Schedule
3
Entrepreneurs’
relief
Mr.
Hammond:
I beg to move amendment No. 14, in
schedule 3, page 120, line 20, leave
out from ‘use’ to ‘for’ in line
21.
The
Chairman:
With this it will be convenient to
discuss the following amendments: No. 15, in
schedule 3, page 120, line 22, after
‘business’, insert
‘where such
assets have been in such use for a period of not less than two years at
the time of the
disposal’.
No.
17, in
schedule 3, page 120, line 26, leave
out from ‘throughout’ to first ‘the’ in
line 27 and insert
‘a 12-month period
beginning not more than two years
before’.
No. 18,
in
schedule 3, page 120, line 30, leave
out from ‘throughout’ to first ‘the’ in
line 31 and insert
‘a 12-month period
beginning not more than two years
before’.
No. 16,
in
schedule 3, page 120, line 31, leave
out from ‘which’ to end of line 34 and insert
‘the disposal of the asset takes
place’.
No. 19,
in
schedule 3, page 120, line 37, leave
out from ‘throughout’ to second ‘the’ and
insert
‘a 12-month period beginning not more
than two years
before’.
No. 23,
in
schedule 3, page 120, line 41, leave
out from ‘group’ to end of line
44.
No. 24, in
schedule 3, page 121, line 1, leave
out from ‘the’ to end and insert ‘condition
in’.
No. 25, in
schedule 3, page 121, line 2, leave
out ‘are’ and insert
‘is’.
No.
20, in
schedule 3, page 121, line 2, leave
out from ‘throughout’ to end and insert
‘a 12-month period beginning not more than two years
before’.
Mr.
Hammond:
Schedule 3 is one of the critical measures of the
Bill. It is very complex, contains lots of technical issues and is
lengthy. There will be a series of debates about it and inevitably
there will be some overlap between issues that arise in one debate and
those that arise in another. If I may, bearing in mind your reluctance
to allow a stand part debate in relation to the previous clause,
Mr. Cook, perhaps I could just say
this—
The
Chairman:
Correction. I cannot allow that to go
unchallenged on the record. I allowed the hon. Gentleman to make the
points, almost ad nauseum, that he had already made on the amendments,
so there was a stand part debate, a response to it, and it was
put to a vote, so let us have the record straight,
please.
Mr.
Hammond:
Okay, and the record will record the phrase
“ad nauseum” as well, Mr. Cook. I apologise if
I erred, but I gained the impression that there was an element of
reluctance. That is my
error.
I was seeking to
make the point that a large number of amendments have been tabled to
the schedule and a large number of outside bodies have raised further
issues with it—all members of the Committee will be aware of
that because they will have received the briefings. A number of issues
have not been covered by the amendments tabled so far, because the
observations from professional outside bodies arrived too late for
amendments to be tabled. It might be possible, depending on the
progress of today’s debate, for further amendments to be tabled.
If it is not, it would be helpful to the Committee if we were able to
cover some of the areas raised by the Law Society, in particular, in a
stand part debate at the end. My point is that I will
resist the temptation to go wider than the amendments to try to sweep up
some of the other issues in the hope that we will be able to come to
them in a stand part
debate.
The
Chairman:
Eminently
sensible.
Mr.
Hammond:
Thank you, Mr. Cook.
This large
group of amendments deals with the scope of disposals eligible for
entrepreneurs relief. As we have already said—perhaps ad
nauseum—it is much narrower than the scope of taper relief. In
principle, we are seeking to establish why the scope of taper relief is
not being applied within the £1 million limit that the
entrepreneurs relief regime proposes. All the amendments in the group
relate to new section 169I. As the Committee will understand, schedule
3 inserts a number of new sections into the Taxation of Chargeable
Gains Act 1992, so the structure of the schedule is a series
of new sections to that Act. Section 169I deals with the
disposal of shares or of assets used in an unincorporated
business.
Three
separate issues are raised by the amendments.
Amendments Nos. 14, 15 and 16 seek to redefine a
disposal of business assets under new section 169I(2)(b),
which deals with the disposal of assets that are used for the business
but that are not owned by it. An example would be the disposal of a
factory building at the time the business operating that building is
closed down. There may be various circumstances in which that structure
is used in the financing of a small business, and where the individuals
involved may personally own assets that are deployed in that business.
That may be because there is difficulty in raising capital for the
business, or because capital can be raised only by giving personal
guarantees or security over personal property—typically
residential property—and it is thought to be safer for the
individual to own the asset personally and allow it to be used in the
business. The subsection seeks to deal with the situation where an
asset is disposed of at the same time as the disposal of the
business.
3
pm
As drafted, the
Bill only allows eligibility for entrepreneurs relief in the disposal
of an asset used in a business, if that business ceases to be carried
on by the individual. The broader issue is the contrast between the
treatment of sole traders—individuals who carry on
businesses—and the treatment of partnerships. As many of the
professional bodies have pointed out, one of the effects of picking up
the old retirement relief regime and using it as the skeleton for the
model of entrepreneurs relief, is that it does not seem well fitted to
the world of limited liability partnerships as a new business form that
is becoming increasingly used. Because of that, we have a situation
where partners in limited liability partnerships will receive different
treatment from individuals who are sole traders. By virtue of new
section 169I(8), assets disposed of by partnerships where the business
does not cease to be carried on, will be eligible for entrepreneurs
relief. That seems somewhat iniquitous. If someone sells a factory
while continuing the business, they will have no eligibility for
entrepreneurs relief in respect of the gain on the sale of the
factory.
Once again,
that is economic nonsense. It discourages people from renewing assets
and it encourages them to hold on to assets used in conjunction with
the business until such time as the business is disposed of. They do
that rather than renewing those assets on a timely basis that is
dictated by normal economic considerations rather than driven by tax
considerations. That is generally not the best way to plan and run a
business and, from the point of view of the economy, it is not the way
to achieve the optimum outcome.
