) to the issuing company include the old
company.”
(5) In section
249 of that Act (substitution of new shares for old
shares)—
(a) in
subsection (2), after “Part” insert “(except
section 195(7))”,
and
(b) in subsection (4),
after “Part” insert “(except section
195(7))”.’.
No.
173, in
schedule 16, page 206, line 37, leave
out from ‘company’ to end of line 38 and insert
‘throughout a period during which
it created the whole or greater part (in terms of value) of the
intangible asset.”’.
No. 174, in
schedule 16, page 206, line 39, at
end insert—
‘(4) After that
subsection
insert—
“(7)
If—
(a) the relevant
company acquired all the shares (“old shares”) in another
company (“the old company”) at a time when the only
shares issued in the relevant company were subscriber shares,
and
(b) the consideration for
the old shares consisted wholly of the issue of shares in the relevant
company,
references in
subsection (4) to the relevant company include the old
company.”’.—[John
Healey.]
6.15
pm
John
Healey:
I beg to move amendment No. 175, in
schedule 16, page 210, line 27, leave
out ‘wholly for money’ and insert
‘,
(aa) the consideration for the
disposal does not consist wholly of new qualifying
holdings’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 176 to
180.
John
Healey:
Quite simply, the amendments would enable venture
capital trusts to dispose of investments that they have held as
qualifying holdings for a period of at least six months for cash
without jeopardising their approval status for the following six
months. The change has been widely welcomed by commentators across the
industry. The director general of the Association of Investment
Companies, for instance,
said:
“We have
had an extremely constructive dialogue with the Government over this
issue and are delighted with this
decision.”
The amendments
would widen the scope of the disregard rules to cover disposals made
wholly or partly for consideration other than cash and have again been
warmly and widely welcomed by representatives from the sector. I
commend them to the Committee.
Amendment agreed
to.
Amendments
made:
No. 176, in schedule 16, page
210, line 35, after ‘disposal’ insert ‘(but
see subsection
(3A))’.
No.
177, in
schedule 16, page 210, line 37, leave
out ‘money obtained from’ and insert ‘any monetary
consideration
for’.
No. 178,
in
schedule 16, page 210, line 41, at
end insert—
‘(3A) If the
consideration for the disposal includes new qualifying holdings,
subsection (2)(a) has effect as if the reference to the holding were to
the appropriate proportion of the holding (the value of which is that
proportion of the value of the holding, determined in accordance with
subsection (3)).
(3B) The
appropriate proportion
is—
TC — NQH
TC
where—
TC
is the market value (at the time of the disposal) of the total
consideration for the disposal,
and
NQH is the market value (at
that time) of the new qualifying
holdings.’.
No. 179, in
schedule 16, page 211, line 4, at
end insert—
‘(4A)
“New qualifying holdings” means shares or securities
which (on transfer to the company) are comprised in the
company’s qualifying
holdings.’.
No.
180, in
schedule 16, page 211, line 7, at
end insert—
‘(6) Nothing in
this section applies in relation to disposals between companies that
are merging (within the meaning of section
323).’.—[John
Healey.]
Schedule
16, as amended, agreed
to.
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