Schedule 14 - Enterprise management incentives: amendments
Finance Bill
11:45 am
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 17, in page 147, line 37 at end insert—
`Indexation of amounts
.—(1) If the retail price index for the month of September preceding a year of assessment is higher than it was for the previous September, then, unless Parliament otherwise determines, paragraph 10(1)(a), paragraph 11(1) and paragraph 16(1) shall apply for that year as if each amount specified in them as they applied for the previous year (whether by virtue of this paragraph or otherwise) there were substituted an amount arrived at by increasing the amount for the previous year by the same percentage as the percentage increase in the retail price index, and
jf13Ý(a) if in the case of an amount specified in paragraph 10(1)(a) and paragraph 11(1) the result is not a multiple of £10,000, rounding it up to the nearest amount which is such a multiple;
(b) if in the case of the amount specified in paragraph 16(1) the result is not a multiple of £100,000, rounding it up to the nearest amount which is such a multiple.
(2) The Treasury shall in each year of assessment make an order specifying the amounts which by virtue of sub-paragraph (1) above will be treated as specified for the following year of assessment in paragraphs 10(1)(a), 11(1) and 16(1).'.
Mr Edward O'Hara (Knowsley South, Labour)
With this we may take the following amendments: No. 23, in schedule 15, page 152, line 22, at end insert—
`Indexation of amounts
.—(1) If the retail prices index for the month of September preceding a year of assessment is higher than it was for the previous September, then, unless Parliament otherwise determines, section 290, subsection (6A) of section 293 and subsection (2)(a) of section 301A shall apply for that year as if each amount specified in them as they applied for the previous year (whether by virtue of this paragraph or otherwise) there were substituted an amount arrived at by increasing the amount for the previous year by the same percentage as the percentage increase in the retail prices index, and—
jf13Ý(a) if in the case of an amount specified in subsection (1) of section 290 the result is not a multiple of £10, rounding it up to the nearest amount which is such a multiple;
(b) if in the case of an amount specified in subsection (2)(a) of section 301A the result is not a multiple of £100, rounding it up to the nearest amount which is such a multiple;
(c) if in the case of the amount specified in subsection (2) of section 290 the result is not a multiple of £10,000, rounding it up to the nearest amount which is such a multiple;
(d) if in the case of the amounts specified in subsection (6A) of section 293 the result is not a multiple of £100,000, rounding it up to the nearest amount which is such a multiple.
(2) The Treasury shall in each year of assessment make an order specifying the amounts which by virture of sub-paragraph (1) above will be treated as specified for the following year of assessment in section 290 and subsection (6A) of section 293.'.
No. 29, in schedule 16, page 170, line 11, at end insert—
`Indexation of amounts
.—(1) If the retail prices index for the month of September preceding a year of assessment is higher than it was for the previous September, then, unless Parliament otherwise determines, paragraph 22 (gross assets requirement) shall apply for that year as if each amount specified in that paragraph as they applied for the previous year (whether by virtue of this paragraph or otherwise) there were substituted an amount arrived at by increasing the amount for the previous year by the same percentage as the percentage increase in the retail prices index, and if the result is not a multiple of £100,000 rounding it up to the nearest amount which is such a multiple.
jf6Ý (2) The Treasury shall in each year of assessment make an order specifying the amounts which by virtue of sub-paragraph (1) above will be treated as specified for the following year of assessment in paragraph 22.'.
Mr Howard Flight (Arundel and South Downs, Conservative)
Amendments Nos. 23 and 29 make the same point as amendment No. 17, which relates to enterprise management incentives. In all three areas, the maximum prescribed limits are already modest, and in the case of EMIs and enterprise investment schemes, they have lost in real value by a year's modest inflation. The extension of the scope for EMIs is greatly welcomed; it is mainly dealt with in schedule 14, but that does not address the low personal limit or the low corporate value limit. Over time, unless the limits are specifically increased, the amounts become worth less and less in real terms. The amendment is designed in essence to index the limit; it is based on section 257C of the Income and Corporation Taxes Act 1988, which allows the indexation of personal tax allowances with rounding up to the nearest £100; the suggested figures of £10,000 and £100,000 are equivalent roundings, given the size of the original personal EMI limit and the original corporate value limit.
