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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, † Mr. Jim Hood, Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 20 May 2008


[Mr. Jim Hood in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

10.30 am
Mr. Mark Hoban (Fareham) (Con): On a point of order, Mr. Hood. It is a pleasure to serve under your chairmanship this morning. Last Wednesday, the Treasury kindly sent members of the Committee explanatory notes on several schedules to which amendments have been proposed. In the main, it is easy to compare the explanatory notes with the amendments as tabled. However, it is not possible to link to the explanatory notes several amendments that have been tabled to schedule 17, which we might debate this afternoon. Can the Treasury supply members of the Committee with information that cross-references the explanatory notes and the amendments, so that those who wish to participate in the debate on life assurance taxation can do so?
The Chairman: I thank the hon. Gentleman. That is not a point of order, although I am sure that the Minister heard what he said and may well respond.

Clause 28

Enterprise investment scheme: increase in amount of relief
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: The clause increases the limit for enterprise investment schemes from £400,000 to £500,000. It is one of a series of changes that have been made since the scheme was introduced in 1993. The limit was increased to £150,000 in April 1998, to £200,000 in April 2004, and to £400,000 in April 2006. Can the Minister advise the Committee why the Treasury increased the limit to £500,000, not to any other amount? The scheme is covered by European Union state aid rules and the clause makes it clear that the increase is subject to approval by the EU. When will clearance be given, and has it been applied for to date? What is the reason for the delay between clearance being applied for and its being granted? There is some ambiguity about the meaning of paragraph 10 of the explanatory notes, which states:
“The EIS has been notified to the European Commission as a State aid, but not yet approved.”
Does that mean that the increase to £500,000 has yet to be approved or that the scheme itself has yet to be approved? It is important for the Committee to know that. Have the Government commissioned research on the effectiveness of the relief in stimulating investment in high-risk businesses?
The Exchequer Secretary to the Treasury (Angela Eagle): As for the hon. Gentleman’s point of order, we will certainly see if we can do anything in advance to assist the Committee’s proceedings. I am not sure when we are due to discuss schedule 17, but if we can make the explanatory notes more clear, we will do so.
It may help the Committee if I set out some background to the clause. The Government are committed to encouraging entrepreneurship, innovation and growth among smaller, higher-risk enterprises and to improving the United Kingdom as a place for businesses to start up, invest and expand. Venture capital schemes, including the enterprise investment scheme are important tools. They contribute to the Government’s wider policy of improving access to finance for small companies and tackling the so-called equity gap suffered by smaller companies struggling to obtain the finance that they need to grow into sustainable, profitable enterprises. As the Chancellor of the Exchequer said in his Budget speech, we need to do more to help small and medium-sized enterprises gain access to finance.
With that in mind, as the hon. Member for Fareham rightly pointed out, the clause increases the annual amount of investment on which income tax relief is available under the enterprise investment scheme from £400,000 to £500,000. As he suspected, that increase is subject to state aid approval and will apply only from 2008-09, once it has been brought into effect by Treasury order. To date, the enterprise investment scheme has helped to raise around £6.1 billion, invested in 14,000 small or high-risk companies. The increase in the annual investor limit is intended to stimulate further investment in such companies by offering a greater incentive to business angels and other individuals, particularly in the light of current financial market disruption. I might point out that the increase has been well received by industry. For example, the CBI confirmed that it welcomed
“the uplift in thresholds for the enterprise investment scheme which should encourage more investment in growth companies.”
The hon. Gentleman asked if the scheme has been notified to the European Commission. I can confirm that it has, but it has not yet been approved. The change described here must also be approved before it can come into effect. When that happens, the proposal is to make it effective from 6 April 2008 by means of a Treasury order. The scheme and the increase have both been notified, and approval is awaited for the combined package.
Question put and agreed to.
Clause 2 8 ordered to stand part of the Bill.
Clause 29 ordered to stand part of the Bill.