The amendments seek to inject
into the structure of the Bill the characteristics of the taper relief
regime, where all disposals of business assets were eligible. That was
one of the key characteristics of the taper relief regime as far as
smaller businesses were concerned, and it was very helpful to them. The
amendment deletes the words on page 120, line 20, so that there would
be no reference to the business ceasing. Instead, it inserts a
requirement for the asset to have been in use for the purposes of the
business for at least two years at the date of disposal. Two years was
picked to represent what would have been the qualifying period for full
taper relief under the previous taper relief regime.
The Government’s drafting
creates what I would call an artificial concept of ceasing the business
as a qualification. We will return to the question of what cessation of
carrying on the business actually means—it is very woolly
drafting and we will come back to it in about 300 amendments’
time. It is a term borrowed from the retirement relief legislation,
where there was clearly an unambiguous intention that retirement was to
take place. Reading this schedule, it is not clear whether there is an
intention for retirement to take place. In some places it looks as
though that is what is in the draftsman’s mind, and in other
places it looks as though that interpretation has been modified. There
is a lack of clarity about what is intended. Given the lifetime cap of
£1 million, we suggest that there is no need for the restriction
on the disposal of assets used in a business at any time as it would
simply mean that somebody got to their lifetime cap more quickly. By
introducing that additional hurdle, the Government are creating a
complex and potentially damaging restriction that could actually be
removed without any significant consequences. That is what amendments
Nos. 14 and 15 address; amendment No. 16 is purely
consequential.
Each of
these little clusters or sub-groups of amendments stand separately.
What I am about to say in relation to amendments Nos. 17 to 20 does not
assume that amendments Nos. 14, 15 and 16 have been
accepted. Amendments Nos. 17 to 20 assume as their
context the continuation of a requirement for cessation of involvement
in the business and they relate to the restriction concerning
the time of ownership of the business. The amendments come principally
from the Institute of Chartered Accountants in England and Wales,
although others have made similar observations. Nobody has any problem
with the one-year period of ownership, but as the current wording of
the Bill is restrictive it is suggested that the qualifying period
should be defined in the same way as the qualifying period for the
substantial shareholding exemption—any 12-month period in the
previous 24 months.
The amendment paper contains four
identical amendments and I have explained the concept behind them. On
reflection, substituting
“a 12 month period beginning not
more than two years before”
for the words in the
Bill, which refer to a period of one year ending with the date of
disposal, does not have any material effect and is arguably unworkable
in relation to new sections 169I(3) and (4). I accept, before the
Minister gets there, that amendments Nos. 17 and 18 are inappropriate.
In other words, the suggested changes have been inserted in four places
where they should have been inserted only in two places. Amendments
Nos. 19 and 20 are the substantive proposals that I want to speak to
and I will accept a slap on the wrist in respect of amendments Nos. 17
and 18.
Amendments Nos.
19 and 20 would create greater flexibility around the time at which it
is necessary for an individual to comply with the requirements, first,
to own 5 per cent. of the shares in the company and, secondly, to be an
officer or employee of the company. Amendment No. 19 would allow a
qualification for entrepreneurs relief where the shareholding fell
below 5 per cent. at the point of disposal, or where the
individual ceased to be an employee or officer of the company, so long
as he held the 5 per cent. and was an officer or employee for a period
of 12 months in the last 24 months.
That aims to give some
flexibility to accommodate real-world scenarios of managed exits from
small businesses. It is quite possible, for example, that the exit of
an individual from a business might involve a structured reduction in
his holding, such that he disposed of some of his shares, leaving him
with 2.5 or 3 per cent. at one point in the process, and he then
disposed of the remainder at his final exit. It is also likely that he
may cease to be an employee or officer of the company before finally
disposing of his shareholding. The tax regime in the Bill will drive
structures for exits from businesses and that is undesirable. We think
that the tax regime should not drive behaviour that otherwise would
optimise the smooth transition of a business from one ownership to
another.
Mr.
Mark Field (Cities of London and Westminster) (Con): I
rise briefly to clarify my hon. Friend’s comments. Would the
12-month period out of the previous 24 months have to be unbroken to
avoid the sleight of hand and other concerns that he has rightly raised
about the tax tail wagging the corporate
dog?
Mr.
Hammond:
My hon. Friend raises a good
point. The intention, as I said earlier, is to replicate the
requirements of the substantial shareholding exemption. My
understanding is that that requires an unbroken 12-month period
beginning not earlier than the period of 24 months from the date of the
disposal in question.
Amendment No. 20 allows the same
flexibility around the timing of the qualifying period where a company
has ceased to be a trading company prior to disposal. That will quite
often happen, such as when a business is being run down and is being
turned into a cash and asset-holding shell and the balance between the
holding of assets and the trading activity becomes such that the
company is no longer treated as a trading
company by HMRC. That is not an atypical situation in the winding up of
a small business when someone is seeking to
retire. Subsection (7)
of the new section signals that the draftsman understood that sometimes
an exit will be structured so as to wind a business down and turn it
into a non-trading shell, but did not understand the possibility of a
managed exit by the individual, where the company will continue trading
as he reduces and finally relinquishes his shareholding and at some
point ceases to hold office. Our challenge to the Government is whether
these arrangements are economically sensible and whether they encourage
a degree of tax planning in the management of small businesses which
will be detrimental to the most efficient functioning of those
businesses and thus of the economy
overall.
