Approval of Companies as Trusts

Orders of the Day — Finance Bill – in the House of Commons at 3:52 pm on 25th January 1995.

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Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury) 3:52 pm, 25th January 1995

I beg to move amendment No. 15, in clause 64, page 57, line 44, at end insert— '(1A) No approvals shall be given under this section after 6th April 1997.'.

The Chairman:

With this we shall take schedule 14 and amendment No. 11.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

Our difference with the Government is not on the importance of investment, especially for smaller and higher risk companies. We have argued long and hard that the Government should do more. A form of venture capital trust properly put together could have a role in that. Our strong concern is that the way in which venture capital trusts are designed in the Bill and the manner of their tax treatment will not provide the stimulus to the right sort of investment in an efficient way.

If the scheme goes ahead, the Government will find—as they did with the business expansion scheme—that they end up using taxpayers' money to subsidise many low risk investments backed by property, primarily for tax avoidance purposes. Given the business expansion scheme experience, we have to ask why the Government are bringing forward a venture capital trust scheme in this way—with no explicit exclusion of property companies and only limited exclusions of property-backed companies.

When I saw in yesterday's Financial Times that the Chancellor of the Exchequer was considering flogging off the Treasury, I thought that I saw a connection—perhaps venture capital trusts will be used to market the Treasury itself. I can see the glossy venture capital trust prospectus now: "Invest in a prestigious central location. Buildings rather tarnished by present occupants. Fake blood to be removed from office of the Chief Secretary to the Treasury. Real beer to be removed from the floor of the Chancellor's office. Excellent potential in an exciting project to be under new dynamic management within two years".

The tax breaks in the scheme are huge. Compelling though the case for assisting in flogging off the Treasury may be, we have to ask how the cost can be justified. The Government estimate that venture capital trusts will cost the Exchequer almost £700 million over three years. The House is right to ask how the Government can justify huge tax breaks to facilitate investment, including some very safe investment. The answer is that they cannot.

As I will set out in my speech, there is every prospect of venture capital trusts as designed in the Bill and defined in the clause becoming a monumental tax avoidance device, stimulating the business of the tax planners more than that of the companies which the Government claim that they are trying to help.

Photo of John Butterfill John Butterfill , Bournemouth West

I am grateful to the hon. Gentleman for giving way and I am sorry to interrupt so early in his speech, but I should like to clarify his thinking for the convenience of the Committee. I fully understand his concern about the absence of an interest-in-land rule in the proposals before us, but apart from the opportunity for what might otherwise be safe investment, would the Opposition support the principle that some tax advantages—such as roll-over relief and the freedom from ultimate capital gains tax—should be afforded to encourage venture capital investment?

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

Later in my speech I shall propose some ways in which the Opposition believe that that concept could be applied more successfully. We have never argued that there is no case for fiscal incentives in investment. Indeed, we have advanced that case very vigorously in relation to much-needed investment in research and development. It is a question of weighing properly and realistically the balance between the cost to the Exchequer of the tax subsidies involved and the actual gain to the public through stimulating beneficial investment. Because of the nature of the tax breaks within the scheme and the property exclusion to which the hon. Gentleman referred, we do not think that the proposal gets the balance right.

We believe that the Government should at least concede that there are risks involved in embarking on this scheme. They should have learnt from the experience of the business expansion scheme. It is wise to propose a sunset provision in the legislation, as Opposition amendment No.15 does, so that Parliament can re-examine the operation of the scheme after two years. We can then assess whether the cost of the tax relief involved has been justified by the additional capital invested in genuinely high risk but potentially productive and profitable enterprises. It is important to invest capital in high risk ventures, but we want those ventures to have at least some probability of success; we do not want to squander taxpayers' money. Past schemes, such as that involving DeLorean, were not always a wise use of economic resources and taxpayers' money.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

The hon. Gentleman was implying that it would be sensible to form a judgment on a company's prospects after two years, when it has been involved in the risky enterprise that one assumes would be the frame for a venture capital trust. Realistically, does he think that two years is sufficient time for that judgment?

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Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

I take the hon. Gentleman's point. Even if, after two years, it seemed sensible to allow the scheme to continue, further evaluation would still be needed. After two years, however, it would be clear whether the Government are right in their contention that the scheme will direct savings into high-risk, productive industrial enterprises, backing up entrepreneurs who are currently short of capital or whether, as we feel, it is likely to divert savings from other investments.

The terms in which the venture capital trust is structured are such that within the parameters of the scheme the influx of funds will gravitate towards the low risk investments which the limited exclusions facilitate. That judgment could be made after two years. We would then be able to assess the balance of costs and benefits and a proper evaluation could be made of what benefits there are, who gets them, and the considerable costs involved.

The Government must face the issue squarely. The tax breaks are enormous: it appears that either the Government have made a major blunder in the way in which the scheme has been designed, or they want to give money away.

Let us consider how the definitions in the clause will work in practice. Those putting money into the scheme will not pay tax on the dividends that they receive up to a limit of £100,000 invested per year, and they will not pay tax when they sell their shares in the venture capital trust. Indeed, it is worse than it first appears. It does not just mean that investors can get up to £100,000 back from the trust in any one year and pay no capital gains tax; it means that everything is free of tax, including the return on the £100,000 invested per year. If the £100,000 yields a £150,000 return, there would be no capital gains tax on the extra £50,000.

Investors can claim tax relief at 20 per cent. in any one year on up to £100,000, provided that the shares are held for five years. A 40 per cent. taxpayer can thus avoid tax of up to £20,000 by putting in the maximum £100,000. So long as an investor has income of £100,000 or more, as the increasing number of privatised utility profiteers do, they need invest only £80,000 after tax because the Inland Revenue will contribute the other £20,000.In total, if the shares purchased in the venture capital trust yield a 50 per cent. growth over five years, for the expenditure of £80,000 of post-tax income the investor will get £150,000 back with no tax to pay and no tax on the dividends received in the meantime.

Even that is not the end of it: investors can also use the venture capital trust to defer capital gains tax. A 40 per cent. taxpayer could sell assets—perhaps in shares or property—with a capital gain of £100,000, put that gain into a venture capital trust and thereby defer the capital gains tax of £40,000. The gain, at least in theory, would he liable to taxation when it was withdrawn from the trust, but there would be nothing to stop the investor reinvesting the money, perhaps in another venture capital trust, further to shelter it.

If the Government want to establish a scheme whereby they are not taxing income which goes into saving—and academics argue that it is an intelligent direction in which to point the taxation system—they should do so in a way which enables everyone to take advantage of the provisions and not simply gear them towards venture capital trusts and other investment schemes which are particularly beneficial to a minority of very wealthy people.

Photo of John Butterfill John Butterfill , Bournemouth West

I am sure that the hon. Gentleman appreciates that the Government are trying to encourage investors away from existing investments that are safe but are not producing the results we want and towards risky entrepreneurial activities. The investor could defer that liability just as long by leaving the money where it is. Provided that he does not realise his existing assets, he can defer liability indefinitely. He is not being offered any real advantage, other than the incentive to move his money from something safe and unproductive to something less safe but, one hopes, more productive.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

I answered that point earlier. Our fear is that the scheme will provide an opportunity to move investment from something safe and unproductive not to something high-risk and productive with tax advantages, but to something equally safe and unproductive offering a much higher rate of real return because of tax breaks. That cannot be right.