Amendment No. 23 prescribes similar proposals for enterprise investment schemes and the suggested figures are equivalent roundings, given the size of the original amounts. Likewise, in amendment No. 29 the suggested figures are equivalent roundings given the original size proposed in the Bill for corporate ventures.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
It might be helpful to point out that the amendment reminds us of the value of the low inflation that we are currently enjoying. Inflation has been at historically low levels for several years.
There is value in having easily remembered round numbers rather than numbers that are slightly changed each year in line with inflation. There are several examples of measures introduced by the previous Government in which indexation was not provided for. I would not agree that indexation should automatically be applied whenever any measure of this kind is introduced. For example, the minimum amount directly invested by an individual in a company in a tax year that can qualify, under the enterprise investment scheme, for income tax relief is £500. If amendment No. 23 were accepted, if the retail price index were 2 per cent. higher than it was last September, that sum would rise to £510 next year, which would not constitute a significant gain for anybody.
There are some minor drafting errors, on which I shall not dwell. There is confusion about what should be done with the £1,000 de minimis amount that applies where, under the corporate venturing scheme or the enterprise incentive scheme, an investor receives value back from the company in which he or she invests. Amendment No. 23 proposes that the sum should be uprated for enterprise incentive scheme income tax relief but does not include a Treasury order to achieve that. None of the amendments deals with the corresponding de minimis provisions for enterprise incentive scheme deferral relief and the corporate venturing scheme. The amendments deal with asset size tests for the enterprise incentive scheme, the corporate venturing scheme and the enterprise management incentive scheme, but leave untouched the corresponding test for the venture capital trust legislation, which needs to keep in step with those for the enterprise incentive scheme and the corporate venturing scheme. Even if the principle were one that we should accept—which I do not think it is—several loose ends would need to be addressed.
We keep all the figures under review and will continue to do so; if at any time we are persuaded that there is a case for changing them, we will do so. That happened in 1998, for example, when we relaxed the gross assets test used for the enterprise incentive scheme and for venture capital trusts; the upper and lower figures were both raised by £5 million, which preserved a difference of £1 million between the amounts while increasing the lower amount by 50 per cent. That is a good example of an inappropriate indexed rise. For the reasons that I have set out, I ask the Committee not to introduce automatic indexation.
Mr Howard Flight (Arundel and South Downs, Conservative)
I take the point about the untidiness of indexation. I should like to put words into the Minister's mouth and ask him whether the Government intend that, over time and by one-off rounded increases, the real values relevant to the enterprise management scheme, the enterprise incentive scheme and, as he points out, venture capital trusts and corporate venturing, should at least be kept up over time.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The hon. Gentleman says that he would like to put words into my mouth. I cannot own the words that he proposed. All that I can say is that we will keep those matters continuously under review in regard to the enterprise investment scheme, the corporate venturing scheme and the enterprise management incentives. When there is need for a change, we will not hesitate to make it.
Mr Howard Flight (Arundel and South Downs, Conservative)
In the light of that answer, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 18, in page 147, line 37, at end insert—
`The gross assets requirement
In paragraph 16 (the gross assets requirement), in sub-paragraph (1) and (2) in each case for ``£15 million'' substitute ''£20 million''.'.
jf4ÝÌThe ChairmanÌ: With this it will be convenient to take the following amendments: No. 22, in schedule 15, page 152, line 11, at end insert—
(3) In subsection (6A) of section 293 (value of relevant assets), in paragraph (a) for ``£15 million'' substitute ``£20 million'', and in paragraph (b) for ``£16 million'' substitute ``£25 million''.'.
No. 28, in schedule 16, page 170, line 11, at end insert—
`The gross assets requirement
In sub-paragraph (1)(a) and sub-paragraph (2)(a) of paragraph 22 (gross assets requirement), for each reference to ``£15 million'' substitute ``£20 million'', and in sub-paragraph (1)(b) and sub-paragraph (2)(b) of that paragraph for each reference to ``£16 million'' substitute ``£25 million''.'.
