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Public Bill Committee Debates

Draft Alternative Finance Arrangements (Community Investment Tax Relief) Order 2008

The Committee consisted of the following Members:

Chairman: Hugh Bayley
Ancram, Mr. Michael (Devizes) (Con)
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Bacon, Mr. Richard (South Norfolk) (Con)
Blizzard, Mr. Bob (Waveney) (Lab)
Blunt, Mr. Crispin (Reigate) (Con)
Boswell, Mr. Tim (Daventry) (Con)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Curtis-Thomas, Mrs. Claire (Crosby) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Greening, Justine (Putney) (Con)
Jackson, Glenda (Hampstead and Highgate) (Lab)
MacShane, Mr. Denis (Rotherham) (Lab)
Meale, Mr. Alan (Mansfield) (Lab)
Smith, Ms Angela C. (Sheffield, Hillsborough) (Lab)
Glenn McKee, Committee Clerk
† attended the Committee

First Delegated Legislation Committee

Monday 7 July 2008

[Hugh Bayley in the Chair]

Draft Alternative Finance Arrangements (Community Investment Tax Relief) Order 2008

4.30 pm
The Exchequer Secretary to the Treasury (Angela Eagle): I beg to move,
That the Committee has considered the draft Alternative Finance Arrangements (Community Investment Tax Relief) Order 2008.
It is a pleasure to serve for the first time under your chairmanship, Mr. Bayley. I hope that we will be detained for slightly less time than we were during our recent deliberations on the Finance Bill. That Committee went on slightly longer than I hope today’s equally important Committee will.
The order was laid before the House in draft on 20 May and is intended to help the community finance sector by opening up the community investment tax relief scheme to sharia-compliant investment. The community investment tax relief scheme encourages investment in community development finance institutions, which I will refer to as CDFIs. Individuals and companies that invest in those institutions are entitled to tax relief worth up to 25 per cent. of their investment spread over five years. In turn, CDFIs use the money to invest in small businesses and social enterprises in disadvantaged communities. Businesses and enterprises that struggle to raise finance from mainstream sources, such as banks, can be assisted by those institutions.
The current rules of the scheme cater of investment of various, but limited, types. Investment in a CDFI and onward investment by a CDFI can be by shares, securities or loans. In practice, however, the vast majority of investment is by way of conventional interest-bearing loans. Investments that in substance amount to a loan but that take another legal form are not currently catered for, so as it stands, the tax relief does not accommodate many sharia-compliant financing arrangements.
Over the past few years, the Government have taken steps to provide that users of financial products that conform to the principles of Islamic law are not unfairly disadvantaged in comparison to users of more conventional products. The order represents a further step down that road. It will mean that for a number of financing arrangements whose substance is equivalent to a conventional loan the transaction will be treated as if it were a loan for the purposes of the CITR scheme.
Mr. Tim Boswell (Daventry) (Con): I am most grateful to the Minister for explaining the order briskly, but entirely clearly. My question might avoid the need for me to make a separate speech. Many of us on the Conservative Benches welcome the growth in microfinance in countries such as Bangladesh and in the United Kingdom through credit unions, for example, and have no difficulty at all with the concept that religiously appropriate lending vehicles should be facilitated. If the measure is confined to those matters and has no unanticipated difficulties, it certainly has my blessing.
Angela Eagle: I thank the hon. Gentleman for his observation. I confirm that the order does not have a wider meaning and is quite narrow in those respects. The scheme is also narrow, although it is generous in the tax relief that it can provide.
The order is intended to make the scheme more accessible to potential investors and borrowers who want to ensure that their financial arrangements conform to the principles of Islamic law. Its provisions are, in my view, compatible with the European convention on human rights. It will extend the range of products that can be offered by CDFIs both to their investors and to the enterprises to which they provide finance, in order to establish a level playing field. I commend it to the Committee.
4.34 pm
Justine Greening (Putney) (Con): The Conservatives also support the order and think that it is right to create a level playing field in that regard, as the Minister has said. Sharia-compliant loans currently do not qualify for the scheme, not because of differences of substance, but due to legal issues. We support the change, which will ensure that the substance of the transactions is what matters, rather than their legal form. We very much support removing that disadvantage from funding in that area and are pleased that it has been tackled.
My London constituency has a sizeable Muslim community, which is active in community issues and in fundraising. A couple of weekends ago my little Ahmadiyya community raised thousands of pounds through a sponsored walk. The community probably raises hundreds of thousands of pounds in a year and I see no reason why it, and many others across the country that go down the sharia-compliant finance route, should not be able to take full advantage of the scheme.
I have a couple of questions, and I would like the Minister to talk about the representations that she received on bringing forward the order. Will she give us an idea of the level of finance that she expects to be unlocked over the coming years and the level of tax relief that will be taken advantage of? If community groups already have sharia-compliant investment, will those projects be able to take advantage of the scheme, or will the level playing field be for new arrangements only? Finally, given that the provision will be new, will the Minister tell us whether guidelines will be issued on how it is expected to work, and how the guidelines will reach those who need to understand them?