Amendments
Nos. 23 to 25 address a slightly different issue. Amendment No. 23
challenges the requirement for an individual to be an officer or an
employee of the company in question. That was not a requirement under
the taper relief regime and it is not obvious why that requirement has
been inserted now. The Minister earlier said that the relief was
targeted at owner-managers: I think she used that phrase, but she
certainly talked about active involvement. I urge the Government not to
slip back into the pre-1994 Labour party thinking that only the people
who work on the shop floor are contributing. The investors who risk
their capital are also a vital part of the equation.
The Minister may say that that
is not a problem because it is perfectly possible for
the business angel investor to become a director of the company. Then
he will qualify, but more and more responsibilities and liabilities are
being placed on directors of companies, for example, in relation to
health and safety with corporate manslaughter provisions coming in. We
should not encourage phantom directorships where for tax purposes
people who have no control or involvement in the day-to-day running of
a business become directors simply so that they qualify for a certain
tax treatment. That would be a detrimental move. We should aim for an
environment in which the directors of a company are the people who are
in control of that business and can therefore be properly held to
account for the conduct of that business on a day-to-day basis. That
requirement will encourage people who are not actively involved in the
business to seek nominal directorships, while having no engagement in
the running of the business. I would be interested to hear the
Minister’s take on that scenario and whether she believes that
there is an issue of concern there. That concludes the group of
amendments. Amendments Nos. 24 and 25 are consequential to amendment
No.
23.
3.15
pm
Jane
Kennedy:
I will take on board your comments,
Mr. Cook, about the volume of my speech. You will be pleased
to hear that you are in good company. The first time I spoke in a
Standing Committee—on the National Lottery Bill—our dear
hon. Friend Gwyneth Dunwoody was in the Chair. Within my first three
sentences she had leaned across the lectern and, as only she could do,
whispered loud enough for the whole of the Committee to hear,
“For goodness sake, Jane, speak up”. I hear what you say
and I will do my best to remember it.
Under
the taper relief rules, business asset taper relief was potentially
available on the disposal of any business assets, provided that there
was a qualifying period of ownership of at least one year.
Entrepreneurs relief, on the other hand, is available where disposal of
assets is part of the disposal of all or part of the business, or where
disposal takes place of assets used up to the time the business ceased.
I confess that I missed which of his amendments the hon. Gentleman felt
were unnecessary, but I heard him say that amendments Nos. 19 and 20
were the two key
amendments.
Mr.
Hammond:
Amendments Nos. 17 and
18.
Jane
Kennedy:
Amendments Nos. 17 and 18. Some business asset
taper relief was available in respect of disposals of shares, if the
company had been a trading company or a holding company of a trading
group at any time in the 10 years preceding the disposal. Entrepreneurs
relief is available only if conditions are satisfied throughout the
year immediately preceding the disposal, or the cessation of the
company’s business, if
earlier.
I will take
first one of the last points that the hon. Gentleman made. He invited
us to consider seriously whether it is sensible to create what he
believed might be described as phantom directorships for tax purposes.
That is not a partisan point; it is a sensible point and I will
consider whether that is one of the matters arising from this set of
reforms that we need to keep closely under review. We will listen to
representations on that
point.
The differences
that I have described between the taper relief rules and those for
entrepreneurs relief mean that entrepreneurs relief is not available on
many disposals that would have qualified for taper relief. That is an
effect of the different targeting of the two reliefs. The effect of
amendments Nos. 14 to 16 would be that an asset that had been used for
business purposes for two years would qualify for entrepreneurs relief,
without the requirement that it be a disposal on cessation of
business.
Amendments
Nos. 17 to 20 would make it possible for assets that had changed use
before disposal to be eligible for entrepreneurs relief, and shares
could qualify even if the conditions of connection to the claimant and
the activities of the company had ceased to be satisfied before the
disposal. That group of amendments comes out of representations made by
the Institute of Chartered Accountants in England and Wales, an
organisation with which I have—I hope—a healthy and
lively relationship. The amendments suggest that the change in the
qualifying period would be consistent with the conditions for the
exemption from tax on gains realised by companies on disposals of
substantial shareholdings. However, the effect of the amendments would
be a significant relaxation in the targeting of entrepreneurs
relief on people withdrawing from business.
The hon.
Member for Runnymede and Weybridge asked whether the lack of
entrepreneurs relief discouraged renewal of business assets. Where a
continuing business replaces business assets, rollover relief is
available, and that has not changed. We do not believe, therefore, that
entrepreneurs relief is needed in those circumstances. It is aimed at
disposals of business and includes closing a business
down.
Mr.
Hammond:
Does the Financial Secretary accept that in the
absence of amendments Nos. 19 and 20, there is an artificial
restriction? She is right in what she says, but can she not envisage a
situation in which, in the course of winding down or selling a
business, the qualifying requirements that one holds a minimum of
5 per cent. of the shares and is an office holder or
employee will cease before the final disposal is made? What she is
doing is denying relief in those cases. It seems to us from a
common-sense point of view that in such cases the Government would not
want to deny relief, other than for money-saving considerations. The
measure will invite people to structure deals and transactions purely
for tax purposes. Her predecessor, with whom I used to have interesting
discussions, felt very strongly that that was not the way to go
forward.
Jane
Kennedy:
I hope that we have interesting conversations
about these subjects. I want to respond to the hon. Gentleman in the
spirit in which he is probing on this matter. I do not believe that
this measure will have the effect that he has described, but it is
another of those areas on which I will keep the impact of the reforms
that he is drawing to my attention under review. I do not believe that
his concern is
justified.
Mr.
Field:
One of the biggest concerns with any artificial
tax-driven deal that is created as a result of these proposals is that
in 12 or 24 months’ time we will face another Finance Bill and
it will contain clause upon clause of anti-avoidance measures. That is
what has happened in the past because the Treasury has constantly and
understandably been playing catch-up with professional advisers who are
able to create artificial mechanisms. We are concerned that a future
Finance Bill Committee will have to consider such measures to
alleviate, from the Treasury’s point of view, problems that
arise with artificial creations that come as a result of
ill-thought-through measures such as this. All that we are asking the
Financial Secretary is that, for once, we be wise before the
event.