jf4ÝÌMr. FlightÌ: Amendment No. 22 raises a parallel issue in relation to EIS investment, and amendment No. 28 in relation to venture capital investment. All three amendments make the point that the gross assets requirement is, at £15 million, particularly modest. We debated that issue at some length in last year's Finance Bill. Enterprise management incentive schemes cost around £10,000 to set up. One reason for their disappointing take-up has been that they are simply not commercially viable for small businesses. It would therefore make sense to increase that limit from £15 million to £20 million to provide a more vital dynamic for the smaller new end of the economy. Given that, sensibly, an attempt is made to synthesise some of the provisions relating to EIS and CVS, we similarly propose an increase to £20 million in relation to EIS qualification and corporate venturing.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
The aim of the targeting rule is to restrict the enterprise management incentives, the enterprise investment scheme and the corporate venturing scheme to small companies. The amendments to EIS and CVS are for an increase in the gross assets requirement from the present £15 million before the investment and £16 million after it, to £20 and £25 million respectively. Those schemes aim to encourage equity investment in small companies. They are targeted in that way because smaller companies experience the greatest difficulty in raising start-up finance and funds for growth and development.
Extending the size of companies that can qualify would divert funds away from the small higher risk companies that the schemes are intended to support, thereby undermining the effectiveness of the schemes and potentially significantly increasing the cost to the Exchequer. Similarly the proposal for a 33 per cent. increase in the limit for enterprise management incentives would undermine the policy of EMI, which is to focus on helping smaller companies recruit and retain the key employees whom they need to make them grow.
We keep those requirements under review. The growth asset requirement at its current level was introduced as recently as 1998 for EIS, and just last year for corporate venturing and management incentives. It would be too soon to consider such a big increase in the requirements for these schemes given that they are aimed at small companies. I do not agree with the hon. Gentleman's comment about low levels of take-up. The level of take-up has been very encouraging in all cases. Taken together, the amendments would significantly increase costs. They would undermine the carefully designed aim of the schemes and create an unwelcome disparity with the legislation for venture capital trusts, which uses the same test. I hope that the hon. Gentleman will not press the amendments.
Mr Howard Flight (Arundel and South Downs, Conservative)
The intent is that the same rule should apply as appropriate across the whole venture capital patch. There is not only the issue of the original real value having been eroded by inflation, relating back to our last debate, but that a study of the venture capital and the new business sectors reveals that there is little logic in having a line drawn at £15 million. It will depend upon the nature of the business how much capital is required, and so on. It would be in the economic interest to bring a slightly wider range of companies within the bailiwick of these tax incentives.
I will not press the amendment to a vote. We have raised the points before and the Government do not want to give way. I hope, in view of the Minister's previous comments, that he is also willing to say that the sizes are limits that the Government will keep under review.
Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
We do, of course, keep all these matters closely under review.
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 19, in page 147, line 37, at end insert—
`Excluded trades
(1) For paragraph 19 substitute—
jf15Ý``19. The following are excluded activities—
(a) advertising and publicising the policies of Her Majesty's Government;
(b) the conduct of surveys or polls as to the opinions of members of the public (or any section of them) on any subject (whether by interview in person or by telephone or through the medium of a group discussion focused upon any particular subject);
(c) estate agency;
(d) consultancy as to the arrangement of objects or artefacts within any living space (where based upon the principles of any non-European philosophy);
(e) fashion modelling (the provision of individuals engaged wholly or mainly for the purpose of displaying, whether or not to the public, items of clothing); and
(f) the publication of newspapers (including magazines or other periodicals, but not journals of a technical or scientific nature).''.
(2) Leave out sub-paragraph (2) of paragraph 19 and paragraphs 20 to 26 inclusive.'.
Mr Edward O'Hara (Knowsley South, Labour)
With this we may take the following amendments:
No. 21, in schedule 15, page 152, line 28, at end insert—
`Qualifying trades
.—(1) In subsection (2) of section 297 (qualifying trades), following ``a substantial part of the trade'' substitute:
jf13Ý``(a) advertising and publicising the policies of Her Majesty's Government;
(b) the conduct of surveys or polls as to the opinions of members of the public (or any section of them) on any subject (whether by interview in person or by telephone or through the medium of a group discussion focused upon any particular subject);
(c) estate agency;
(d) consultancy as to the arrangement of objects or artefacts within any living space (where based upon the principles of any non-European philosophy);
(e) fashion modelling (the provision of individuals engaged wholly or mainly for the purpose of displaying, whether or not to the public, items of clothing); and
(f) the publication of newspapers (including magazines or other periodicals, but not journals of a technical or scientific nature).''.
(2) Leave out subsections (3) to (9) inclusive of section 297 and subsections (5) to (5C) inclusive of section 298.'.