The scheme offers huge tax breaks when the money goes in, with relief from income and capital gains tax; breaks when the money is in the trust, when dividends are not taxed; and tax relief when the money comes out, with relief on capital gains. It is no wonder that Mr. John Speirs, director of BES Investments and a leading adviser on business expansion schemes, stated in The Sunday Times on 4 December 1994: I cannot see why anyone should pay capital gains tax again…If we had written it ourselves we could not have come up with a better Budget for the tax shelter industry.He did not say "a better Budget for high-risk, productive small companies. That damning indictment of the Government's scheme is anything but an isolated comment. The savings and investment press is full of more of the same. On Second Reading, I quoted from the excellent publication, Small Company Investor. Perhaps the Financial Secretary will say whether he has yet adopted my advice and taken out a Treasury subscription to that magazine, which gave a commendably informative guide to the real consequences of the Government's proposals. It published a feature headlined: Life is just a bowl of tax cherries. Will you need to pay capital gains tax again? Maybe not. Another article in the same issue asks: What has our Chancellor, Kenneth Clarke, been doing to turn our smaller company investment dreams into a reality? How could he get his budget so right— the Committee can tell that I am not quoting selectively— and yet so horribly wrong? No, not the VAT on fuel blunder, but the tax relief for smaller company investment. He did what was needed to pump up investment by making the reliefs huge—and then he took some of it away by dragging in property. Isn't that just what happened with BES? Our bet is that there will be an avalanche of lower-risk, property-backed schemes taking money away from entrepreneurial small companies. That is precisely the opposite effect that the Government claim. It added: Think again Chancellor. Such comments are not confined to the savings and investment press. A number of academics have reached similar conclusions. A report produced by the SME centre at Warwick university and published by the Government entitled "An Assessment of Firms Located On and Off Science Parks in the United Kingdom" stated: Other options which have been suggested for overcoming the financing problems which developing high technology businesses claim to experience include:The establishment of venture capital funds which would focus exclusively on the high tech sectors. Such funds, however, have been established in the past without achieving significant success. It continues: Additional tax support for business angels. The introduction of the Enterprise Investment Scheme could be seen as a satisfactory development in this light. However, other research casts doubt upon the use of taxation incentives in inducing desirable changes in this area. In a study sponsored, I understand, by the Department of Trade and Industry and others and entitled "Understanding the Small Business Sector", the author, D.J. Storey, an acknowledged expert on these matters, said: The research evidence suggests that government has to look very carefully at proposals to use the taxation system to provide `incentives' to modify the behaviour of individuals who own small businesses. Currently, it is unanimously recognised that small business owners have to invest more heavily in their own businesses rather, than being excluded from doing so, as was the case with the BES. For example, research evidence consistently shows that individuals who do not reinvest sufficiently in their own businesses run a much higher risk of business failure. However, the history of BES is one of desirable objectives of small firm policy being the focus of taxation exemption, for these only to be used as tax avoidance vehicles. Our recommendation would therefore be to avoid, wherever possible, the use of the taxation system to provide incentives in this area. Instead we feel that government would be best advised to use its powers of persuasion, possibly through collaboration with banks and accountants, to emphasise the investment message. The message that excessive withdrawals from the business are likely to lead to its failure has to be drilled home to small business owners, rather than emphasis being on the provision of tax breaks for the wealthy. That gives a wider perspective of the context in which VCTs are being introduced and their likely effect on the small business sector. Unlike the Government, Labour believes that such comments should be taken seriously, and that a measured and careful approach must be taken to fiscal incentives of these types, although we acknowledge, as I have said, that a role can be argued for them.

Faced with the weight of comment and the quotations and analyses that I have cited, we believe that the Government must give some answers, rather than—as always—arrogantly expecting the public to accept that Ministers know best, especially when they patently did not know best about the business expansion scheme and other schemes which they subsequently had to return to the House to change.

It was revealing that, when the Financial Secretary replied to the debate on Second Reading on Tuesday last week he had no answer to the charge that the form of VCTs that the Government are proposing will be used disproportionately for tax avoidance and tax sheltering. I expect that when the Financial Secretary replies he will claim that the clause takes care of tax avoidance dangers. I am arguing that it does nothing of the sort. I accept that the clause excludes dealing in land, goods, banking and other financial services, some leasing business and legal and accountancy services, but most crucially of all it does not exclude, as I understand it, property-backed schemes. Similarly, it does not exclude elderly people's accommodation.

There is ready scope for abuse of the scheme for tax avoidance purposes, which will not provide investment in the high-risk productive businesses and manufacturing businesses that the Government claim for it. That is why we tabled amendment No. 16, which would have put limits on the way that property could be used to back companies qualifying for VCT relief. A Liberal Democrat amendment which would have the same effect has been selected for debate today. It seeks to stop schemes mainly backed by property from benefiting from the extensive tax reliefs of venture capital trusts. Both amendments—the Labour amendment which was not selected and the Liberal Democrat one which was selected—introduce into VCTs the same property restrictions that the Government felt that they had to introduce into the business expansion scheme and the enterprise investment scheme.

Given all that happened, particularly with the business expansion scheme, it is ironic that the Government propose to remove the safeguards from the BES and EIS in the Bill and not to introduce them into VCTs. What possible argument can there be for not ensuring the safeguards that the Government had accepted? Could it be anything to do with the fact that the property restriction is so unpopular with the BES and EIS tax planning industry? It is difficult to find any other reason why those safeguards should not apply.

Opposition Members believe in learning from experience and acting with a knowledge of the way in which markets have behaved, rather than planning simply on the basis of the way in which we might like to suppose that they would behave. If two investments have the same or similar return, investors will naturally tend to invest in the lower risk option. Their advisers will advise them to do just that. Experience shows that the tax planning industry can demonstrate great ingenuity in trying to create relatively low risk investments, often backed by property. We believe that the Government could and should create better mechanisms for ensuring that tax relief ends up supporting the financing of enterprises which generate the greatest value for the UK economy and which most need extra investment capital.

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As drafted, the schemes would also lead to a very complex structure which could produce some rather bizarre results. For instance, if someone bought a narrow boat and operated it as a holiday business, he or she could qualify for VCT tax benefits, but if they leased the boat to another person, who also operated it as a holiday business, that person would not qualify for the VCT benefits. If that person operated the boat as a holiday business for part of the year and leased it to someone who operated it as a holiday business for the remainder of the year, that person would probably end up in the High Court to determine whether or not he or she qualified for VCT tax benefits.

We should think about those things while the proposed legislation is before the Committee so as to avoid the complexity and the never-ending growth in the volume of tax legislation. [Laughter.] The Chief Secretary and the Financial Secretary laugh, but they are responsible for the volume of tax legislation. Nothing is more onerous to the small businesses that they claim to be helping than the huge volume of legislation and red tape for which the Government have been responsible.