Jane
Kennedy:
The hon. Gentleman is right. There are many
occasions when behaviour changes as a result of changes in the tax
regime. That was the point made by the hon. Member for Runnymede and
Weybridge on the way in which decisions relating to the disposal of
assets might be influenced by the application of entrepreneurs relief.
With even the best structured tax regime for capital gains tax and
given the most detailed thought, there will still be tax advisers whose
whole purpose is to advise businesses on how to manage their investment
decisions and their decisions on the disposal of assets to their
advantage in tax
terms.
We are talking
not about people evading tax but about businesses making decisions
based on the tax regime within which they function. I accept the point
that the hon. Gentleman is making, but we believe that,
by introducing much-desired simplicity by making
changes to capital gains tax, we will reap benefits for businesses in
the coming months and years. Even if we had changed the regime as
suggested by the Conservative party in its amendments, tax advisers
would still be working hard to find ways of minimising the tax
liabilities for their clients. While the hon. Gentleman has made a
point
worth making, it is not relevant. I suspect that we shall be doing what
he suggests that we shall be doing anyway.
[Laughter.]
Businesses
will continue to be set up for a variety of commercial reasons. The
hon. Member for Runnymede and Weybridge asked why there were
differences for sole traders and partnerships. Tax, including the
possible availability of entrepreneurs relief, will be just one factor
that people might want to take into account when deciding the business
structure that is right for them. I acknowledge that the tax regime
does influence decision making, but it is not the only
factor.
Mr.
Hammond:
Of course, the Minister is right, but let us
suppose that I am a sole trader setting up a new small business. I
expect to have business assets that I might like to sell and on which I
shall receive entrepreneurs relief. Why would I not set up the business
as a limited liability partnership with my wife rather than as a sole
trader, knowing that if I just take the simple step of establishing it
as a limited liability partnership—or even an ordinary
partnership—I would be able to sell business assets and gain the
benefit of entrepreneurs relief without having to cease the business?
That seems a perverse signal to send; it would cause people to
structure their businesses in an unnatural way simply for tax
advantages.
Jane
Kennedy:
Any tax relief will have pressure around its
edges. I accepted the point about how the regime might influence
behaviour, and the hon. Gentleman has now described more than one way
in which it may be perverse. We believe that the rules, as drafted,
strike a reasonable balance with clear conditions, but I have said that
I shall keep the relief under close
review.
Amendments Nos.
14 to 16 would have the effect that I have described. They would allow
disposals to qualify for relief, even if the individual was not
withdrawing from business. Amendment Nos. 17 to 20 would allow the
assets to be switched away from businesses, but to continue to qualify
for relief. Amendment No. 15, perhaps unintentionally, would prevent
some disposals following the cessation of a business from qualifying
for relief as, in certain cases, assets would not meet the new test of
having been in business use up until the point of
disposal.
Mr.
Hammond:
I am grateful to the Minister. She is reading out
the answer to the points that have been made, but will she think about
what she is saying? Let us consider the example of the factory and its
disposal. The right hon. Lady said that, if an asset becomes used for a
non-business purpose, it ceases to be eligible for entrepreneurs
relief. In the course of disposing of a business, it would be unsafe to
switch the business to new premises and then dispose of the old
premises that were held outside the business as assets of the
individual because they would then be disqualified from eligibility for
entrepreneurs relief. It is that sort of micro-management and how the
decision process is taken that we consider will be so debilitating,
unnatural and inhibitive of the way in which people would normally
handle such matters.
3.30
pm
Jane
Kennedy:
The hon. Gentleman has described a further
example of the way in which behaviour might be affected by the relief,
as provided. We do not expect that that would be the effect. However,
for those reasons, as I have said, I will keep the matter under close
and active review.
All
the amendments are unnecessary. In constructing schedule 3, we have
deliberately focused entrepreneurs relief on individuals disposing of
all or part of their business. It is the people who have built up a
successful business whom we want to reward, and the benefit of the 10
per cent. effective tax rate will be of most value for business owners
and material investors at the point of disposal. Broadening the scope
of the relief in the way proposed, to allow a wider range of assets or
looser connections to the business activity to qualify, would
necessarily dilute this
focus.
Having
heard my response to his opening speech to the amendments, I hope that
the Member for Runnymede and Weybridge will accept the further detail,
which I hope I have provided, and not press his amendments to a vote.
We are in his hands. If he chooses to press them, I will invite my hon.
Friends to
resist.
Mr.
Hammond:
I am disappointed by the right hon.
Lady’s response because I do not feel that she has engaged with
the specific issues raised. She talked about simplification; surely it
must be obvious to anyone on the Committee listening to the debate and
reading schedule 3 that this is not a simplifying measure. This late
amendment, the entrepreneurs relief, has hugely complicated the
Government’s proposals on capital gains tax. In fact, it has
removed the only benefit of the original package, which was so abruptly
introduced but, in its favour, did simplify the system. Grafting
entrepreneurs relief on top of the proposals makes them hugely
complex.
The Financial
Secretary talked about the incentive for tax advisers to develop all
sorts of planning scenarios. In the real world, where the maximum tax
savings will be £80,000, only the simplest planning strategies
will be implementable. People will not be able to go to large firms of
accountants and have them establish very complex tax planning
strategies, because the amount of tax to be saved simply will not
justify it. I am pleased, but alarmed, by the number of matters that
she has agreed to keep under review. I can see that the Government are
going to have to appoint a new person to the Treasury Front-Bench
team—the under-secretary for reviews of the Finance Act 2008. If
the hon. Lady keeps all these matters under review, she is going to be
very busy.
