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I cannot remember the precise statistic, but a staggering proportion of our largest companies—40 per cent. of the top 100, I think, although one of my hon. Friends may correct me—were not among the top 100 companies 30-odd years ago. There is a high degree of churn and
innovation in the economy and we need those new businesses, which aim to grow and are constantly nurtured, to come through.
The entrepreneurs’ relief—the Government’s solution for buying off the protests of small businesses, the most numerous group—will offer nothing of any significance to the entrepreneurs whom I have mentioned. Clearly, a serial entrepreneur who founds and sells business after business will not find the opportunity of a tax refund on the first £1 million of gain to be a significant incentive. The relief will, however, provide a break for those selling small businesses worth up to £1 million, and that is a welcome concession and U-turn by the Government.
I shall not focus any more on the loss of taper relief, although we could debate its implications. I shall restrict myself instead to the restrictions that the Government have imposed on the entrepreneurs’ relief that they offered in order to buy off opposition among small businesses to the abolition of taper relief. In Committee, concern was expressed by professional bodies and by people who run small businesses and who are likely to be affected. They said that, under the restrictions as they were drafted, some people, who on any equitable analysis looked as if they should get the relief, would be denied it. We had visions of all sorts of apparently perverse outcomes that would bring the measure into disrepute and create significant confusion.
I therefore welcome Government amendment No. 29. I am sorry that the Financial Secretary is not here, but I offer my compliments to the Economic Secretary, who is here in her stead. In Committee, the Financial Secretary pledged to look again at the restriction that would have meant that if rent had been received at any time in respect of any asset that was the subject of an associated disposal, that asset would be ineligible for entrepreneurs’ relief. An associated disposal is the disposal of an asset that is used in conjunction with a business, but is not owned by the business. To take a common model as an example, if a business owner who personally owns the factory building from which his business operates had at any time received rent from his own business for the occupation of that factory, it would not have been eligible for entrepreneurs’ relief when an associated disposal took place alongside the disposal of the underlying business.
In the case of many small businesses, the majority of the value of the global activity may well be in the associated asset, rather than in the business itself. That can be for all sorts of reasons—from security to the need to use mechanisms to raise finance. It is quite common for an asset, particularly a building, to be held in separate ownership. The measure would have been especially harsh for old, established businesses, for which any period of rent payment for such an asset at any time in the past would have led to disqualification of the asset. The measure was likely to have been particularly unfair to businesses such as farming, in which a separation structure is widely used; the people who own the land are often different from those engaged in the business of farming it.
I am glad to say that the Government have taken our suggestion on board and disregarded all periods of ownership before April 2008 during which rent was received. They have therefore removed a potential anomaly that would have given rise to considerable unfairness. I
am grateful to the Financial Secretary and the Economic Secretary for listening to the arguments and reconsidering on this occasion.
However, we now have to address other issues. I hope that the Ministers have considered the arguments on those as well; they have not responded in the same way. The Opposition amendments in this group are aimed specifically at achieving clarification from Ministers on these issues, and we hope that we will hear a concise argument on why they are not prepared to accept the amendments. There are no politics in this. It is fair to say that, by and large, this schedule is as dull as ditchwater, but technical clarification is essential. Amendments Nos. 89 to 91 involve a housekeeping exercise that is of wider importance and touches on the debate that we have just had about how we make our tax law. I shall go into more detail on that in a few moments.
The exception to the “dull as ditchwater” label is amendment No. 88, which deals with the treatment of share options under the enterprise management initiative. That initiative was set up by the Government to encourage people working in a business to own shares in it. It was aimed at helping high-tech start-up businesses—as I say, that is exactly the kind of business that we need to foster—in order to attract the kind of people that they need if they are to grow. Those people might come from the academic sector or another business, but typically they could command high salaries and comfortable packages working in other sectors. The scheme was seen as a way of offering them a real financial incentive to take the risk of working in a far less certain and predictable environment.