I have a suggestion as to how the scheme can be changed and improved. The Labour party believes in listening to the real arguments and considering the real nature of the market with which we are dealing. It would be well worth the Government looking at the 50 per cent. rule, which requires that a VCT must hold 50 per cent. of its qualifying assets in the ordinary shares of unquoted companies.

Let us not forget that that requires small companies to give up a good part of control and equity to raise the funds they need. That is something that small businesses view with a great deal of apprehension. The fact that it is required reflects something of an obsession with equity in this country which contrasts with the tendency to fund through debt which is more prevalent among our successful European competitors and in the far east. There is a strong case for relaxing the 50 per cent. requirement so as to allow companies preferring to issue, for example, fixed rate securities, to benefit from the VCT advantages.

Photo of John Butterfill John Butterfill , Bournemouth West

When the hon. Gentleman refers to ordinary shares, does he mean only ordinary shares or would he include preferred shares? He will know that the structure of many of the schemes is that the lending institution will take the preferred shares, leaving the ordinary shares with the entrepreneurial management. That structure enables them to give a larger proportion of the ordinary shares to the management, thereby giving a greater incentive to management than would otherwise be the case.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

The hon. Gentleman draws attention to an important distinction. It is a useful point, but I was making the case for shifting from the 50 per cent. requirement of equity, of holdings in shares of whatever form, to the case for enabling the company requiring the capital to take it in the form of fixed interest securities, which would not involve that surrender of control. It was the importance of control from the perspective of the firm receiving the savings and making the productive investment that was of concern to me.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Is the hon. Gentleman seriously suggesting that tax relief under the scheme should be extended from equity investment to fixed interest investment? Is that what he is saying? Surely that runs counter to what he was saying just now about risk. There is far less risk in investing in fixed interest debt, which takes priority over equity in a liquidation. Surely he is not suggesting that the risk should be reduced in that way.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

I am saying that a comprehensive look at the scheme would lead to a number of the parameters which are operating being varied. The 50 per cent. requirement on shares is one of them. The case for reducing the tax breaks also bears examination. Rather than the definition that the Government are using, which is essentially that the scheme can be applied to anything within certain broad terms and not on a list of exclusions, why not be more positive and say that the scheme will apply in the case of X, Y or Z or to those firms which satisfy the relevant criteria?

By taking a number of elements of reform to the package one could put together a form of venture capital trust which would more successfully achieve the Government's stated aim of ensuring that available savings went to the high risk companies which are investing particularly in manufacturing or undertaking research and development. The scheme as designed by the Government will not achieve those objectives.

Talking about venture capital trusts, the Financial Secretary said on Second Reading: The Labour party is ill advised to come out against them at this early stage."—[Official Report, 17 January 1995; Vol. 252, c. 673.] That seemed to imply that somehow we would be better advised to come out against them later when the hard earned money of middle and lower income taxpayers had been wasted in subsidies for tax avoidance by those with enough money to extract the maximum benefit from the trusts. The amendment gives us and the Government the chance to do just that.

If the Government will not look again at the schemes now, they should look again at them in two years as we suggest. They should look at them early in 1997, which may be just the time when the electorate is taking another—and final—look at the Government. If the Financial Secretary is so confident of his arguments, so confident of the public, economic and industrial benefits of the trusts as defined in the clause, he should have nothing to fear from such a mandatory review and should find it easy to accept the amendment. If he does not, we shall not only vote to try to make him do so and support the Liberal Democrat amendment to exclude property-backed schemes, a proposal that we also tabled, but we shall vote against this ill-judged vehicle for tax avoidance by voting against clause 64 in the Division Lobby.

Photo of George Young George Young The Financial Secretary to the Treasury

I hope that the Committee can be persuaded to resist the amendments.

The hon. Member for Oxford, East (Mr. Smith) began by saying that he supported the principles of venture capital trusts, but by the end of his speech he had so qualified his support that little remained intact. At one point he challenged the whole philosophy of using the fiscal regime and tax incentives to create fresh investment in new businesses. He focused almost exclusively on the relationship between the potential investor and the venture capital trust; he did not spend quite so much time examining the potential impact on supply-side change, job creation and investment in new and expanding businesses.

The hon. Gentleman asked me whether I had read a particular publication. I am not conscious of having done so. I recall that the last time the hon. Gentleman read out a list of publications held by the Treasury, he came across one called "Baking Technology". That was a misprint: it should have been "Banking Technology". However, I understand the hon. Gentleman's surprise.

Photo of George Young George Young The Financial Secretary to the Treasury

My hon. Friend the Member for Beaconsfield (Mr. Smith) made a pertinent and perceptive point. Having criticised VCTs for being too safe for the tax breaks, he floated a suggestion that would have made them even safer by allowing more of the money to be invested in fixed-interest securities.

Let me try to put the debate in a slightly broader context. When my right hon. and learned Friend the Chancellor introduced the idea of VCTs in his 1993 Budget, he said that the biggest contribution that any Chancellor could make to reducing unemployment in the medium term was to ensure that the conditions were in place for new businesses to become established and for small businesses to grow. In the past year, through the industrial finance initiative, we have been examining savings and the flow of funds through the economy into the business sector. That initiative identified the shortage of equity and other long-term finance as one of the problems facing small businesses today.

The CBI has conducted its own surveys in the past few years. Those surveys have shown that there are difficulties in the raising of funds, particularly in the range of up to £500,000. Dr. Steven Abbott, in association with the London business school, has shown that the United Kingdom economy has the capacity to produce 20,000 potential "star" start-ups, but only half that number are created, and nearly half of those rely on "funding gap" finance, mainly short-term overdrafts and loans. The VCT scheme is one of the Government's responses to a problem that has been generally recognised by serious commentators.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

I do not think that anyone would deny that there is a shortage of capital, particularly in small and medium-sized businesses. When suggesting ways of dealing with that shortage, however, will the Financial Secretary bear in mind the failure of the business expansion and enterprise investment schemes, which use tax breaks for that very purpose?

Photo of George Young George Young The Financial Secretary to the Treasury

This scheme is more like an investment trust—it is quoted and pooled—than the business expansion scheme.

Having carried the hon. Member for Oxford, East with me so far, I hope that I can persuade him to stay with me for another paragraph or two. With respect to the hon. Member for Stoke-on-Trent, South (Mr. Stevenson), the VCT scheme is not a tax scam for the wealthy, as he likes to portray it. He misunderstands the contribution that it can make to supply-side reform, the expansion of successful firms and the creation of jobs. Fiscal incentives may be needed if we are to capture those benefits. That is why I said, and I repeat it now, that the Labour party was ill advised to come out so firmly against VCTs as proposed by the Government.

There has been an encouraging response to our proposals. Already, many people say that they are seriously considering setting up venture capital trusts, and as far as I am aware none are focusing on nursing homes, granny farms or any of the other schemes mentioned by Opposition Members.