Schedule 11

Venture capital schemes
Mr. Hoban: I beg to move amendment No. 82, in schedule 11, page 212, leave out line 28.
The Chairman: With this it will be convenient to discuss the following amendments: No. 83, in schedule 11, page 212, leave out line 32.
No. 84, in schedule 11, page 213, leave out lines 1 to 5.
No. 85, in schedule 11, page 213, leave out line 16.
No. 86, in schedule 11, page 213, leave out line 20.
No. 87, in schedule 11, page 213, leave out lines 27 to 31.
No. 88, in schedule 11, page 214, leave out line 4.
No. 89, in schedule 11, page 214, leave out line 8.
No. 90, in schedule 11, page 214, leave out lines 15 to 19.
No. 94, in clause 30, page 15, leave out line 6.
No. 95, in clause 30, page 15, leave out lines 13 to 17.
Mr. Hoban: This group of amendments probes schedule 11, which amends the rules for the schemes and carves out the three areas of shipbuilding, coal and steel. The explanatory notes to the schedule indicate that the carve-outs have been prompted by EU state aid rules, which specify the circumstances in which aid can be given to those industries. Schedule 11 cites three documents to justify that position: for shipbuilding, the framework published in the Official Journal of the European Union on 30 December 2003; for steel, the guidelines published on 4 March 2006; and for coal, article 2 of “Council Regulation (EC) No 1407/2002”, which was published on 23 July 2002. One question that immediately springs to mind is why the Government have taken so long to implement the regulations, since they have been part of EU rules for between two and six years.
I particularly want to discuss the amendments on the coal industry, which would remove the coal industry from the excluded activities in schedule 11. When I looked at the Council regulation, it appeared that it would still be permissible for aid to be given to the coal industry through venture capital schemes. For example, article 5 of the regulation deals with aid for accessing coal reserves, whereby aid for initial investment can be paid until 31 December 2010. It appears that under EU rules a VCT could invest in a company seeking to open up new coal reserves or exploit existing reserves until the end of 2010. However, the Government, through the changes in the schedule, seek to prevent that. When energy security is an issue—that is referred to in the regulation—we should be considering how best to exploit our domestic reserves. Some hon. Members will doubtless think about the environmental impact of mining more coal, but we currently have coal-fired power stations. Several people are looking to build new stations using clean coal technology. If nothing else, it could be argued that we should mine more coal. Why has coal been excluded from schedule 11 when, according to the Council regulation, coal mining could qualify for aid and it might be possible to encourage VCT schemes to invest in exploiting new or existing reserves of coal?
We believe that, in practice, the exclusion of shipbuilding and coal and steel will have a minimal material impact. Analysis shows that fewer than 10 companies in all three sectors have used the venture capital scheme for the last 14 years, and no coal production companies have ever used the enterprise management incentives scheme. To date, about £1 million has been invested in companies in these sectors across the enterprise investment scheme, venture capital trusts and the corporate venturing scheme. To put it in context, that represents 0.01 per cent. of the funds raised under the tax-based venture capital schemes. Despite evidence of what happens in practice, we were obliged to put this matter on a legal footing by explicitly excluding those trades, and that is the purpose of the schedule. It is important to remember that state aid controls mean that British companies can compete fairly because their European competitors are being prevented from receiving unfair subsidies as well. There is a prize to be gained by successfully achieving state aid notification and approval for our schemes.
Mr. Hoban: Does the Exchequer Secretary recognise that the rules set out in the EU Council regulation come into force on 31 December 2010? We seem to be having early adoption in the UK whereby in other EU member states aid can be granted similar to that which is prevented from being granted in the UK.
Angela Eagle: It is important to remember that the context for these exclusions is small start-up companies, and there are other capacities within EU laws for these industries to gain support.
Stewart Hosie (Dundee, East) (SNP): The Exchequer Secretary argued that the exclusion is necessary for EMI schemes and I do not doubt that. She said that there is a requirement to put this on a legal footing and I am sure that that is true. She is also right that there are other schemes for start-up companies.
I am not sure whether it has happened yet, but there is a determination to use carbon capture and storage with coal-fired power stations. There is a possibility that low-sulphur coal mines will be reopened. There may be new entrants to the market who wish to do that. Given that, and given the possibility of future energy shortages, will it be possible to revisit this issue if new entrants want to use CCS and low-sulphur coal and reopen existing fields?
10.45 am
