Mr Howard Flight (Arundel & South Downs, Conservative)

I beg to move amendment No. 34, in page 49, line 38, leave out `Those' and insert—

`In subsection (7) of section 76 of the Finance Act 2000 for ``6th April 2000'' substitute ``6th April 1998''.

(3) These'.

Dr Michael Clark (Rayleigh, Conservative)

With this we may take amendment No. 35, in page 49, line 39, leave out `amendments made' and insert `provisions brought into effect'.

Mr Howard Flight (Arundel & South Downs, Conservative)

We welcome clause 76, in general, which extends business taper relief to non-trading companies because of the problems with the definition of trading companies and because greater moral worth is not necessarily attached to trading than to non-trading companies. I suggest gently that to be in accordance with the tax law rewrite, subsection (2) might be better read if it made reference to the dates on which the amendments would have effect rather than referring back to previous legislation.

Our amendments reflect that the extension still has the complexities of different dates between the start of taper relief and the start of business relief. Taper relief rules apply from April 1998, but the new rules on business assets came into force only in April 2000. The result is that many people who acquired assets before April 2000 on terms which then did not qualify for business asset taper, but which now do, have a less favourable as well as a different tax situation from those who acquired business assets after April 2000. In many cases, they may end up paying more capital gains tax, rather than less. The amendments seek to address and cure that problem and to get rid of the considerable tax complexity that results from the two different dates.

There is a view that it might be more satisfactory, in due course, to have a workable statutory definition of qualifying companies for the purpose of business assets. In addition, there are still investors who are not employees and those who hold more than 10 per cent. We would continue to argue for an amendment to the trading company definition that is based wholly or mainly on purpose, rather than on activities, as at present.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I remind the Committee of the policy background of the arrangements in the clause. Two principles govern access to the more generous business assets rate of capital gains tax taper relief. The first is to encourage desirable investment by compensating for risk in, for example, unlisted trading companies. The second is to encourage employees to align their interests, so to speak, with those of the company for which they work, through share ownership.

As the hon. Gentleman explained, the purpose of amendments Nos. 34 and 35 is to backdate to 6 April 1998 the benefits of the new definitions of business assets that were included in the Finance Act 2000 and, in particular, the benefits in clause 76. There are several reasons why I do not wish to do that: it would produce no increase in productivity or benefit to the economy; it relates to past behaviour; and it would be expensive, with substantial deadweight costs.

The changes that the Government made last year provided real and positive encouragement to entrepreneurial investment and greater employee share ownership. Our aim is to provide the right conditions to boost productive business activity. The amendment would not achieve that. It provides no encouragement for the future, but seeks instead to reward past activity. Therefore, the hon. Gentleman will not be surprised that I am not attracted to it.

The amendments would be extremely expensive. I am sure that the hon. Gentleman would agree that a cost of some £300 million during the next three years for activity that has already occurred would not be considered a good investment, by any stretch of the imagination. In my view, that expenditure would be wholly wrong. I understand the hon. Gentleman's argument, but the Government are not attracted to it.

In addition, the amendment would require us to revisit closed tax assessments and would direct money away from the new enterprise economy, rather than providing incentives for growth. Those are real problems. I think that the hon. Gentleman agrees with our changes, but wishes that we had made them last year, so that the benefit would have accrued over that time. I am sure, however, that he appreciates that it would not be—dare I use the word?—prudent to use £300 million to reward what has already happened. Therefore, if the hon. Gentleman presses the amendment to a vote, I ask the Committee to reject it.

Mr Howard Flight (Arundel & South Downs, Conservative)

I thank the Paymaster General for her clear exposition of the Government's stance. We have only £8 billion in spending reductions to play with, so if we find ourselves in power, I accept that £300 million is a mature sum of money.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

The hon. Gentleman will recall the lengthy discussions that we had on this point last year. Does he agree that the philosophy behind taper relief is that it rewards length of time of ownership? In other words, the longer one has the asset, the more relief one receives. His amendment would ensure that individuals were not disadvantaged for complying with that philosophy. They will have held the asset for a long time, so they should enjoy the same benefits as do people who acquired the asset after April 2000.

Mr Howard Flight (Arundel & South Downs, Conservative)

I thank the hon. Gentleman for his comments. I agree only to the extent that taper relief is allied with business relief. The broad concept relates to those people who work hard for a business, make it succeed, acquire a manager-owner mentality and so on. A mixture of business relief and taper relief is designed to achieve that.

The argument about longevity of holding by itself is much more questionable. Indeed, many economists would argue that it causes considerable economic distortion, and that the Government's attempt to change the capital gains tax regime purely in that context is economically misconceived. There is, however, a straight trade-off between money and fairness. There is a considerable and justifiable feeling of unfairness among longer-serving employees, who will end up paying more on their shares in the company, even though they almost certainly worked just as hard before April 2000 as they have done since. That has largely been the nature of employee share-ownership.

The argument about fairness and, overall, about creating employee ownership in companies is consistent with the amendments and with the case that we argued last year. However, the Government have made it clear that they will not give way, for the reason that has been given. On that basis, I beg to ask leave to withdraw the amendment.

Mr. Burnett rose—

Dr Michael Clark (Rayleigh, Conservative)

I wonder whether the hon. Member for Arundel and South Downs (Mr. Flight) would care to withdraw his amendment after the hon. Member for Torridge and West Devon, whom I meant to call before, has spoken. If I may say so, the hon. Gentleman did not rise quite as promptly as I would have wished.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I apologise, Dr. Clark. You are quite right that I should be quicker off the mark.

I hope that the hon. Member for Arundel and South Downs agrees that the Government's philosophy—I am not questioning its merits or otherwise—is to reward length of tenure of ownership. It seems to me this year, as it did last year, that discriminating against those who have held the assets for longer flies in the face of that philosophy.

Mr Howard Flight (Arundel & South Downs, Conservative)

I accept, as night follows day, that that is a logical argument. However, I reserve our position on the principal argument for longevity of ownership. I think, however, that everyone agrees that share ownership by employees is economically and personally successful and desirable.

I stand by the comments I made earlier, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 76 ordered to stand part of the Bill.