Clause
30
Enterprise
management incentives: qualifying
companies
Mr.
Hoban:
I beg to move amendment No. 93, in
clause 30, page 14, line 16, leave
out subsections (2) and
(3).
The
Chairman:
With this it will be convenient to discuss
amendment
No. 97, in
clause 30, page 15, line 22, after
‘by’, insert ‘subsections (4) and (5)
of’.
Mr.
Hoban:
I think that the debate on this group of
amendments will proceed along similar lines to the previous
debate. The rules affecting enterprise management incentive schemes are
being amended through clause 30 with the introduction of a new test for
qualification—an employee number test. That test will join a
series of other tests set out in part 3 of the Income Tax (Earnings and
Pensions) Act 2003, which deals with issues such as independence,
having only qualifying subsidiaries, a gross assets test, and ensuring
that businesses do not engage in excluded activities, which are listed
in that provision. They are principally activities involving investment
in significant property assets and real assets, whether intangible or
tangible; financial services; and facilities management. I suspect that
at the end of our proceedings coal, ship-building and steel will also
be excluded. The amendments to clause 30 will introduce a further test
to enable companies to qualify, requiring them to employ fewer than 250
full-time equivalent employees.
The Minister has set out the
process that led to the introduction of that requirement, but it would
be helpful for the Committee to understand why the magic number is 250
and not a lower or higher number. Unlike amendments in the previous
group, there is no cross-reference to the relevant Council regulation
or document to support that 250 cut-off. It would therefore be helpful
if the Minister would explain where that requirement came
from.
A couple of
points of detail have emerged from representations that have been made
to members of the Committee on clause 30. The Institute of Chartered
Accountants has suggested that there should be guidance on who would
need to work full-time and part-time so that businesses, when
calculating full-time equivalents have some understanding of what rules
should apply. Does that mean a 40-hour week or a 35-hour week, and does
it mean that someone who works 20 hours a week is working half a week
or two thirds of a week? Some indication from Her Majesty’s
Revenue and Customs on that issue would be
helpful.
The ICA has
also suggested that, for completeness, those on adoption leave should
be discounted
alongside those on paternity and maternity leave when calculating the
250 figure. Because of the difficulty in calculating the number of
full-time equivalents, it has asked whether HMRC will disregard minor
breaches where it is evident that the company has taken reasonable
steps to comply with the new
requirements.
Angela
Eagle:
To put the discussion in context, the enterprise
management incentives are intended to help smaller, higher-risk
companies recruit and retain staff by allowing them to issue share
options with tax advantages to employees. Provided that the conditions
of the legislation are met, any gains from EMI share options are free
from income tax and national insurance contributions, and that is the
context of this debate. The hon. Gentleman asked a couple of
questions about the changes set out in clause 30. He was right to point
out that we have introduced a limit of 250 employees as a definition
for those companies that will be eligible for the scheme. He asked why
the figure is 250. It comes from the requirement that the Commission
has laid down, because it is within the European Union’s
definition of a small and medium-sized enterprise. As part of our
ongoing discussions for state aid approval, that is what the Commission
has suggested we base the figure on.
The national employers skills
survey consistently finds that skills shortages in the labour market
are most severe among companies with fewer than 250 employees,
so there is an evidence base there. There is also the potential for
market failure, with regard to the ability of companies of that size to
attract appropriate staff to help them grow and expand, and that adds
to the evidence base for the 250 figure. We have no other evidence to
present to the Commission in favour of a different limit, which is why
we have settled on the limit that it suggested. It has always been our
intention, since the introduction of EMI, to target small and
medium-sized enterprises. To that extent, I hope that I have given the
hon. Gentleman the justification for what might have seemed, initially
at least, to be an arbitrary figure. It is actually based on EU
definitions and our own evidence base of skills
shortages.
Mr.
Hoban:
Would the Minister give us an indication of the
points on which we won the argument with the European Commission? We
have identified those issues where we have completely lost the
argument, and I do not doubt the basis for that: 250 employees is seen
as a limit for small and medium-sized
enterprises.
Angela
Eagle:
First, we are having negotiations. We are not
having an argument.
Mr.
Philip Hammond (Runnymede and Weybridge) (Con): Of
course.
