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).
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 qualificationan 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 Majestys Revenue and Customs on that issue would be helpful.
The ICA has also suggested that, for completeness, those on adoption leave should be discounted
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 Unions 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: 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.
Stewart Hosie: I think the 250-employee limit is very sensible, not least because it covers 277,000 of Scotlands 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. Gentlemans 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.
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 Committees 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.
(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.
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
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 lowif anywages 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 casethey 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 companiesit is an equally challenging environment. I welcome the Exchequer Secretarys 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 Secretarys 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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