Mr. Peter Bone (Wellingborough) (Con): Is the Exchequer Secretary arguing that we cannot do this because of EU regulations, or because of a decision by the Government, as it does not affect many companies?
Angela Eagle: I am arguing that it is because EU rules preclude us from doing it. If the amendments were passed, it is clear from our negotiations that we would fail to get state aid notification from the EU, and we would lose all three schemes, with all their benefits. That is absolutely clear. What I was hoping to do with the figures for those three sectors over the past 14 years was to reassure hon. Members that those exclusions will not produce a great effect. That overlap existed prior to our negotiations on state aid rules. The European Commission has made it absolutely clear that the coal industry must be excluded. The amendments, if passed, would jeopardise all the schemes, which I am sure is not the aim of the hon. Member for Fareham. He said at the start that they were probing amendments, and I take him at his word.
Mr. Hoban: The Exchequer Secretary referred both in this debate and the previous one to the negotiations with the European Commission about the schemes. Is she saying that the only barrier to the schemes obtaining formal notification from the Commission is the exclusion of those three industries, or are there other issues that have been debated? If there are other issues, would she outline those to the Committee?
Angela Eagle: That is not the only barrier, but it is an absolute barrier. The Commission has made it clear that if we do not exclude those three sectors no state aid notification will be granted for the schemes, which would destroy them and produce the related negative effects. I am sure that the hon. Gentleman would agree with me that not being able to run the schemes would have a negative effect on our ability to support those companies that find themselves in what is known as the equity gap—in the middle of start-up and growth. There are other issues, some of which crop up in subsequent clauses, so I do not want to go into great detail now. I can assure the hon. Gentleman that the negotiations are ongoing. We are confident that we will be able to get state aid, and we are working through the issues as the European Commission raises them.
Mr. Hoban: I am grateful for that clarification, which addresses some of the points that we will raise later. Would the Exchequer Secretary explain what the consequences would be if we did not receive approval for the schemes? Would the impact be retrospective, for example?
Angela Eagle: In theory, it could be retrospective to the beginning of the schemes, and it could require us to chase every grant that had ever been given to a company. I do not wish the Government to find themselves in such circumstances and I hope that the hon. Gentleman agrees.
It is in the interests of all our start-up companies that we maintain the schemes and the benefits that they convey. That is why we are working to avoid the worst-case scenario. If the changes to the schemes are not introduced, we risk a Commission investigation under article 88.2 of the EC treaty, which could lead to our having to withdraw the scheme or the associated tax reliefs and engage in what is known as aid recovery—reclaiming all the money, going all the way back. I cannot think of anything that I would rather the Treasury did not have to spend its time doing, which is why we are trying to be as helpful as we can in the negotiations for state aid.
I am sure that the amendment is a probing one, and that given the explanations that the hon. Member for Fareham has received about why certain sectors have been excluded, as well as their tiny presence over the years in this particular scheme, he will be sufficiently reassured to withdraw it.
Mr. Hoban: I am grateful to the Minister for responding in such detail to the amendments, which are indeed probing amendments. She has helpfully shone a light on the process that we have to go through to get the schemes approved by the Commission. I hope—and I am sure that she will do so—that she will take a robust approach with the Commission. I share her view that it would be a dreadful waste of time and resources to try to chase up all the companies to recover the money, and it is important, therefore, that the schemes receive the approval that they need from the Commission. For people investing in those schemes, that process creates uncertainty in some respects, because the goalposts keep shifting, almost from year to year. I do not want to move on to the next group of amendments, but in previous years, £1 million was invested in schemes that are now excluded, and there may be other changes, which creates uncertainty about what is appropriate when managing the future development of a scheme. In light of the explanation that the Committee has received from the Minister, I would not wish to impede the approval of these schemes by the Commission, so I beg to ask leave to withdraw the amendment. [ Interruption. ]
Amendment, by leave, withdrawn.
Schedule 11 agreed to.
The Chairman: Before I call the next group of amendments, may I tell hon. Members that I can hear murmuring in the Committee? If I can hear murmuring, hon. Members are not in order, and I ask them to pay attention to whoever is addressing the Committee. If they wish, hon. Members may take their jackets off.
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