We are supportive of the order. It is a step forward, and we look forward to seeing the benefits in the coming months and years.
4.37 pm
Mr. Jeremy Browne (Taunton) (LD): As this is the first time that I have served under your chairmanship, Mr. Bayley, I welcome you to your exalted position. Thank you for giving me the opportunity to contribute.
I am curious about the cost implications. If I understood the Conservative spokesperson correctly, she said that the Conservatives would be interested in knowing how much extra money the Government anticipate will be invested as a consequence of the order. It would also be interesting, and important for the Committee, to know what the total value of the tax relief will be, and the impact that will have on public finances.
Mr. Boswell: I am in no sense derogatory either about what the hon. Gentleman says or about the idea behind the order, which I warmly welcome. It would be appropriate if the Minister said something about the auditing of the resources involved. Sadly, there have been cases—not in any particular religious community—where moneys have gone adrift or have not been used for the right purposes. It is absolutely important that we have the Minister’s assurance that such things will not be allowed to happen. I do not anticipate trouble, but it would be useful if she could put on the record that there will not be any.
Mr. Browne: I am grateful for that intervention, which was directed more at the Minister than at me, but I echo and share the hon. Gentleman’s point.
I think that all hon. Members are enthusiasts for microfinance projects and want people to take greater responsibility for their communities by encouraging positive and socially desirable behaviour. The order will stimulate such activity, which must be a good thing. However, we must always be vigilant about the potential for fraud or other inappropriate behaviour. I am therefore interested to hear what the Minister has to say.
I apologise to the hon. Member for Putney if I implied that she did not ask a question about the cost to public finances—I was probably not listening with sufficient attention. Such a question shows how important the issue is. I do not anticipate there being a large cost, but it would nevertheless be helpful for the Committee to be informed whenever there are revenue implications.
On that note, and on the broader point that I, along with hon. Members of all parties, am keen to encourage such socially desirable behaviour, I look forward to the Minister’s response.
4.41 pm
First, the Conservative spokesperson asked what representations were received to bring the order forward. It was worked up by Her Majesty’s Revenue and Customs in collaboration with the Community Development Finance Association, which is the main representative body for the community finance sector. HMRC also convened the Islamic finance tax technical working group, which included representatives from the main accountancy and law firms and from Islamic finance institutions. That is the nexus within which the changes before us were first raised and considered. We are confident that we have not missed anything obvious in bringing forward an appropriate response.
The hon. Lady asked whether the order will apply to all existing or all new arrangements when it comes into effect. It will apply to all new arrangements. Such things cannot work backwards. She also asked about guidance to ensure that potential beneficiaries are aware that they may wish to consider the proposals. HMRC produces a guidance manual for the CITR scheme. Guidance on the changes brought about by the order, should it be passed, will be published and available shortly after it comes into effect.
The hon. Lady and the hon. Member for Taunton asked about cost and the size of the sector. The take-up of community investment tax relief is low, due to its strictly targeted rules. We do not expect a substantial cost increase to the Exchequer as a result of the expansion to include sharia-compliant lending. At the end of 2007, there were 20 community development finance institutions. The hon. Gentleman asked about the numbers. There was investment of about £40 million under the scheme. Currently, 300 small and medium-sized social enterprises benefit from the onward investment. The sector is quite small, so it really is microfinance, but that does not mean that it is not doing something extremely important. Consequently, I do not advise the hon. Lady or the hon. Gentleman to spend too much time worrying about the implications for the public Exchequer.
I was asked whether the legislation will be resistant to fraud and tax avoidance. Yes, the existing rules for the relief include a rule to deter avoidance. Amounts invested through the scheme are relatively modest and there is a limit to the amount of money that any individual community development finance institution can attract under the tax relief. There is no reason to assume that making the scheme accessible to those who wish to use sharia-compliant arrangements will increase avoidance, which is already extremely low, so it can be done without undue risk. The scheme is entirely beneficial, but it will not break the Exchequer. With those reassurances, I hope that Opposition Members and my colleagues on the Labour Benches will be happy to accept the order.
Question put and agreed to.
That the Committee has considered the draft Alternative Finance Arrangements (Community Investment Tax Relief) Order 2008.
Committee rose at fifteen minutes to Five o’clock.

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