The main details of the scheme have been widely publicised. Investors who buy quoted shares in a venture capital trust will be able to invest in a spread of unquoted companies. That shows that it is very different from the business enterprise scheme which, by and large, was not quoted and consisted of single product schemes. Investors will be exempt from tax on dividends from the venture capital trust and from capital gains tax when they dispose of shares in the venture capital trust.

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If investors subscribe for new ordinary shares in the VCT, they will in addition be entitled to income tax relief at 20 per cent. provided that the shares are held for at least five years. They will also be able to defer capital gains tax on a chargeable gain which arises from the disposal of any assets where that gain is reinvested in the venture capital trust by that same subscription. There is a limit for tax relief on subscriptions of £100,000 a year.

Venture capital trusts must be quoted on the stock exchange and will enjoy the same exemption from corporation tax on capital gains as investment trusts. At least 70 per cent. of the investments of venture capital trusts will have to be in unquoted trading companies with not more than 15 per cent. in any one company or group of companies. Venture capital trusts may count investments of up to £1 million in any one unquoted trading company in any one year towards the 70 per cent. unquoted trading company requirement, provided that the gross assets of each company do not exceed £10 million before each investment. I am afraid that that knocks out doing the Treasury building under the ingenious scheme that the hon. Member for Oxford, East floated at the beginning of his speech. He will find that the sums involved are substantially in excess of £10 million.

Each venture capital trust may put up to £1 million a year in each company. The trust would be well advised to keep its eyes on rather more than 70 per cent. because it must not fall below that percentage. To put it another way, the legislation gives the VCT a 30 per cent. leeway for when it buys and sells investments.

The VCT may invest in most types of unquoted trading company but as the hon. Member for Oxford, East said, certain activities are specifically excluded. They are: dealing in land, commodities and other financial products; dealing in goods otherwise than in wholesale or retail distribution; banking; insurance; money lending; hire purchase financing, and so on; the leasing of assets or receiving royalties or licence fees; and providing legal or accountancy services.

That considerably reduces the scope for the venture capital trust scheme to be used for low-risk investment. Unlike the business enterprise scheme, it does not apply to investment in private rented housing companies. The VCT legislation follows the enterprise investment scheme legislation in providing for the Treasury by order—subject, of course, to Parliament—to amend the meaning of qualifying trades and the figures of £ 1 million and £10 million. That should give a measure of flexibility in running the scheme.

The theme of the speech by the hon. Member for Oxford, East was that the scheme would become a major tax break for the few. The Chancellor anticipated such reactions in his Budget speech. Tax reliefs of this kind are designed to stimulate much-needed investment in business and enterprise and to create jobs rather than new tax loopholes. As I said on Second Reading, some firms have a high growth potential because they are able to benefit from innovations, but they are sometimes unable to get access to normal sources of finance through the stock market or the banks. That is because they have special characteristics which the financial system is unwilling or unable to accommodate, hence the funding gap which the industrial finance initiative has identified.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

What evidence is there that the tax treatment of investment in those companies is the problem?

Photo of George Young George Young The Financial Secretary to the Treasury

The problem is the shortage of risk capital, of investors being unwilling to provide capital for such firms without some sort of fiscal incentive. Many serious commentators who have looked at that structural problem in the UK economy have been drawn to that conclusion.

Photo of Mrs Helen Liddell Mrs Helen Liddell , Monklands East

Does the Minister accept that there is a considerable problem in the venture capital industry, particularly in relation to small and medium-sized enterprises? There is a funding gap, and one of the reasons for that, the venture capitalists tell us, is that it costs as much to service a loan for a major management buy-out or for a major privatisation as it does to service one for a small or medium firm. Nothing in the Bill gives any hint that that gap will be filled in any way.

Photo of George Young George Young The Financial Secretary to the Treasury

The whole purpose of the clause is to reduce the cost of risk equity capital for small businesses. We are making it easier for those businesses to access the capital that they need. That is the thrust of the measures before the Committee this afternoon.

The proposals in the Bill are the result of the painstaking consultation that has taken place in the past year. It is a balanced package and it has been warmly welcomed. The Association of Investment Trust Companies has said that the scheme has a good chance of success in encouraging equity investment in small, unquoted companies. Rothschilds has said that the measures will nurture business in the United Kingdom food sector. Others have said that the trusts are imaginative and bold, and that the measures will bring investment in private companies within the reach of more investors. The challenge now is to secure that potential.

Photo of Clive Betts Clive Betts , Sheffield, Attercliffe

The Financial Secretary has used one or two extracts from the comments of various commentators, who seem to commend the scheme because of its tax benefits. Given the calculations that are being done on the tax relief that is likely to arise from these measures, perhaps the Financial Secretary could say what sort of people on what sort of incomes will benefit from that tax relief. Will he give clear Treasury estimates of what sort of schemes will benefit, how much more investment will go into small manufacturing firms rather than into property schemes, and how many jobs will be created? Have those estimates been done or are we living in a vacuum?

Photo of George Young George Young The Financial Secretary to the Treasury

If the hon. Gentleman reads the publication that we put out on Budget day, he will find the best estimate that we can make of the take-up of the scheme. We have worked out roughly what the forgone tax relief will be. As I said, we have excluded a number of activities that we do not think are appropriate. At this stage, a number of merchant banks and investment trusts are putting together potential venture capital trusts. The information that I have read contains no evidence that they are going into the sort of low-risk, property-backed investments that the hon. Gentleman mentioned.

I have noticed the investment mentioned by Rothschilds, which is interested in helping small firms in the food manufacturing and food processing business, which needs to access high technology and where a problem exists in raising capital. I hope that no one in the Committee will criticise firms benefiting from this sort of scheme.

Photo of Andrew Smith Andrew Smith Shadow Chief Secretary to the Treasury, Shadow Spokesperson (Treasury)

The Financial Secretary has mentioned Rothschilds twice. In what form were Rothschilds' comments made to the Government? Did it make them as an adviser or as a consultant on the matter?

Photo of George Young George Young The Financial Secretary to the Treasury

Speaking from memory, Rothschilds put out a press release welcoming the scheme on Budget day and it was available for everyone to read.

Photo of George Young George Young The Financial Secretary to the Treasury

As far as I am concerned, that is all.

One of the amendments proposed by the hon. Member for Oxford, East would restrict the take-up to schemes that were taken up before, I think, April 1997. Because the Government are keen to ensure that good-quality investment arises from the venture capital trusts scheme, I do not think that that is a sensible way to proceed. Everyone agrees that it takes time to look this out and to encourage it. VCTs will often want to research the sort of investment that they wish to make before they get off the ground. Putting a time limit on the scheme, especially one as short as two years, will tend to hurry that process, which will not always have good results.

The second reason for objecting to the amendments is that they may have a perverse effect. More VCTs may seek approval in the first two years than would otherwise be the case, simply to meet the deadline. The purpose of the amendments may have been to save the Exchequer money, but they would not necessarily achieve that, and we could be left with a large number of potential VCTs lying dormant, without raising any new capital for the economy.