No. 27, in schedule 16, page 170, line 11, at end insert—
`Excluded activities
(1) In sub-paragraph (1) of paragraph 26 (excluded activities), following ``excluded activities'' substitute:
jf13Ý``(a) advertising and publicising the policies of Her Majesty's Government;
(b) the conduct of surveys or polls as to the opinions of members of the public (or any section of them) on any subject (whether by interview in person or by telephone or through the medium of a group discussion focused upon any particular subject);
(c) estate agency;
(d) consultancy as to the arrangement of objects or artefacts within any living space (where based upon the principles of any non-European philosophy);
(e) fashion modelling (the provision of individuals engaged wholly or mainly for the purpose of displaying, whether or not to the public, items of clothing); and
(f) the publication of newspapers (including magazines or other periodicals, but not journals of a technical or scientific nature).''.
(2) Leave out sub-paragraph (2) of paragraph 26 and paragraphs 27 to 33 inclusive.'.
Mr Howard Flight (Arundel and South Downs, Conservative)
The amendments relate to three different sectors and cover territory debated in last year's Finance Bill. The list of qualifying activities is a hangover from the old days of business expansion schemes. Even at that time, it was a mistaken reaction to a belief that the BES was being abused in the property arena; in reality, the property sector was about to collapse and many people failed to make money through property BESs.
There is a list of qualifying or excluded activities, which has a strange historic moral purpose behind it. The amendments would substitute a new list of excluded activities. In today's age, some might view it as equally not worth having morally or in terms of economic interests. I present the argument in this fashion intentionally to make the point that specifying excluded territory on moral grounds is subject to fashion and revised judgment and also fails to make commercial sense. These are probing amendments whose objective is to get rid of the list of excluded activities.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
The reason for excluding certain trade activities is to target the schemes on companies in the greatest need and to ensure value for money. I am sure that the hon. Gentleman realises that. They are not excluded, as the Opposition used to suggest, on moral grounds, but because they are generally less risky and because the investor's stake is effectively underwritten by property owned by the company. I was sad to discover that the millennium dome was left off the Opposition list, but we can discern a new bandwagon on their list this year.
A relevant factor for the Government is the extent to which the essentially artificial trades involved in these activities could be set up for the purposes of obtaining relief without exposure to an appropriate level of risk. The reliefs in the schemes are very generous and it is right to target them at companies carrying out riskier forms of enterprise. That applies to all these provisions.
Mr Howard Flight (Arundel and South Downs, Conservative)
Does the Minister accept that one of the excluded activities, agriculture, now faces the highest risk and is more in need of capital economic activity than any sector in the country?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I will deal with that immediately, if the hon. Gentleman would like. Farming is one of the excluded activities from the list that is kept under review. The list was most recently extended in the Finance Act 1998 to exclude some additional activities, including farming. It was partly a response to the concern of the farming industry itself—referred to in the hon. Gentleman's opening remarks—that the tax-driven acquisition of farm land was making it more difficult for existing farmers to expand.
We have recently been asked whether now is an appropriate time to readmit farming as a qualifying trade. Of course, we have every sympathy with businesses affected by the foot and mouth epidemic, but all the schemes that are the subject of the amendments apply only to companies, and our figures suggest that fewer than 5 per cent. of livestock farms—I emphasise that that is livestock, not arable—are incorporated, so only 5 per cent. could potentially qualify. Even then it is unlikely that such farms would attract the interest of unconnected outside investors. The measures would not address the immediate liquidity problems of most of the farms suffering from foot and mouth disease.
Moreover, allowing farming to qualify for EIS deferral relief would principally benefit so-called hobby farmers rather than those whose livelihood depends on farming. I am sure that the hon. Gentleman would not want us to do that, because it would divert investment away from genuine higher-risk trading activities. Those who wish to invest in rural industries, rather than farming and market gardening, can do so under the existing rules. The rules would not prevent such companies from being based on existing farms.