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Under the taper relief regime, which has now been abolished, gains on disposal of enterprise management initiative shares were treated as if the acquisition of the shares had occurred on the date of grant of the underlying options. That favourable treatment was unique to EMI shares. It was designed to promote the EMI, because the Government had identified it as a beneficial measure to promote the growth of high-tech start-up businesses.
Under the entrepreneurs’ relief scheme, favourable treatment is no longer available, so a key benefit of the EMI scheme is removed. There is real concern that that treatment represents an abandonment of the Government’s commitment to the EMI and, even worse, of their commitment to employee share ownership. The Economic Secretary will have the opportunity, when she stands at the Dispatch Box to reply, to be clear and unambiguous about the Government’s commitment to the EMI and to employee share ownership more generally. If she asserts that the commitment will continue, she might explain why she has removed the key advantageous tax treatment that the taper relief delivered, and say why she thinks that potential employees would be tempted by EMI share options, given the lack of any favourable tax treatment.
Amendment No. 88 was tabled more in hope than expectation. It would make EMI shares subject to the same treatment as pertained under taper relief. Its fiscal impact is likely to be very limited, because one of the criteria for receiving the entrepreneurs’ relief is that a person must own 5 per cent. of the business in question.
It would be very unusual for an individual to own 5 per cent. of the shares in an EMI company. It can and does happen, but we are by no means talking about hundreds of thousands of people. The Economic Secretary has the opportunity to send a strong signal about the value that the Government place on high-tech start-up businesses, and about the Government’s commitment to the EMI scheme and employee share ownership in general. Concerns about that commitment are more salient than the concern about the treatment of EMI shares under the entrepreneurs’ relief.
Amendments Nos. 89 to 91 deal with associated disposals, as does Government amendment No. 29. The issue relates to the conditions that must be met if a disposal is to qualify as
“a disposal associated with a relevant material disposal”.
As I said, the stuff that we are dealing with is complicated. A relevant material disposal is a disposal of an interest in a business. A disposal associated with a relevant material disposal is the disposal of an asset that is used in conjunction with the business, but is not owned by the business. Before the disposal of that asset can be treated as a disposal associated with a relevant material disposal, three conditions have to be satisfied. They are set out in proposed new section 169K of the Taxation of Chargeable Gains Act 1992, which is inserted by schedule 3 to the Bill.
To paraphrase, condition A is that there is a material disposal. Condition B is that the disposal is made as part of the
“withdrawal of the individual from participation in the business”.
Condition C is that the associated asset has been in use for the purposes of the business. There is no problem with conditions A or C; they are fine. The amendments would delete reference to condition B, so that any disposal of an asset—typically a building or land, but possibly also intellectual property—owned separately by an individual but used in connection with the business would be an associated disposal.
“withdrawal...from participation in the business”
gave us cause for concern in Committee. It is a bit of a woolly concept, and we foresaw that the provision would give rise to uncertainty, and ongoing problems as taxpayers struggled to understand whether they would be entitled to relief. However, the situation changed somewhat when draft guidance was published, and I am grateful to the Financial Secretary for circulating it. It helpfully defines what
“withdrawal...from participation in the business”
“A withdrawal from participation in the business concerned relates to the ‘material disposal of business assets’ which qualifies for Entrepreneurs’ Relief...That is, it takes place when the individual reduces his or her interest in the assets of the partnership, or their holding in the company, as the case may be. It is not necessary for the individual to actually reduce the amount of work which they may do for the business.”