Angela
Eagle:
There is a difference. Secondly, these schemes
predated the guidelines for state aid that we are in the middle of
negotiating. Essentially, we had schemes that were
created before the state aid structures were created. We are therefore
having discussions and negotiations with the European Commission to
ensure that we can get state aid approval for pre-existing schemes so
that they do not have to end.
11
am
Stewart
Hosie:
I think the 250-employee limit is very sensible,
not least because it covers 277,000 of Scotland’s 279,500
businesses. However, there are other rules, including the one on
£30 million of gross assets. Every European economy is
different, so I wonder whether there is a breakdown of the proportion
of businesses that might be eligible, country by country and nation by
nation within the UK. The breakdown of SMEs in England is rather
different from the composition in Scotland, where there is a small
number of very large companies and a large number of very small
companies. Do we have a comparative analysis, country by country, as
that would be very
helpful?
Angela
Eagle:
I am not sure that I have one to hand, but I take
the hon. Gentleman’s point. These incentives are aimed at small
and medium-sized enterprises, which comprise the bulk of businesses in
the UK. There are other EU state aid arrangements for large global
companies which would not become involved in this kind of very
specific scheme. The aim of the scheme is to fill what is known as the
equity gap, and to help small and medium-sized developing companies
with high growth potential to attract employees, who will help them
make that next step, and therefore convey the benefits of that
innovative, high-growth sector to our economy. The hon. Member for
Dundee, East is right: other European economies can have very different
structures. The European Commission has to work within its own state
aid rules to accommodate those differences.
I hope that I have managed to
explain the point about the 250 employees for the hon. Member for
Fareham. He asked how that would work as a definition, which is clearly
important for companies that are close to that limit. Guidance will be
produced shortly after Royal Assent. Guidance on similar points is
already available in the venture capital manual. HMRC is happy to
discuss any difficult cases or any cases where there may be some
confusion among companies which qualify now, but think they might be
quite close to the edge of not
qualifying.
On the
point about adoption, we have to follow EU guidelines, which do not
currently include adoption leave. The UK is ahead of much of the rest
of the EU in recognising adoption and parental leave. Some EU countries
do it, but the vast majority do not. Again, HMRC is happy to discuss
cases where this may be an issue. I hope that those answers satisfy the
hon. Gentleman and that he is happy to accept the contents of the
clause. Let me again reassure him that 6 per cent. of those currently
receiving assistance will be excluded from the 250 limit. That is 400
out of the 7,000 or so companies that are currently
benefiting.
Mr.
Hoban:
Will the change have a retrospective impact on
those companies with over 250 employees?
Angela
Eagle:
No. They will be able to keep the share options and
advantages that they have to date, but they will not be able to access
any more. That is how the change will work. With that reassurance, I
hope that the hon. Gentleman is happy to accept the
clause.
Mr.
Hoban:
I am grateful to the Minister for the way in which
she has explained the inclusion of the 250-employee limit. I am sure
that those listening to the Committee’s proceedings will be
interested to know that guidance is to be published on what
“full-time” and “part-time” mean. Given
that the words crop up often in the regulations, that guidance
will be welcomed by many people.
I want to pick up the comment
made by the hon. Member for Dundee, East. I wonder whether we have
really analysed the interaction between the different limits and to
what extent the gross asset test rules companies in and out. Is the
interaction in danger of reducing significantly the pool of companies
that can take advantage of the schemes, to the detriment of encouraging
entrepreneurial activity in the UK? I leave that thought with the
Minister, but I beg to ask leave to withdraw the amendments.
Amendment, by leave,
withdrawn.
Mr.
Hoban:
I beg to move amendment No. 96, in
clause 30, page 15, line 21, at
end insert—
‘(5A) The
amendments made by subsections (2) and (3) of this section shall not
come into force until the Treasury has laid before the House of Commons
a report which sets out how companies deemed to be in a group because
they are owned by a private equity and venture capital firms can become
qualifying companies under paragraph 8 of Part 3 of Schedule 5 to the
Income Tax (Earnings and Pensions) Act
2003.’.