It is not clear from the drafting, but it seems that the intended effect of the amendments is to substitute the existing list of excluded activities, which was largely drawn up by the previous Conservative Government, with an entirely new list. The similar amendments tabled by the Opposition last year included the corporate venturing scheme and the enterprise management initiatives. The wider point that the Opposition may want to make is that there is no case for excluding any activities from the scheme. I do not agree, if that is the force of their two rather different-ranging sets of lists from the past two years. For example, it is clear that those who advise potential EIS investors consider that property-backed activities carry a lower level of risk. That is not surprising. Publications that provide an assessment of investor risk for EIS share issues give significant weight to that factor. If the more common property-backed activities were not excluded, experience gained from the EIS predecessor shows that most EIS investment would be channelled into such companies, denying to other forms of company the opportunity to raise the funding.
If the list were abandoned, that would also encourage those who want the benefits on offer but do not want to act in accordance with the aims and spirit of the schemes. There is no reason why those who abuse the business expansion scheme by, for example, setting up essentially artificial retail trades, in antiques or paintings, or by interposing artificial distribution companies between genuine wholesale and retail companies, would not act the same way in relation to EIS if they were free to do so. We would end up with the same range of abuses that existed under the business expansion scheme.
I hope that I have given Committee members ample reason not to pursue the amendments.
Mr Howard Flight (Arundel and South Downs, Conservative)
First, may I make a distinction between abuse and measures that may be needed to prevent avoidance, and the concept of economic activities that are either more deserving than others or are deemed to be of higher or lower risk? I made the point that the list was born of the BES days and indeed of the previous Conservative Administration. Economic history shows that it was ill conceived at the time. There were comments that BES was being used too much for property investment, and the property market collapsed shortly after. Many people lost a lot of money and learned from their experience. The probing amendment was first tabled to deal specifically with agriculture. While 95 per cent. of farms are not owned individually, there is no great difficulty in people using a corporate vehicle if they wish, and being able to use one of the schemes as a source of badly needed capital. I ask the Government to think further about agriculture.
Secondly, the list is out of date. It reflects moral judgments on the economy made 15 years ago and is well overdue for revision in terms of what areas need capital. As I have said, the amendment is probing. The Minister replied to the effect that agriculture has been examined, but I still believe that that is unsatisfactory.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
This list is not about morally excluded activities, but levels of risk and whom we want to incentivise. There is no point trying to incentivise low risk activities because, by their nature, they are already incentivised. We keep risk under review and I thank the hon. Gentleman for drawing the Committee's attention to the losses sustained by investors under the previous Conservative Government.
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 20, in page 150, line 4, leave out from `option),' to end of line 6 and insert—
`for paragraph (b) substitute—
``(b) at the time of the release of rights under the old option, the requirements of paragraph 9 (purpose of granting the option) are met in relation to the new option;''.'.
I trust that the Government will accept the amendment, because the Bill is defective. As it stands, it will be possible to exchange a new EMI option for an old one only if the total value of the new options does not exceed £3 million. That will mean that, if a company uses up its full EMI capacity and is then taken over at a premium, it will not be able to roll over the options into the acquiring company. The remaining provisions of paragraph 63 of the EMI rules are inadequate to protect the position of the new option. Paragraph (b)(ii) is irrelevant once the limit of 15 participants is removed. The Government might know that that defect has been noted by the Chartered Institute of Accountants, and we want the Government to address it.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
As the hon. Gentleman said, the amendment would remove the requirement that, in a company reorganisation, the maximum value of options in respect of the acquiring company does not exceed £3 million at the date of the grant. Removal of that requirement would allow one company or group to breach the generous £3 million limit as a result of the merging of several companies with EMI options. There is the potential to have an unlimited number of shares under the EMI option.
Mr Oliver Letwin (West Dorset, Conservative)
I apologise for referring to the previous debate, but one of the Minister's comments has been reverberating around my mind and it is relevant. Is she claiming that, because capital markets in Britain are incapable of allocating risk to reward and vice versa, the Government intend, with EMI and other such schemes, to direct investment more heavily than the capital markets would otherwise do towards riskier ventures?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
Our view is that there are enterprises involving greater risk that need investment and that we must encourage engagement with those companies, be it by staff investment support or through the markets and outside investment. As such, the schemes are focused on the riskier end. I am not saying anything new in that—that was the thrust of our comments in last year's Finance Bill Committee. Opposition amendments, which would extend the scope to slightly less risky parts, would not target such enterprises in the intended way. They would also draw investors' interest to the less risky end of the spectrum. That is why we do not support the general drift of the amendments. I hope that that clarifies the point for the hon. Gentleman.