It goes on to give examples, which I will not read out. Withdrawal from the business is defined as occurring when an individual reduces his interest in the assets of a partnership, or his holding of shares in a trading company. In other words, if condition A is met—if there is a material disposal of business assets—condition B, which
is that the individual makes such a disposal as part of a withdrawal from the business, will always be met. Condition B becomes tautologous as a result of the definition of the term
“withdrawal...from participation in the business”
Before we had the benefit of the guidance, we thought that condition B was offensive, but we now see that it is merely otiose. It adds nothing to the provisions of proposed new section 169K. We arrive at that understanding not through the mechanism of amending primary legislation, which is what the group of amendments would do, but by relying on non-statutory guidance. I suggest to the Economic Secretary and the House that that is not a satisfactory way to proceed. I offer her the opportunity to tidy up by using amendments Nos. 89 to 91 to put in the Bill what she is saying through guidance. If she is good enough to confirm that my interpretation, and the interpretation of others who have looked at the guidance, is correct, and that condition B will always be satisfied when condition A is satisfied, she must come to the conclusion that condition B is redundant and completely unnecessary. I suggest to her that the position should be made clear not through a non-statutory definition of
“withdrawal...from participation in the business”,
but by deleting condition B. The Government addressed the substantive concern about condition B, but they did so in the wrong way. Making a condition self-fulfilling is not a satisfactory way to legislate. I am keen to hear the Economic Secretary’s response on that point.
Amendments Nos. 92 and 93 relate to restrictions on relief for associated disposals. The Government have dealt with the restriction where rent is payable in Government amendment No. 29. Other restrictions arise where the asset is in use for business for only part of the period of ownership, where only part of an asset is so used, or where the individual has owned the asset for only part of the period of business use. Again, guidance has been issued—CG64145—and that clarifies the point. It indicates that HMRC officials will be encouraged to take a common-sense approach to the application of those restrictions and that in terms of interpreting what is a just and reasonable apportionment—the test in the Bill—they are being encouraged to make the apportionment on the basis that any reasonable person would think appropriate.
My remarks on amendments Nos. 89 to 91 apply to some extent to this group of amendments as well. It is better that we have clarification in the guidance than not at all, but it would have been better still if it were in the Bill. However, in this case, the guidance does not render what is in the Bill meaningless or unnecessary, so the Minister can make her case for doing it in guidance if that is what she prefers.
Amendments Nos. 92 and 93 have been largely answered by the delivery of the draft guidance note. I wait to hear what the Minister has to say about amendments Nos. 89 to 91 and also wait for reassurances in respect of amendment No. 88 and the Government’s commitment to EMI schemes.
Mr. John Redwood (Wokingham) (Con):
I remind the House that I have included in the Register of Members’ Interests the fact that I am a director and a shareholder
in a small company, but I do not wish to draw on that experience for the purpose of these remarks.
I support what my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) said about the need for the Government to listen carefully to those who say that the new capital gains tax regime is not as supportive of employee shareholding as it could be. I fully accept that the Government were well intentioned in wishing to get the main headline rate of capital gains tax down. I think that everyone in the House, with perhaps a few exceptions, is in agreement that that was a good thing to do. We were becoming very uncompetitive with the headline rate that we had, and it is good that the general rate is being reduced.
However, it is most unfortunate, rather like the unfortunate idea of abolishing the 10p tax band to pay for the welcome lower rate of standard income tax, that in tidying up to try to pay for this measure, some of the rather good reliefs and opportunities that had been offered to entrepreneurs and to employee shareholders by the Government in previous Budgets were swept away, making the regime far less attractive.
If I may draw on a personal experience from my past, I was involved in chairing a company that was financed by private equity where the incentive packages to individuals in the company were most important in driving recovery, profit and success for that investment. My experiences of that model and of talking to others who had been involved in private equity, including constituents of mine, persuaded me that there is a definite correlation between the success of British enterprise and the ability to reward and encourage people at all levels of an organisation with employee shareholdings so that they can participate in that success.
I am therefore pleased that my hon. Friend tabled amendment No. 88, which would adapt schedule 7D so that some of the less generous terms that appear to be reflected in the reform of capital gains tax could be removed. Like him, I think that EMI is a good scheme, and I look forward to hearing the Minister explain how it might rest if his amendment, or something like it, were not introduced during the remaining proceedings on the Bill.