This
is a probing amendment that I want to explore with the Minister because
it deals with an important group of companies that cannot take
advantage of EMI and other schemes. They are small or medium-sized
companies that work, in many cases, in high-risk sectors of the
economy, have the same recruitment issues that the Minister outlined in
relation to the previous amendment, and are owned or invested in by
venture capital and private equity companies. The qualifying conditions
for these schemes mean that firms owned by venture capital companies
cannot take advantage of them because they will aggregate
employee numbers, or the gross assets of companies owned by a single
venture capital business or by a partnership that has invested in them,
and potentially catch companies out through the independence rules. I
recognise the importance of rules about independence and the
aggregation of employee numbers and gross assets. They prevent large
trading groups from circumventing the rules to qualify for those
reliefs by trying to fragment their activities over a number of
companies. One would not expect companies that private equity or
venture capital have invested in, such as Boots or BAA, to be able to
fragment their activities and qualify for these schemes. In the same
way, one would not expect large companies not owned by venture
capital to be able to take advantage of the same schemes. Many venture
capital funds invest in start-ups, as well as small and medium-sized
companies, but they sometimes lose out and cannot offer their
employees EMI schemes. Nor do venture capital funds qualify for the
research and development tax credits for small
companies.
The
Government have rightly stressed that there should be a level playing
field so that companies owned by venture capital companies do not have
any unfair advantage compared with those owned in other ways.
That principle was established clearly and beyond
any doubt in last year’s debate about the private equity sector.
In this situation, small and medium-sized companies are unfairly
disadvantaged compared with their peers that are not owned by venture
capital partnerships. The British Private Equity and Venture Capital
Association has been in discussion with the Treasury about this matter
for some time, and I know that the issue exercises its members. I
should be grateful for an explanation of how the Government can tackle
it. How can we use the existing definitions of venture capital schemes
in other legislation to create a framework to ensure that small and
medium-sized companies operating in high-risk markets all receive the
same advantages and can all participate in EMI schemes regardless of
whether they are owned by venture capital
businesses?
Stewart
Hosie:
Will the Minister turn her attention to what
happens when a company goes into administration? Could part of it be
saved by being purchased by a venture capital firm? It could be run as
a stand-alone company, but the new-purchase part that comes out of
administration could not benefit from EMI schemes. Such schemes could
be the sort of incentive needed to keep the best staff and stop them
drifting off.
I shall
cite the real example of an engineering company that had lost a major
contract and gone into administration. A venture capital outfit said
that its core business was extremely successful. The company was small,
with 85 highly skilled people, but because the venture capital firm had
bought and developed two or three other companies over time, it did not
need these rules. In those circumstances, we would still have, in
effect, a stand-alone company that did not fit in with other parts of
the business but needed time to grow and re-establish itself to win
back some of the business that it lost. Is there sufficient flexibility
to allow at least that part of the business to benefit from the EMI
schemes? I ask that not because it would benefit that particular
company or similar companies, but because it might be an added
incentive for venture capital firms to see the opportunity to buy out
something to protect it or to increase its growth in a way that was
less marginal or more attractive if EMI schemes were available for the
part of the business that was purchased. Will the Minister consider
that
example?
Angela
Eagle:
The hon. Member for Fareham was right to be wary
and warn the Committee of the dangers of fragmentation and tax
avoidance in the control arrangements. He rightly pointed to the nub of
the issue. Clearly, there is a balance between making the schemes
available in the widest possible way and not opening up loopholes that
would be exploited by those who would fragment for tax avoidance
purposes.
The
enterprise management incentive scheme was introduced in 2000 to allow
smaller, high-risk companies to grant share options with tax advantages
to their employees. They have been a success, with more than 7,000
companies granting options to more than 100,000 employees by 2006. The
scheme is aimed at smaller, independent companies that are less likely
to have access to the finance needed to attract highly-skilled
employees, and that is where we intend these schemes to assist. We need
to keep that in mind when
we are thinking about venture capital companies or, indeed, private
equity. The provision has a control requirement so that EMI is
available only to companies that are genuinely small and independent.