Mr Oliver Letwin (West Dorset, Conservative)
As this threatens to be the only interesting point that we have managed to discuss this morning, I am tempted to pursue it one stage further. That is no reflection on either my hon. Friends or Ministers; this is just a boring part of the Bill—[Interruption.]—like most other parts of the Bill. Does the Economic Secretary seriously maintain that the current risk to reward ratio offered in the United Kingdom capital markets is, in the Government's view, systematically distorted? That would be the only rationale for her observations.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
No, it would not. The rationale is the one that I have already set out. EMI offers generous targeted tax reliefs to help companies recruit and retain the staff that they need to help them to grow. As I told the hon. Gentleman, we must ensure that the scheme is focused on only smaller, higher-risk companies. Without targeting rules, the market would respond by devising schemes to extract tax reliefs without risk, because one attraction of the market is to try to find good returns with low risks. I am sure that I do not need to explain that to the hon. Gentleman.
The changes in this year's Finance Bill will make the EMI even more generous and not only remove the limit on the number of employees who can be granted the EMI option, but double the value of the shares that can be granted under EMI. Those changes were warmly welcomed during the consultation period. As I said, the amendment, which would remove any financial limit in the case of company reorganisations, would undermine the objective of the tax-relieved incentives. Although the hon. Gentleman was hopeful that we would accept the amendment, I urge the Committee to reject it.
Mr Michael Jack (Fylde, Conservative)
The Economic Secretary mentioned the figure of £3 million. Why does the Treasury think that £3 million is the right figure? On what basis was that calculated?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
We considered that. We believe that that is the right figure and targets the right range of companies. Indeed, we believe that that will lead to the right outcome in terms of risk. We welcome the support of the Institute of Directors on the matter, which said:
``We welcome the increase in the limit on the value of shares under option to £3m, the removal of the limit on the number of participating employees and the removal of the ``key'' employees requirement.''
The limit represents a 100 per cent. increase, which no one can dispute is significant, and gives much greater scope for employees to benefit from the growth of their company.
Mr Michael Jack (Fylde, Conservative)
The Economic Secretary seems to be telling me that it is right because it is right. Any increase is bound to be welcomed. I return her to my question: how was the £3 million figure calculated? What was the basis of deciding that £3 million was right?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
We looked to see what the take-ups were like and what value was likely to target the companies that we wanted to target. The figure is generous. The Institute of Directors, which does not lightly praise the Government or routinely welcome Government initiatives but is careful with its praise and judgments—as I am sure that the right hon. Gentleman is aware—has welcomed the increase and considers the sum a reasonable one to pick. Of course, we consulted widely on the matter, and as a result of that we arrived at the figure of £3 million.
Mr Andrew Tyrie (Chichester, Conservative)
If we consult firms and ask them whether they would like a relief, they are likely to say, ``Yes, please.'' The choice is between selective targeted relief and slightly lower rates across the board. Such choices must always be made with a tax system. In this case, the Government have gone for selective targeting, so the issue is whether they identified a need for it.
The Economic Secretary said a moment ago—I hope that I am almost quoting her—that some areas were not receiving the investment that they needed. That means that the Government must have their own assessment of need or the right level of investment; that assessment must differ from that of the capital markets; and some distortion in those markets must be creating the inadequate level of investment and therefore the need.
Has the Economic Secretary estimated that need and market distortion? Has such an estimate been published and I have missed it? If not, will she put it in the public domain? Is the situation getting worse or better? I think that she is really saying that the Government should, to some degree, be in the business of picking winners in one part of the capital markets. That is a risky road to go down. Before I conclude that that is what she is saying, will she answer my questions?
Mr Oliver Letwin (West Dorset, Conservative)
I do not want to extend the debate unduly, but I want to expose the fallacy of what the Economic Secretary has said, and I hope that she will revise her remarks as a result. From the inception of the schemes, their purpose has not been to try to overcome a misalignment of risk and reward in the capital markets or the economy as a whole, although my hon. Friend the Member for Chichester (Mr. Tyrie) is right that it would have been rational to do so had there been a problem. Nor has the Chancellor ever suggested that there was such a problem. The schemes' purpose is to change the position on the graph of the indifference curve of investors.