We have
tabled these amendments to be helpful and to probe the
Government’s intentions. There is still a lot of uncertainly out
there about what this regime will mean in practice. I had hoped that
the Financial Secretary would clarify at least the Government’s
intention today. Our fear and our belief is that this was done in a
great hurry in response to pressure from business organisations and
particularly from the Federation of Small Businesses, which should get
a mention for its success in getting this huge climbdown for small
businesses.
Some of the consequences that I
have spelt out and will be spelling out in future debates were not
intended. They were not the result of some great Government plan to
deprive this or that person. They have fallen through the cracks of
hastily drafted legislation. We were hoping that the Minister would do
more than undertake to keep under review some of these issues,
particularly the requirement for employment or office holding. Later we
shall come to the requirement for a 5 per cent. share
holding. I had hoped that she would undertake to review such issues
before Report. I sense that the mood of the Committee is that we have a
great deal to get through and we want to discuss many other areas in
schedule 3. Therefore, in the interests of time, I beg to ask leave to
withdraw the amendment.
Amendment, by leave,
withdrawn.
Mr
.
Hammond: I beg to move amendment No. 21, in
schedule 3, page 120, line 39, leave
out ‘the individual’s personal company’ and insert
‘unlisted’.
The
Chairman:
With this it will be
convenient to discuss the following amendments: No. 22, in
schedule 3, page 127, leave out lines 37 to
42.
No. 38, in
schedule 3, page 127, line 37, leave
out from ‘company”’ to end of line 42 and
insert
‘has the same meaning as in section
165(8).’.
No.
39, in
schedule 3, page 127, line 39, leave
out ‘5%’ and insert
‘1%’.
No.
40, in
schedule 3, page 127, line 41, leave
out ‘5%’ and insert
‘1%’.
No.
41, in
schedule 3, page 127, line 42, at
end insert ‘, or
(c) in which he
holds shares under an approved HMRC share
scheme.’.
No.
42, in
schedule 3, page 127, line 42, at
end insert ‘, or
(c) in respect of
shares in which he holds EMI qualifying
options.’.
No.
5, in
schedule 3, page 127, line 42, at
end insert—
‘(3A) Shares
held by an individual through an employee profit sharing scheme or a
share-ownership scheme shall be exempt from the requirements of
subsection
(3).’.
No.
43, in
schedule 3, page 128, line 9, at
end insert—
‘“EMI
qualifying options” has the meaning given in section 527(4) of
the Income Tax (Earnings and Pensions) Act
2003,’.
Mr.
Hammond:
Again, I intend to address the issues
raised in this group separately, but they all deal
with the circumstances in which a sale of shares is a qualifying
disposal for entrepreneurs relief. Amendments Nos. 21 and 22 challenge
the requirement for a 5 per cent. holding of shares. There was no such
requirement in relation to taper relief or in relation to the share in
a limited liability partnership. Limited liability partnerships are an
alternative form of business structure and are comparable to
incorporation for a smaller business. That rule seems to have been
lifted from retirement relief and not updated to reflect the emergence
of limited liability partnerships, as I said earlier. That is onerous
for those in high-tech industries, for example.
The hon. Member for Dundee, East
raised some points raised by the BioIndustry Association. It has drawn
attention to the fact that in capital-intensive start-up areas to which
highly skilled employees need to be attracted, it is not unusual to
give employees shares or share options in the business. It would be
unlikely that anyone but the most lucky employee or one of a group of
founders—perhaps those who came out of a university and set up a
high-tech business—would hold more than 5 per cent. of the
shares each after they had suffered a number of dilutions during the
capital-raising process of taking their business forward. That is a
function of the fact that significant equity needs to be released in
order to attract the capital.
Therefore, I
invite the Financial Secretary to think about the example of five
brilliant bioscientists leaving a university and setting up a business
on the Cambridge University science park. Over the years, they first
raise £500,000, and then another £500,000, but on each
occasion they will have to give away part of the equity in the business
until they come to the point at which they are reasonably successful.
They would be ready to dispose of their company by perhaps floating it
on the stock market or selling out to a much larger company, but by
that stage the five of them would have between them only 24 per cent.
of the original equity. They will not qualify for entrepreneurs relief,
and to me that is a bizarre situation.
With the greatest respect to
small businesses, many people go into business and establish small
companies, not with the intention of creating a large business,
employing lots of people, floating it on the stock market and creating
millions of pounds of wealth, but simply with a view to having a
comfortable lifestyle and engaging in useful and remunerative activity,
which is very worthy. Such small businesses are the backbone of our
society, and I applaud them. However, in economic terms, we should
focus on those who start businesses with a view to turning them into
the Googles, the Microsofts and the major biotech companies of the
future. It is on those businesses that the Government should focus
their
attention.
Stewart
Hosie:
I think that I have just discovered a double
whammy. I had not considered the dilution of shares at the back end in
the way that the hon. Gentleman has. The dilution of shares will be
intensified by this measure precisely because the outside investor, if
they want the same cash return with the new tax regime, might demand
more from the pot. Therefore, the scenario described is now more likely
under the new rules than it was
before.
Mr.
Hammond:
The hon. Gentleman is giving me more credit than
I deserve, because I had not discovered that, but the logic of what he
says is absolutely right. I am sure that risk-taking investors, faced
with alternative asset classes with similar tax treatment and perhaps
with other opportunities elsewhere in the world, will certainly look
for compensation for the reduction in post-tax return that they will
receive. Why should high-tech, high-capital requirement business be
disadvantaged as compared to low-tech, low-capital requirement
business? That does
not look like the forward-looking, technological
focus that I would expect from a Government who were thinking about
this country’s future.
Emily
Thornberry:
Will the hon. Gentleman help with this point?