Hon. Members on both sides of the House have come to understand how important small businesses, and smaller businesses led by people who wish them to grow rapidly, are to a successful enterprise economy. The Government’s introduction of the taper relief and the 10 per cent. rate for enterprise undoubtedly gave a considerable fillip to enterprise and meant that a bigger population of smaller companies were able to grow more rapidly with people getting that direct incentive, which was then not going to be taxed at nearly such a penal rate as if the capital gains tax regime had remained unamended.
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I hope that the Minister will take some pride in what the previous Chancellor did for enterprise and venturing in that earlier regime, which was one of the best things that he ever did. I hope that she will accept my compliments in the spirit in which they are intended. It would be a tragedy if a subsequent Budget started to demolish some of that good work, perhaps inadvertently or because of cheese-paring. I will be interested to hear what the
Treasury arithmetic is on all this. The first-round consequence of reducing a rate of tax may well be to reduce the amount of tax collected, but the second or third-round consequence of a more favourable capital gains tax regime may well be to generate more revenue. That would have been my conclusion had the then Chancellor reduced the overall rate, leaving in place the more favourable rates for enterprise. However, there is a danger that the disincentive effect of the cheese-paring with the smaller enterprise rates will offset the possible good effects of the lower overall rate, so that the estimates that we might otherwise have had of rising revenue from greater success will be nipped in the bud or we will find ourselves short-changed.
I hope that in responding the Minister will understand that we are, as the Government were prior to this reform, very keen on these promotional measures, particularly for employee shares, which can be extremely important. I would like her to share some of the thinking about the arithmetic behind these measures. There is always the danger that a crude concentration on first-round effects to try to offset revenue loss will do much more damage in the medium to long term because it will limit growth in the British economy and limit the growth of any smaller companies, and we will end up with less revenue.
Kitty Ussher: I am grateful to hon. Members for tabling amendments in these technically complicated areas. It is important to use this stage of the Bill’s passage to ensure that the meaning is entirely clear. I am sure that my right hon. Friend the Financial Secretary would want me to put on record her gratitude for the conversation in Committee that led to our tabling Government amendment No. 29. That was a useful exchange, and we are pleased about that.
Let me run through the amendments in order and give the Government’s response. Amendments Nos. 89 to 91 would make it easier for people to qualify for entrepreneurs’ relief under the rules for so-called associated disposals, which are, as the hon. Member for Runnymede and Weybridge (Mr. Hammond) said, disposals of assets which individuals owned personally but which were used in a business that the individual carried on either in partnership or through their personal trading company. As he said, to qualify as an associated disposal three conditions have to be met. The amendments would remove entirely the condition that the disposal of the associated asset must take place as part and parcel of the individual’s withdrawal from the wider business.
I suspect that that was not sufficiently clear in the guidance, so I will take the opportunity to clarify it now. It is of course draft guidance, so we can revisit it. The disposal mentioned in the guidance is the disposal of the associated assets rather than the withdrawing from the general business. Entrepreneurs’ relief is targeted at disposals of businesses and it is right that there must be a clear link between the individual’s disposal of his interest in the business per se and any disposal of an associated asset that he let the business use. The first condition for relief on an associated disposal is, therefore, that the individual makes a disposal of his interest in the business. The second condition follows naturally from the first condition, and it is that the disposal of the interest in the business and the associated disposal of the asset are exactly that—associated.
The hon. Gentleman says that the second condition is not clear. I do not agree, but it is a useful conversation
to have. The condition sets out the factual test that must be satisfied. There must be a link—an association between the withdrawal from the business and the associated disposal of the asset. The House will want to know that the same condition existed in the rules for retirement relief and it did not cause any difficulty in that case.
The hon. Gentleman said that condition B is always satisfied when condition A is satisfied. That is not the case, and perhaps he has misunderstood the guidance in this technical area. Condition B is not otiose. The disposal it refers to is the associated disposal, as I have said, so it is needed to establish the connection between the two disposals. That was the case for the old rules for retirement relief.
Mr. Philip Hammond: The Economic Secretary said that the guidance might be unclear. The guidance is very clear. I wonder whether she means that the wording of the Bill is unclear. The wording of paragraph 3 of proposed new section 169K states:
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