As with all enterprise investment scheme rules that the Government now believe it is reasonable to relax, the land rule was inherited from the business expansion scheme. It was introduced to prevent companies that held more than half their assets in land and buildings from using the scheme. The rule, however, became onerous to operate because it required regular valuation of assets. Even more worrying, it could prevent a trading company—for example, a manufacturing company—that owned its own premises from using the scheme. It surely is not right to preclude a company from using the VCT scheme merely because it owns its own premises. That would be a ludicrous proposition and that is why we are not supporting that exclusion.

The proposal is a serious response to a serious problem. Nothing I have heard so far in the debate has convinced me that the premise on which it is founded is otherwise than correct. Real potential exists in taking the concept forward. A real opportunity exists to open up lower-cost risk capital for small and promising new businesses. I very much hope that the Committee will reject the amendments and give the clause a Second Reading.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I wish to speak to amendment No. 11. I hope that, in spite of his opening remarks, the Minister will consider the amendment because it recycles the Government's own argument, and with legitimate force. He has not convinced me that circumstances have changed so dramatically that serious consideration of the amendment is not required. However, let me first put the debate and the amendment in context.

It is generally recognised that there needs to be a fundamental shift—perhaps even a cultural shift—in the way in which we finance small businesses and in the availability of finance to small businesses. To the extent that the Government's proposals for venture capital trusts are a contribution to that, I and my colleagues welcome them and, in principle, support them. The amendment is specifically a qualification; it in no way constitutes opposition to them. They could be useful and helpful although I stress that they are not the whole answer but a contribution towards the resolution, or at least a reduction, of the problem.

One problem is that of developing new incentives for business investment by means of tax breaks. Surely after 15 years in power, the Conservatives are able to recognise that tax breaks have their uses but, by definition, create the potential for abuses. One person's tax incentive is someone else's tax avoidance scheme. That is not a contentious statement; indeed, it is accepted as part of the business of tax avoidance. However, the right balance must be struck so that we do not create a system that is geared more to tax avoidance than to the creation of investment for small businesses.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

I do not think that the hon. Gentleman was a member of the Standing Committee that debated last year's Finance Bill. Had he been a member, he would have had the opportunity to take part in an important debate on the difference between tax avoidance and tax evasion. Will he place on record the fact that tax avoidance is a legitimate activity, whereas tax evasion is not?

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I have no problem with that proposition, but the fact that something is legal does not mean that it is efficient; nor does it mean that it is in the Exchequer's interest or that it will create the benefits that the tax breaks were created to achieve.

So that there is no doubt, I repeat that basically we welcome the proposals on venture capital trusts. I hope that they will succeed in helping more money to get to the small businesses that need it. I see no conflict of interest, but I am concerned to ensure that we get the balance right.

Before I examine that particular part of the amendment, it is worth asking the House to make a simple comparison between small business finance and the success of small businesses in the United Kingdom and those in, for example, the Republic of Germany. There are some fundamental differences that will not carry over, but there is a growing recognition—perhaps because of the difficulties in the property market that we have experienced in recent years—that it is a matter of culture that we tend to regard investment in property as a higher priority than investment in business. That is one difference between the cultural attitude of the average Briton and that of the average German.

Before he buys a house or invests in property, the average German will choose to invest in a family business in which he can have a stake, either directly, if it is his family's business, or indirectly, if it is someone else's business, through which he can contribute to the wealth-creating process, the economy and, of course, his own prosperity. We have to find a way to make that cultural shift in this country.

Perhaps the one silver lining that might yet emerge from the otherwise disappointing state of the property market is that circumstances are forcing us to reassess whether it is right for us as individuals—let alone business people—to put so much of our savings into property rather than business. To the extent that the climate is changing, I accept that the scheme may make a contribution.

Photo of John Butterfill John Butterfill , Bournemouth West

It has been said from the Opposition Benches that property is a low-risk investment. Does the hon. Gentleman agree that that view would not be accepted by many of the people who now have negative equity on their homes? Experience over the past few years shows that property is a very high-risk investment. Nor would that view be accepted by the many property companies that have gone bust or have had to be rescued by all sorts of schemes. The state of the property market in the past few years has shown that there are just as many risks in property as there are in any other business. Under those circumstances, does the hon. Gentleman think that the scheme is likely to be abused?

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I accept the first half of the analysis. That is a fairly widespread, obvious observation of what has happened. I shall return to the hon. Gentleman's particular point when I address the detail of the amendment, because he made a fair comment, but first I shall finish the broader argument about schemes for encouraging investment in small businesses.

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Having looked a little more closely at other aspects of small business finance in the United Kingdom and in other countries, I saw that there was clearly a role for the banks in general. It is interesting that the Minister, quite without question, acknowledged that there is a venture capital gap. Most hon. Members who take part in debates on small businesses probably agree with that, but it is not always true that central bankers and joint stock bankers in this country agree. I have often heard the argument that there is absolutely no shortage of money, but there is a shortage of suitable enterprises. That, of course, is a matter of judgment and depends on what a banker decides is a good investment.

The banks have poured money into dubious ventures in South America, which they have had to write off, while denying many potential enterprises in this country the funding that they wanted. There is no doubt at all that too much business is also funded on short-term overdraft rather than on longer-term loan and equity. The structure is not always satisfactory, which makes businesses vulnerable.

The Government could explore a partnership between themselves and the banks to try to find ways in which small businesses could have access to finance through the banking system comparable with that available to larger companies. In my own experience of running a small business—I am told that it has not changed all that much over the years—I went along to my bank with a proposition, a business plan and an indication of my cash flow and my requirements, and the bank more or less said that it did not want to see my business plan. I was told that, depending on my equity, if I owned my own house and if I was prepared to put it on the line, I would be given the money. That was not the help that I needed. It was not the right attitude. It meant that I had to take a considerable risk.

However, what really irked me was that even though the bank was getting its security, I was told that, of course, as an untried small business, I had to pay cash in advance when ordering basic working capital equipment to run the business, as I could not get credit. I paid a premium rate of interest on the money that I had to borrow from the bank because I did not have a proven track record—despite the fact that the bank had total security over my home. It seemed double jeopardy for me and double security for the bank. Time and again, small business people say to me that they have to pay more interest to finance their wage bills than their customers, who do not pay them and who make them wait for payment. They say that they are being squeezed at both ends.

You may call me to order, Mr. Morris, but the point is relevant. The scheme is helpful, but it does not deal with the problem that I outlined. I hope that the Minister will recognise that we need to look more widely at ways in which to change the culture. However, I accept that the scheme contributes to that change.

I shall refer to the specifics of amendment No. 11 and the restrictions in it, and also address the point made by the hon. Member for Bournemouth, West (Mr. Butterfill). It is true that the property market has been somewhat depressed, although it is variable. Indeed, in certain sectors of commercial properties, there are signs of an upturn. However, it is acknowledged—the Government clearly had to amend the business expansion scheme to take account of the fact—that property-based schemes, essentially, have been used as an abuse of the previous schemes. People were not investing in productive enterprise but were simply building up property portfolios—that is the cultural point that I am making.

The Government introduced the restriction, and I am sure that the Minister is aware that the wording of my amendment is taken entirely from their own legislation on business expansion schemes. I do not think that the Government have made their case; although in the short term the climate may not be encouraging, the property market problem could lead to abuse in the future, and that could turn a good scheme into something that to some extent falls into disrepute.