Would not amendment No. 21 simply allow the tax relief that the
Government wish to give to entrepreneurs to be given to the stock
exchange? That tax relief would therefore be available only to
investors, not to entrepreneurs. It turns the whole idea of the tax
relief on its
head.
Mr.
Hammond:
The relief would be available to investors in
unlisted shares. The hon. Lady used the term stock exchange. It would
not be available to investors in stocks quoted on a stock exchange.
That is the point of inserting the term “unlisted”. It
reflects the taper relief regime where unlisted shares—and under
the terms of that regime, also shares quoted on the alternative
investment market—were, in most cases, treated as unlisted
investments. Unlisted investments were eligible for taper
relief.
I would be
delighted if the Minister said that she could not accept the amendment
in the terms in which it is phrased, but that she accepted the point
behind it and would address it in another way. The point we are trying
to get to is about the 5 per cent. threshold. Let me be frank with her.
I have a vision of the person drafting the measure. In his mind, he has
a small factory—perhaps in Birmingham, Erdington—that is
bashing something out. There are boxes going out the door and there is
a hard-working entrepreneur who owns 100, 50 or 33 per cent. of the
business. That is the business that the draftsman has in mind, and when
thinking about that type of relatively low-capital business, I can
understand his insertion of the 5 per cent. limit. However, when we
look at the kind of high-tech, high-capital businesses—perhaps
those growing up around our universities—which we so desperately
need to promote and foster, the 5 per cent. threshold starts to look
like wishful thinking and an absurdly high bar that we are asking
people to clear.
As I
said on Second Reading, it seems bizarre for the Government to
reward investors in buy-to-let properties and owners of second homes
with a lower tax rate, to give owners of small, low-capital lifestyle
businesses a lower tax rate, but to say to those who risk their capital
and earning potential by working, founding and investing in high-tech,
potential high-growth businesses, which form the British winners of
tomorrow, that they must pay a relatively high rate of tax. It is a
bizarre signal to send, and I cannot believe that the Government wanted
to send that message to those people. That is why I would be delighted
were the Minister to accept, or at least recognise, our concerns, even
if she cannot accept the amendments in the precise terms in which they
are drafted.
Amendments Nos. 21 and 22
replace the definition of a personal company with the phrase
“unlisted” company. I have deliberately not defined
unlisted company. There are various ways in which it could be done. As
I said earlier, under taper relief it included companies listed on the
alternative investment market, although that is not essential. Why
should the relief be more restrictive than it was under taper relief,
when everything under the entrepreneurs relief is subject to the
overall £1 million cap?
Before I sit down, I want to
return to a specific point relating to enterprise management initiative
options, which was raised earlier by the hon. Member for Dundee, East.
In high-tech industries, such measures will almost always result in
holdings of less than 1 per cent. on exercise. I have a question for
the Minister. The enterprise management initiative was created by the
Government to encourage these people. They are now going to be
penalised. They make a conscious choice to take risk and to be
remunerated by capital gain rather than going to work for a big company
and being remunerated through income.
A concern being expressed by
professional bodies is that the way in which EMI options are treated by
the schedule suggests that the Government have lost interest in them,
have had a change of heart and are signalling that they should no
longer be used as the preferred route to incentivise employees in these
businesses. I should be grateful if the Minister answered that
challenge and, if I have got it wrong, gave a categorical assurance
that the Government remain committed to the EMI
regime.
3.45
pm
Stewart
Hosie:
The way in which it has worked historically is that
the banks would facilitate the purchase of the shares for a day or so
to allow them to be sold. Given that they now need to be sold for a
year, given that there is a very tight credit squeeze and given the
market uncertainty, far from being an incentive, it might be that
someone simply cannot raise the money to crystallise and make the
profit and they would be landed with a
liability.
Mr.
Hammond:
The hon. Gentleman is right and I wonder whether
the Minister and her colleagues have thought this through. The point
about an option is optionality. One sits on it and hopes that it will
have value but it does not have a downside. If it does not have any
value, one has not lost anything. One turns around and walks away from
it. As soon as anyone exercises that option, as they will be required
to do to gain the benefit of entrepreneurs relief, and acquire the
underlying shares, they will be exposed to risk. They could collapse in
value. The company could become insolvent. They could reduce to zero in
value. It is not about a bank lending for a couple of days. It is about
a bank lending for a year and being prepared to take the full risk of
something happening to that business during that time. Options and
shares are not interchangeable in that way. Shares represent a capital
risk. Options represent an opportunity with no downside risk.
That was amendments Nos. 21 and
22. There are lots more amendments in the group. Amendment No. 38
explores a different approach to the same problem and one which would
simplify and introduce consistency within the Taxation of Chargeable
Gains Act 1992, which this schedule amends. Amendment No. 38
substitutes in new section 169S at page 127 line 37 for the existing
definition of a personal company as a trading company in which an
individual holds at least 5 per cent. and is an officer or
employee, a definition that is already in section 165(8) of the
Taxation of Chargeable Gains Act. That definition is 5 per cent. of the
voting rights. It is not as loose as I would like, but it
is a looser definition than the one which has been imported from the old
retirement relief into the entrepreneurs relief
schedule. If the Bill
is enacted we will have a situation where the Taxation of Chargeable
Gains Act will define a personal company in two different ways. It will
define it at section 165(8), as amended, as being a company in which an
individual holds 5 per cent. of the voting rights, with no obligation
whatsoever to own 5 per cent. of the ordinary shares, and it will
define it in respect of new section 169S as a requirement to hold both
5 per cent. of the ordinary share capital and 5 per cent. of the voting
rights. It is a reduction in flexibility, an unhelpful complication in
the Act and an additional impediment in the raising of capital having
to have 5 per cent. both of the ordinary share
capital—that is to say the beneficial economic interest in the
business—as well as 5 per cent. of the voting
rights.