Investors make judgments about risk and reward at any given combination of those two phenomena. The aim of the schemes is to make investors as a whole less risk averse by improving return, which moves the whole indifference curve up the graph. That applies as much to highly risky and hence highly rewarding enterprises as to highly unrisky and therefore unrewarding ones. It has no relationship to the point on the curve on which any given enterprise may fall. I do not know whether, on the assumption that investors in the UK are collectively too risk averse, it is sensible to induce investors to move upwards on the indifference curve. I plead agnosticism, but that is the purpose of the schemes.
The Economic Secretary's justification for rejecting my hon. Friend's points is therefore against the spirit of the schemes. I hope that she will see fit to revise her remarks, because I think that they mislead the Committee about the Government's purposes, let alone a rational purpose.
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
I will in no way gainsay what I have said. I strongly believe that the hon. Gentleman's remarks on changing the risk-averse nature of some investors support my points. That is one issue that we address in the schemes. I am curious about why the Conservatives are so interested in the topic, because they had the EIS scheme and introduced the VCT scheme.
I was originally dealing with the argument advanced by the hon. Member for Arundel and South Downs, who suggested that a moral element was involved. I shall not go back over the previous set of amendments, Mr. O'Hara, because you will rule me out of order, but we are not talking about a moral stamp of approval—quite the reverse. I gave the relevant reasons earlier.
All that needs to be said about enterprise management incentives is that the scheme was based on consultation and developed in detail by an advisory group including representatives from the companies most likely to benefit and from practitioners. The outcome was devised keeping in mind those whom we wanted to benefit from the scheme, the detail of which is entirely appropriate.
Mr Andrew Tyrie (Chichester, Conservative)
Does the Economic Secretary agree that a scheme created and devised by the interest group most likely to benefit may not result in a scheme that is most likely to benefit the economy?
Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)
The point is that it is a targeted measure, as are the other schemes we have been discussing this morning. The economy benefits if proposals are targeted; performance is improved and so is access to investment in the relevant part of the economy. The Opposition seem to be suggesting a scattergun approach, in which they distribute tax largesse—which they do not have anyway—without targeting. That is not within the spirit of the measure, which I hope that the hon. Gentleman now realises.
Mr Howard Flight (Arundel and South Downs, Conservative)
We welcome the increase to £3 million and the other reforms in schedule 14, most of which we suggested in the debate on the EMI schemes last year. If a company in which a person has EMI options is taken over, and he cannot continue them, he will lose unless amendment No. 20 is accepted. One solution is that the maximum value of options in respect of the relevant company's shares should be recorded at the time of the original grant and not at the time of the release of rights under the old options. However, if nothing is done about it, a person will be unfairly treated if his little business is taken over and it is not of his doing. The amendment applies to takeovers, not to applications further to increase the £3 million limit.
Amendment negatived.
Schedule 14 agreed to.
Motion made and Question proposed, That further consideration be now adjourned.—[Mr. Allen.]
Mr Michael Jack (Fylde, Conservative)
On a point of order, Mr. O'Hara. Am I correct in assuming that the motion proposed by the Government is debatable?
Mr Michael Jack (Fylde, Conservative)
I hope that I might catch your eye and discuss it. I am surprised that the Government Whip has decided to propose the motion at this juncture, as it is only 31 minutes to one o'clock, when our proceedings are supposed to conclude. It is disappointing that the Government have seen fit not to inform us. It raises questions about their preparedness to advance before the Committee the subsequent clauses for the afternoon sitting. Perhaps it also suggests how the Opposition have assisted through their careful and proper probing of clauses and schedules, thereby creating an opportunity to make further progress.
I express my disappointment that the Government Whip has seen fit to pull stumps now, when officials whose purpose is to advise Ministers are present, but unable to perform their function. It is a shame that the Government Whip has sought to end our discussions at this stage; I would have appreciated the chance to move on to further business.
Mr Graham Allen (Government Whip (technically Vice Chamberlain, HM Household); Nottingham North, Labour)
It is unusual for Government Whips to say anything in Committee. I was merely responding to the agreement made through the usual channels. I am sorry that certain hon. Members are obviously not privy to those discussions.
Mr Edward O'Hara (Knowsley South, Labour)
The circumstances are simple. An Adjournment has been proposed and I shall put the Question to the Committee. Hon. Members who object should vote against it.
Question put and agreed to.
Adjourned accordingly at twenty-nine minutes to One o'clock till this day at half-past Four o'clock.