I respond to the hon. Member for Bournemouth, West by saying that all that is required for there to be a potential abuse is an upturn in one sector of the property market, taking it significantly ahead of inflation—I hope that he is optimistic enough to see that that may happen in some places.

Far be it from me to give tips to those who plan such things in the City, but I represent an area that has not suffered the collapse in property prices that has happened elsewhere—we have experienced quite the reverse—and I can see that someone could easily be interested in offering a property-based portfolio in Aberdeen and the rest of north-east Scotland, where over the past few years there have been rent revaluations adding 200 and 300 per cent., and increases in both domestic and industrial property prices well ahead of inflation. People may say that we have also had a downturn, but it did not happen at the same time as the national downturn.

Circumstances can change. I do not wish to disparage the idea that people can invest in property, or to suggest that property is not a legitimate business. However, simply investing in the capital appreciation of bricks and mortar does not fundamentally add to the national wealth. I repeat my earlier analysis that that is part of the problem of the British culture—[Interruption.] If I buy a piece of property and it appreciates, nothing has been done to create new material resources, whereas if I buy a business making or selling things or providing services, something definite has been done to create national assets. Furthermore, as we have experienced over the past few years, what goes up can come down with one hell of a crash, especially if it was based on paper revaluations.

Photo of John Butterfill John Butterfill , Bournemouth West

Will the hon. Gentleman explain how, if his amendment were accepted, he would overcome the problem of a manufacturer with a substantial asset—perhaps his own factory—that would take him above the limit? By what methods would the hon. Gentleman cater for that?

Secondly, how would the hon. Gentleman deal with the problem of the variations in valuations that appear from time to time, both because different valuers are used and because of rapid changes in the property market? Surely we now know that that market is far more volatile than we used to think. At the time of the BES abuses, we all thought that property values would go up for ever, but I do not think that many of us believe that any more.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

That is a fair point, but although the Government are relaxing the provisions now, they administered the scheme on their own terms in the past. The argument about valuations is important and valid, but the question is administrative and can be resolved. There could be a periodic revaluation by the normal methods—either by using the district valuer or by having two competing valuations. That would be perfectly reasonable.

The more specific arguments about valuations and about a manufacturer with a substantial property investment raise two points. First, if such a person owns a substantial amount of property, he also has the means to raise the finance himself. One therefore wonders whether he needs the attraction of venture capital trust funding. He has an asset against which he can borrow.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I have already given way to the hon. Gentleman a couple of times.

The second point is that I am somewhat sceptical about the idea that many companies are geared so that the value of the property is more than 50 per cent. of the value of their total business. In my opinion, unless it is a property-based business—in which case it should be properly restricted—that business has got its gearing slightly wrong. However, that issue comes into play in some businesses, such as hotel businesses, and the potential restriction that the amendment proposes is relevant in those circumstances.

In effect, the Minister has said, "We did have that restriction but, perhaps because the property market is rather quiescent and because people have complained that it is slightly complicated, we have decided to relax it." However, the commentators—not only myself and not only the Liberal Democrats—say that the Government are making a fundamental miscalculation, which they may live to regret. That is my argument.

I think that the Government accept that the amendment is not a wrecking amendment, nor is it spiteful or irrelevant. It is pertinent, and its aim is to protect the virtue of the Government's scheme, to ensure that the scheme does not fall into disrepute because it becomes open to abuse of development simply as a tax shelter rather than what it is designed to be—a real contribution to opening up investment for small businesses.

Maurice Fitzpatrick, senior tax consultant of Chantey Vellacott, commented: EIS share issues are potentially subject to the same kind of marketing abuse which existed for BES in the 1980s. He said that investors would now be bombarded with schemes, only a proportion of which made sense". He said that effectively they would be squandering their tax relief on manager or proprietor expenses". The Government should be mindful of those worries.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

That was referring to the enterprise investment scheme, not venture capital trusts.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I appreciate that, but the same problem will continue if the Government are so relaxed about it. We ask the Government not to spoil a good idea by being too relaxed about it and allowing it to become a marketing tool for tax shelters, rather than a genuine contribution to small business investment because, if that happens, the Government will need to modify it substantially later.

It is possible to spoil a good idea by being too lax about it. After all, the Government have said that they are anxious to maintain tight control of public expenditure and public finances.

If, as a result of miscalculation, the budget is exceeded because the take-up is greater than expected, because the opportunities are much greater, simply for tax shelter purposes, or if money is diverted away from genuinely productive investment, the danger is that people will say that the scheme is bad and did not deliver the goods, and we shall have to go back to the drawing board.

I repeat that I believe that the Government have the basis of a good scheme. We propose an amendment that will ensure that it continues to concentrate on the objectives that the Government have in mind, which we support and endorse.

I think that there is even uncertainty about the scheme on the Government Benches. The Government should take seriously the argument about tax loopholes. They have, understandably, poured scepticism on the argument of, for example, the shadow Chancellor of the Exchequer, that substantial amounts of money can be reclaimed by closing loopholes. They have retorted, also with some justification, that closing tax loopholes effectively places extra taxes on business.

However, the Government must recognise that, if they create a potential abuse that costs a significant amount, they give credence to the argument that there is more opportunity to close loopholes. In those circumstances, it is astonishing that, having recognised that they got it wrong with their previous schemes, the Government appear to be knocking that lesson aside casually and, as some commentators are saying, they are in danger of making a potentially costly mistake.

What alternatives exist? The Red Book calculates that the scheme will cost £150 million in 1995–96, which presumably is in lost tax revenue. That figure will be up to £290 million in 1996–97. Those are only estimates, because the figures are based on the presumed take-off. If our concerns are justified and the property market goes into some sort of unexpected pre-election or even post-election upturn—that seems unlikely at present—we are concerned that the figures could soar out of control.

The Government have a strategy to keep public finances under control. They want to cut taxes, but should they suddenly find that their figures are out by a factor of one or two, questions will inevitably be asked about how they managed to let rip the economy and how they lost control over it. The Government have not imposed cash limits or restrictions, other than the approvals that might provide some sort of control.

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The Government could find a substantial amount of money being used in that way. If that money was being used to achieve the cultural shift that I mentioned and for genuinely wealth-creating small business investment, I would say that it was well forfeited by the Exchequer. But if it was simply being used for schemes based on an upturn in the property market rather than for real wealth creation—schemes that were being promoted as tax shelters and havens—I would not regard that as good use of the money. The Government would be rightly criticised for failing to get a grip on public finance.

We are proposing a constructive and helpful amendment that is entirely in accord with the Government's realisation of what happened under their previous schemes. While I acknowledge that the Minister contends that the proposals are fundamentally different from previous ones, it is clear that they are not—not just to me, but to those who make a living in the City out of such packages. They believe that the Government may have made a mistake. The Government may find that the policy will be abused and the finances will go out of control. They may have to forfeit more tax revenue than they intended for less productive gain.