Amendments Nos.
39 and 40 represent yet another approach, which I hope will tempt the
Minister. The point here is to show her that there are a number of ways
of tackling the problem. Amendments Nos. 39 and 40 would accept the
Government’s architecture of a minimum percentage requirement
for voting and ordinary shareholding, but make it less of a threshold
by replacing 5 per cent. with 1 per cent. If the Government insist on
having a threshold, we can at least make it a level that is unlikely to
trip up
entrepreneurs.
So far,
we have heard no explanation whatsoever of the purpose of a 5 per cent.
threshold. We have not heard any rationale for it being set at 5 per
cent. We know very well that there is no rationale. It was just lifted
from the provisions on retirement relief. Whether the threshold is
abolished, reduced to 1 per cent. or limited to voting rights only and
made consistent with the rest of the TCGA, will the Minister explain
why the requirement is in the Bill and why it has been set at that
level?
Amendment No. 41
takes us back to the debate that we had in relation to schedule 2. One
group of losers from the restructuring of capital gains tax is holders
of shares in approved employee share schemes. I heard the Minister say
earlier that she doubts the figures provided by ifs ProShare, which
suggest that 270,000 employee shareholders—quite a small
percentage of the total; I think that it is 16 per cent. or a little
less—would have gains that exceeded the annual exemption limit.
Of course, the vast majority of them will not. Most people who are
members of the Tesco employee share plan will have a relatively small
holding and will make gains that are comfortably within the annual
exemption limit. I accept
that.
With the greatest
of respect to the right hon. Lady, while I think that we all welcome
employee share ownership in large and small companies, I do not think
any of us would argue that employee share owners in Tesco are as
necessary and vital a driving force to the future expansion of business
as employee shareholders in small start-up high-tech businesses, where
the incentive of owning shares is a key part of the package that drives
the business forward. Those are the kind of businesses that double in
size every year. Although it may sometimes seem to
us— [
Interruption.
]
I am concerned,
Mr. Cook, at the possibility of another
by-election. I hope that the hon. Member for Ealing, North will recover
his composure in a
moment. It may seem to
us sometimes when we read the newspapers that Tesco doubles in size
every year, but I can assure members of the Committee that on closer
inspection they will find that it does not. The Minister said last week
in the Chamber, in response to something that I said about employee
share
ownership:
“Our
figures show that the average amount of gain that a typical employee
makes from save-as-you-earn options is well under the annual exempt
amount of £9,600 a year,
but”—
she said
presciently—
“I
have no doubt that we will return to that point in
Committee.”—[Official Report, 28 April 2008; Vol.
475, c. 66.]
Well, here we
are.
As I am sure has
been discussed under the previous schedule, the old CGT regime meant
that basic rate taxpayers who held shares in their employer for at
least two years were subject to only a 5 per cent. CGT charge, or 10
per cent. for higher-rate taxpayers. They face an additional 13 per
cent. tax on any gain above £9,600 because they are not eligible
for entrepreneurs relief. It does not seem likely that the Government
would wish to argue for
that.
In the quotation
that I gave from the Chamber last week, the Minister
said:
“Our
figures show that the average amount of gain that a typical employee
makes ... is well under the annual exempt
amount”.—[Official Report, 28 April 2008; Vol.
475, c. 66.]
But in an answer to
the hon. Member for Edmonton (Mr. Love) on 12 December, when
he asked for an estimate of the number of individual members of
save-as-you-earn schemes that would be affected by the changes
introduced by the recent Budget, she
said:
“The
information requested is not available.”—[Official
Report, 12 December 2007; Vol. 469, c.
620W.]
I would be grateful if she
could tell the Committee when the information that she was apparently
quoting last week in the Chamber became available, and in what form
that information was
collected.
The
amendment extends the definition of a personal company to include a
company in which the individual holds shares under an HMRC-approved
share scheme, regardless of the percentage of shares held. Surely the
Government have to send a consistent message. If they no longer wish to
encourage employee shareholding in companies that will grow,
and in which that shareholding will therefore become worth
significantly more than the annual exemption limit, let them say so
clearly. I would hope that that is not the Government’s position
and not the case that the right hon. Lady wishes to
argue.
Amendments Nos.
42 and 43 take us back to EMI options, the importance of which we have
discussed. EMI options were introduced in the Income Tax (Earnings and
Pensions) Act 2003, but it is no good introducing these things as an
incentive to people and then snuffing out the signals that they are
meant to send with subsequent legislation. That not only erodes the
value of the initiative, but undermines confidence in future
initiatives and weakens the signal that the Government seek to send
with similar initiatives in the future.
Amendment No. 42 adds a company
in which the individual holds EMI options to the
definition of a personal company, again without a percentage
requirement. That allows for sale of the options, rather than having to
exercise them, addressing the point that the hon. Member for Dundee,
East made in an intervention. Allowing the options to be realised with
eligibility for entrepreneurs relief, avoids the need to raise the
finance and to take the risk of holding a capital asset and possibly
seeing it depreciate over a year—getting the timing wrong. That
would send a powerful signal in favour of the EMI regime.
The Minister should not
underestimate the concern among professional bodies that the
Government’s apparent abandonment of EMI in the set of
provisions is sending a signal that the Government are no longer
committed to it. I am not an expert in those areas, but I understand
that professional bodies have already picked up signals from the
Government that they may no longer be as keen on the EMI scheme. If
that is not the case, it would be helpful if the Minister could make an
unambiguous statement of the Government’s commitment to the EMI
scheme. The amendment adds a provision that options under EMI qualify
the individual under the entrepreneurs relief regime, and it inserts
into the relevant section the definition of EMI taken from the Income
Tax (Earnings and Pensions) Act. I look forward to her
comments.