As the hon. Member for Fareham said, that has a valuable role in
preventing tax avoidance. I am not suggesting that private equity
engages routinely in tax avoidance or any such thing, and I would not
like anyone to think that I was, but unfortunately the tax avoidance
industry will take advantage of any opportunities to exploit
incentives. The balance to which the hon. Gentleman alluded is
therefore important. Private equity-backed companies are more likely to
have the financial resources to offer competitive remuneration packages
to the employees they need in the companies they acquire. It is not
obvious that the scheme should be routinely available to private
equity. However, I am happy to say that we are in discussions
with representative bodies in the area to see how to address their
perceived worry about not having access to such schemes without
creating avoidance opportunities—that is the key point—or
opening up the incentive any wider than its deep and successful focus
since its introduction in
2000. 11.15
am
In
essence, amendment No. 96 would drop the amendments made to clause
30(2) and (3) until a Treasury report was laid before the House of
Commons. That proposal is not sensible; again, it brings us back to our
negotiations on state aid. Our amendments are necessary to secure state
aid clearance of the EMI scheme. The Government are seeking to ensure
certainty for companies by securing approval for the enterprise
management incentive scheme. All member states have to be compliant
with state aid guidelines. Non-compliance would risk the worst-case
scenario talked about under earlier clauses. We are in discussions
about this. We have to balance other methods of financing companies,
particularly through venture capital or private equity, against the
creation of avoidance opportunities. We believe that the focus
of the scheme has been correct to date. With those explanations, I hope
that the hon. Gentleman will withdraw his
amendment.
Mr.
Hoban:
The Minister is correct about the
importance of striking the right balance between creating incentives
for legitimate activity and encouraging tax avoidance. That underpins
much of part 3 of the Income Tax (Earnings and Pensions) Act 2003.
However, we must be careful not to get sucked into too rosy a view of
private equity and venture capital. Before coming to the House, I had
experience of working with people who have been backed by private
equity and venture capital companies. They would not have argued that
they were well rewarded by their backers. The money invested is capital
for them to expand the business, not to pay the management fancy
salaries, particularly at the smaller, higher-risk end. Boots and the
Automobile Association are very different from the companies able to
qualify under the tests, which have gross assets of less
than £30 million and fewer than 250 employees. In such
companies, many are paid low—if any—wages because their
venture capital backers want to see them invest in growing the
business, not in fancy cars and flash offices. We should not fall into
the trap of thinking that their life is easy or that the money from the
backers is on tap.
Angela
Eagle:
I hope that the hon. Gentleman is not trying to say
that I think any such thing. I also hope that he agrees that the
schemes are there to help those who have no other option. If we can
find a way to incorporate other forms of support without creating those
potentials for tax avoidance and while keeping the scheme focused, then
we will certainly do that, and we are in discussions to see how we can.
I am not talking about fancy salaries or cars
either.
Mr.
Hoban:
The Minister said that venture capital-backed
companies might not suffer the same recruitment problems as those not
backed by VC funds because they could afford to pay better salaries. In
my experience, that is not the case—they suffer from the same
recruitment issues as other high-risk ventures. Money is not there on
demand from the backers to fund the businesses. Where additional
investment is made at a later stage, a price is extracted for such
investment. These ventures are as high-risk and have the same
recruitment challenges as any small or medium-sized companies—it
is an equally challenging environment. I welcome the Exchequer
Secretary’s assurances that discussions are taking place with
representative bodies to see whether the rules can be modified to
enable these companies to benefit from this and from other incentives
from which they are currently
excluded.
Angela
Eagle:
As these schemes are directed at
bridging the equity gap or market failure, if private equity or venture
capital bodies or their representatives can demonstrate to us that
there are still shortages and skills gaps caused by market failure, it
would enormously assist their cause in this
endeavour.
Mr.
Hoban:
I am sure that the Exchequer Secretary’s
words will not go un-noted by people in this field. It is easy
for Ministers to be offered arguments to the effect that they cannot do
something because of tax avoidance. I appreciate that, but in this case
she should use her best endeavours to reach a situation that would
encourage more entrepreneurial activity in the UK and expand
the incentives to private equity-backed companies. In these economic
conditions, we need to incentivise people to take risks and help to
grow the economy. Given her reassurances about the discussions that she
and others are having with the industry, I beg to ask leave to withdraw
the
amendment.
Amendment,
by leave,
withdrawn.
Clause
30
ordered to stand part of the
Bill.
Clause 31
ordered to stand part of the
Bill.
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