In those circumstances, I genuinely and sincerely commend the amendment to the House. It is constructive and designed not to undermine the positive and beneficial effect of the Government's proposals, but to ensure that they are targeted where they will be most beneficial—productive investment.

Photo of John Horam John Horam , Orpington

The clause, and the amendments and schedule associated with it, involve the subject of the financing of small businesses, and all our speeches today will concentrate on that. We should remind ourselves of the importance in the economy of small businesses. There are about 5 million businesses in this country at present, 97 per cent. of which have fewer than 20 employees and 90 per cent. of which have fewer than 10 employees. None of us are in any doubt as to the significance to the economy of small businesses, which are growing in importance, as the hon. Member for Gordon (Mr. Bruce) acknowledged.

The down-sizing of large businesses, the stripping out of layers of management in a relatively ruthless fashion and the out-sourcing of all sorts of competencies that have traditionally been done inside large companies provide opportunities for small businesses and starting up small businesses. I am delighted that my hon. Friends, not only in the Treasury, but at the Department of Trade and Industry, have come up with a large number of schemes.

I do not think that the Opposition have questioned the size of the Government's effort, although they may have criticised the direction. I understand that in the Budget alone, the schemes combined add up to about £1.7 billion over the next three years—a substantial sum. That takes into account, not only the VAT thresholds, but the transitional relief for business rates and the venture capital trust scheme.

I have one concern. The measures fail in one crucial sector: start-ups. A surprisingly small number of the schemes we are discussing help people to start businesses as opposed to helping them to expand them. The balance between providing help to start a business and providing help to expand a business is wrong. More help is needed at that crucial stage.

In my experience of talking to venture capitalists I have found that they are not concerned to consider schemes that require less than £2 million—

Photo of John Horam John Horam , Orpington

My hon. Friend says that the figure is £500,000. But even if the minimum level of interest is £500,000, the same is still true. Venture capitalists say that it is simply not worth their while to put all their effort into such schemes, when the figures involved are often £50,000, £100,000, £150,000 or maybe £200,000 at maximum.

In The Times I read of a dentist who had created a new portable dentist's drill to carry out dentistry at home—God forbid that we should have dentistry at home as well as in the dentist's chair. He was searching for finance and was quoted in The Times as saying: The attitude in Britain was all wrong. It seemed as if we had to prove we were not defrauding anybody before we could start. Abroad we were welcomed with open arms. That dentist has taken his business to Austria, where he is receiving £200,000 from the Austrian Government towards research and development prior to launching his new product. We have missed the opportunity—perhaps to our regret.

Although the measures are welcome—I fully concede that they are substantial—they do not tackle that problem. Many of the other schemes that are part of the Treasury's armoury—for example, the loan guarantee scheme—are also not helping. The hon. Member for Gordon mentioned banks and the role of banks within small companies. His comments about how banks approach the issue were correct. But the approach taken by the banks does not help start-ups, and banks are becoming less and less concerned with start-ups.

The welcome new schemes in the Budget do not provide a great deal of help for start-up businesses. In addition, the money that has previously been available for start-ups is not as great as it once was. I learnt with consternation that one of the training and enterprise councils has recently had to cut out entirely all the money previously available for supporting enterprise. As a result of the new arrangements brought together in the single regeneration budget of my right hon. Friend the Secretary of State for the Environment, all the money is now being spent on training. As a result of the new framework, one TEC will have no money next year to support enterprise schemes.

We need patient money—money that is willing to wait for a return for perhaps four, five or six years. Obviously, it is hoped that the return will be all the greater. In its excellent little pamphlet "Agenda for Enterprise", the Federation of Small Businesses states: in order to encourage enterprise we would welcome the provision of secure, stable, long-term finance, with preferential, fixed, low-interest loans for small businesses … A Government-funded `soft loan' scheme should replace the plethora of Government enterprise schemes (Enterprise Allowance Scheme, Loan Guarantee Scheme etc)". That is what small businesses want.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

It is precisely because my hon. Friend is right about patient money that it is foolish of the hon. Member for Oxford, East (Mr. Smith), who is not currently in his place, to suggest a fundamental review after two years. In many cases, much longer periods will be needed to form an intelligent assessment of the genuine risk capital prospects.

Photo of John Horam John Horam , Orpington

I agree. I do not think that we need any reviews. The balance of the schemes is broadly correct, but in the one sector that I have mentioned, more effort needs to be made. The effort required would not involve much money. I have written to my right hon. Friend the Chief Secretary and also to my noble Friend the Minister for Consumer Affairs and Small Firms at the Department of Trade and Industry with specific proposals on helping start-ups. The suggestions were made to me by a company called Alpha Europe Associates, which has considerable experience of the subject.

I suggested that a small fund with a mixture of Government and private sector money—perhaps not more than £100 million of Government money—topped up with £200 million of private sector money, managed by people with experience of starting up small businesses, would constitute the core of an effort to get quite a lot of small businesses off the ground. We are talking about only £10,000, £50,000 or £100,000; we could start a lot of small businesses with £100 million or £200 million.

I wrote to my right hon. Friend and, as usual, I received a well-written and sympathetic reply. However, he raised three objections to my proposals: first, they would cost money; secondly, they were bureaucratic; and, thirdly, they would distort competition—very traditional arguments from the Treasury.

First, my proposals need not cost a lot of money. We could do a great deal of good with a small amount of money. We could achieve good value for money by putting Government or private sector funds in a proper framework behind small business start ups. If we were slightly less generous with the venture capital trust proposals—which are costing £290 million—and allocated some of that money to a start-up scheme, I think it would prove a wiser use of public funds. My proposal could cost the Treasury nothing but a redistribution of the effort that it has already made.

Secondly, I do not think that my proposals are in the least bureaucratic. The machinery for assisting small business is already in place. My right hon. Friend the President of the Board of Trade has developed the business link scheme throughout the country. That sort of machinery could be used to provide some small financial help together with the counselling and training already provided under the business link scheme. There would need to be only a small guiding core of people at the centre of Government helping the process along.

Thirdly, any scheme—the Government have a large number—can be construed as distorting competition. Surely one more scheme would not distort competition unduly. I do not take that argument very seriously.

Although I fully support the imaginative, large-scale and generous schemes which my hon. Friend has introduced in the Budget, I think that more attention must be paid to the problem of business start-ups. The competitive economic climate created by the Government in the last few years offers the opportunity to generate many more enterprises and reduce unemployment significantly.

Photo of Mrs Helen Liddell Mrs Helen Liddell , Monklands East

I am delighted to be called to speak after the hon. Member for Orpington (Mr. Horam) because I agree with a number of points in his speech. I wish to address my remarks to the area of business start-ups.

As the Financial Secretary said, it is important to look at the broader context of the purpose behind establishing venture capital trusts. The aim is to provide assistance to small and medium-sized enterprises but, regretfully, I believe that the Government have missed a valuable opportunity by going down this route.

There is a problem with the venture capital industry in this country. The hon. Member for Orpington referred to the reluctance to invest: it is difficult to raise money for projects of £2 million and less, particularly in the area of business start-ups. If the start-ups are high risk or high tech, the difficulties are even greater. The venture capital industry in this country is not adventurous; like our banks, it tends to be risk averse. If we are to promote the growth of small businesses we have to ensure easier access to finance.