Jane
Kennedy:
The group of amendments seeks in one way or
another to relax the conditions under which disposals of shares and
securities can qualify for entrepreneurs relief. Amendments Nos. 21 and
22 would remove the 5 per cent. shareholding requirement and extend the
relief to any holding of shares or securities in an unlisted company.
Amendment No. 38 also seeks to remove the 5 per cent. shareholding
requirement. Amendments Nos. 39 and 40 seek to dilute the 5 per cent.
shareholding and voting rights requirements to 1 per cent. Amendments
Nos. 5 and 41 to 43 seek to extend relief to shares acquired under
employee share schemes or the enterprise management incentive scheme.
Again, all those amendments are
unnecessary.
4
pm
In constructing
schedule 3, we have deliberately focused entrepreneurs relief on
individuals who own their own business or a material stake in a
company. The relief is designed to promote and reward substantial
investment and involvement in a business. We consider the 5 per cent.
shareholding test to be a suitable benchmark for that purpose. The hon.
Gentleman has spoken at length about why he thinks that we arrived at 5
per cent. However, entrepreneurs relief is targeted at those with a
material stake in a company and those who play an active role in it.
The right to vote is an important part of defining that activity. The
rules, therefore, require the qualifying 5
per cent. material stake in the company to be accompanied by the same
minimum percentage of voting rights. We are striking a balance between
focusing relief on material investors and allowing many people to
benefit from the relief and the cost of the relief. The hon. Gentleman
has heard explanations for the 5 per cent. He just does not agree with
the explanations that have been offered.
I shall turn now to the EMI
question. May I offer him an absolute commitment to the EMI as a
valuable aid to help small companies in riskier areas to recruit and
retain the staff that they need to grow? Our commitment to EMI is shown
by the increase in the individual limit from £100,000 to
£120,000, which took effect from 6 April 2008. The impact on
individual investors will depend on their personal
circumstances.
Mr.
Hammond:
I am grateful to the Minister for that
clarification, which will be heard beyond this room. I am sure that it
will be a welcome statement of the Government’s
intentions.
I want to
return to the question of the Government’s apparent obsession
with the idea that they want entrepreneurs relief to be available only
to people who have a material interest in the business.
[Interruption.]
The
Chairman:
Order. May I ask Members seeking to hold a
conversation to do it outside or to
desist?
Mr.
Hammond:
I want to ask the Minister if it is her view that
a 4 per cent. interest in a company that has grown to be worth
£10 million is less material than a 40 per cent.
interest in a company that is only worth £1 million?
That is not how I think about the growth of companies and the
development of the
economy.
Jane
Kennedy:
In defining what we mean by interest and a
material stake in the business, we drew the line at 5 per cent. We
believe that that was the right balance to strike. I accept the example
that the hon. Gentleman gave of five young students coming out of
university and investing in the way in which he described. If the
capital gain were split between the five equally, they would not
receive the relief. In seeking to define what we meant, we have arrived
at the definition that I have described. We believe that it strikes the
right balance.
Some of
the amendments in this group make reference to employee share schemes.
Some of the schemes, such as the share incentive plans, and capital
gains tax relief, remain in place, while the vast majority of
participants, including the save-as-you earn schemes, have capital
gains well below the tax-free annual exempt amount. In all cases, the
income tax and national insurance benefits of scheme membership remain
in place. We do not believe that it
is—
Mr.
Browne:
I did not mean to stop the Minister mid-sentence.
What assessment has she made of the additional cost to the Exchequer if
the Government were to accept the amendment tabled by the Conservative
spokesman to reduce the threshold from 5 per cent. to 1 per cent.
ownership of the company?
Jane
Kennedy:
I do not have that figure immediately in front of
me. If we have a figure for it, I will supply it to the
Committee. It is not material to the consideration of the amendments
themselves. We do not believe that the amendments are necessary in
principle. It is not necessary or desirable to connect the
shareholdings described in some of the amendments—that is the
share incentive plans and the save-as-you-earn schemes—to the
entrepreneurs
relief.
Having heard my
remarks in response to the amendments, I hope that the hon. Member for
Runnymede and Weybridge will not press them to a vote, but if he does
choose to do so, I hope that my hon. Friends will
resist.
Mr.
Hammond:
I am, once again, disappointed. I do not get the
impression from the Minister’s response to that group of
amendments, as I did from her response to the previous group of
amendments, that she was even listening to the issues. There was no
sense of a thoughtful response or even a concession that there might be
a grain of something that needs to be “kept under
review”—to use her
phrase.
I do not want
to labour the point, but I sometimes wonder whether Ministers and those
who advise them understand at all how small and medium businesses work
and what motivates the people who get involved in them. The message
going out from here is very negative. It is sending the wrong signal to
all sorts of people. We have heard that the Government are now in
“listening mode”—they switched to listening mode
on Sunday morning. I would have thought that in the spirit of that
listening mode the Minister would have wanted to look at some of these
issues again because the 5 per cent. limit is a problem; it will
exclude people who should not be excluded and it will preferentially
treat lifestyle businesses while penalising those in
high-capital-requirement, high-growth businesses that really are
important to the economy.
I noted the result of the last
Division, and because of the arithmetic in the room I am not going to
detain the Committee by pressing the amendment to the vote. Those
outside will have heard that we have made the case, they will have
heard that the Minister has failed to respond to it and that the
listening Government are not listening as far as entrepreneurs,
high-growth businesses, holders of share options in those businesses
and holders of employee shareholdings are concerned. They will draw
their own conclusions. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Further consideration
adjourned.—[Mr.
Blizzard.]
Adjourned
accordingly at eight minutes past Four o’clock till Tuesday 13
May at half-past Ten
o’clock.
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