I regret that the Government are concentrating on the tax-incentive side of releasing finance under venture capital trusts. I recognise, as does the hon. Gentleman, that we need to establish a fund to assist small businesses. However, I think that the Government must give a signal to the banking community that small business has an important and growing role in our economy. If people have to access finance for small business start-ups through a maze with a carnivorous plant at every corner we will not see the kind of growing, wealth-creating economy which allows everyone to benefit from the enterprise of a few.

The venture capital trusts as proposed by the Government are the son of the business expansion scheme. The Government have learned very little from the chaotic shambles that that scheme became when it was hijacked by those who used it to make a quick buck. We must also consider the role of advisors. Advisors are often the ones to benefit most from Government schemes, not the businesses which receive money in the first instance.

Many people who start up in business are faced with a plethora of difficulties. The one-stop shop concept has not percolated through the economy to the extent that the Government anticipated and people are bemused by what they are expected to do in order to set up a business.

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As the hon. Member for Gordon (Mr. Bruce) pointed out, new business men and women confront difficulties every time they go to the bank. At the small or medium-sized enterprise level, property provides the collateral which enables people to raise money to start a business. At present, banks are willing to lend only if people are prepared to put everything on the line—not just their house, but preferably their granny also—as security for the loan.

The Government's venture capital trust proposals address only one side of the issue. I am particularly interested in the field of business angels. I see nothing in the Government's venture capital trust proposals that will create a meaningful environment within which they can thrive. I have seen good business angels and I have also seen very bad business angels—those who seize any opportunity to rip off people who are prepared to put their livelihoods and careers on the line in trying to establish a business.

We must harness all available savings into the investment process in order to expand the small to medium-sized enterprise sector of the economy. The business angel comes into his or her own when he or she has a commitment to the business that is being established. A concern that I had about the business expansion scheme—notwithstanding the fact that it was hijacked—that I also have about the Government's proposals for venture capital trusts, is that they build a remoteness into the relationship between the investor and the enterprise.

Businesses require long-term commitment. I agree with the hon. Member for Orpington's point that money is increasingly available to small and medium-sized enterprises in the short term, but at the first hint of trouble—for a start-up, it is usually about 18 months in—the money starts to dry up and people face a tremendous void which can lead to business failure and personal bankruptcy. The Government have not proposed anything to ease that situation.

I would like to see more imaginative thinking in providing finance to small and medium-sized enterprises—not least because, as a Scot, I recognise the difficulties within the Scottish economy. Throughout the 1980s, there was a disproportionately low number of business start-ups in Scotland. I have cited the figures in the Chamber before and I hope that hon. Members will not be bored if I repeat them. They are extremely dramatic. If Scotland had kept pace in job creation terms with the level of business start-up experienced in the south-east throughout the 1980s, we would have created 195,000 extra jobs. Even if we had imported the death rate of businesses throughout the recession, we would still have been ahead by 36,000 jobs.

There is a supplement in today's edition of The Scotsman which examines business start-ups. Every survey that has been undertaken by the newspaper and by Scottish Enterprise has found that 70 per cent. of small businesses say that the biggest obstacle they have encountered relates to raising start-up finance and finding the funds that they require after about 18 months. Starting a business is an extremely risky venture. As the hon. Member for Orpington said, many people start up businesses because they have been made redundant from bigger enterprises. They are not used to a small business environment, and it takes them time to adjust. The proposals in the Bill represent a missed opportunity to help create the environment which would allow small and medium-sized enterprises to become established and grow.

I am concerned about the point made by my hon. Friend the Member for Oxford, East (Mr. Smith) about the property exclusions. There is always an attraction for money to go where the easy option is— towards property. That is what happened in various schemes in the past and it is extremely disappointing that the Government have not sought to recognise it and plug that loophole.

Referring to amendment No.15, it is important that we get some empirical evidence of how the schemes operate. Particularly throughout the 1980s, there were numerous schemes aimed at generating finance for small and medium-sized enterprises, but we in Britain have not yet got it right. We are still getting wrong the structures that we create. Too much emphasis has been placed on providing tax incentives for those with money. Perhaps some of those on vastly inflated salaries from newly-privatised utilities will consider putting some of their money into schemes that will help create small businesses. Quite frankly, We have missed the opportunity to do something meaningful for the small business community.

Two years is an inadequate time in which to assess the scheme. Here in the Chamber it may be an interesting debating point, but in two years a man or a woman seeking to set up in business can go from being prosperous and hopeful, with plenty of opportunities, to personal bankruptcy and the need to dig oneself out of a hole that one is in because of the inadequacies of the financial sector in Britain.

I was interested that the Financial Secretary referred to the role of Rothschild. Perhaps he has an inside track into the thoughts of Rothschild through Lord Wakeham who joined the firm yesterday.

He referred to the Association of Investment Trust Companies that initially welcomed the proposals from the venture capital trusts, but has since entered caveats into the operation of the trusts and wishes the Inland Revenue to take a closer look at how the trust companies can operate in the best interests of investors. I should like the Inland Revenue and the Treasury to examine them to make sure that they operate to the long-term benefit of the businesses that, hopefully, will be started.

I share the view of the hon. Member for Orpington; there is a need to take start-ups into account. I greatly regret the fact that the proposals in the Bill represent a massively missed opportunity and I have even more regret that, after more than a decade of looking at how we can fill the equity gap for small businesses, the Government have failed to grasp the nettle and address the problems that the businesses create and, in failing to do so, limit the potential for economic growth in Britain.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

I shall try to be brief, because many of the most important points have already been made.

It is clear from the speeches of the hon. Members for Oxford, East (Mr. Smith), for Gordon (Mr. Bruce) and for Monklands, East (Mrs. Liddell) that there is a great deal of common ground on both sides of the Committee, at least on the principle that we want to attract more risk investment into business start-ups and small and medium-sized businesses generally which, in certain circumstances, could have a really dramatic future. One thinks of the drugs sector and some of the high-tech firms that have grown up on science parks and so on.

Even in Britain, with all the criticisms levelled against our systems and our culture, we achieve some significant breakthroughs and that is a good thing. We need more of that, and the answers to be provided to encourage it do not consist simply of tax relief measures, although they play an important role and the idea of venture capital trusts is very helpful.

Clearly the banks have a much more important role to play than hitherto. I agree with the hon. Member for Monklands, East that business angels—an idea very much promoted by the Government—also have an important role to play. We want a country in which they are many more high-net-worth individuals who are prepared to take risks because they are attracted by them, and not necessarily with the benefit of tax relief. That would be the best outcome.

I am rather saddened by the way in which the Labour party—and to some extent the Liberals, too—seem still to be obsessed with a form of voodoo economics whereby, when examining any form of tax relief, they immediately look not so much at the potential benefit of the relief and the result for the supply side of the economy or the jobs, as at who is likely to put their money into it or be induced to do so, and whether it is fair.

All money, so long as it is legally earned, is welcome as investment, whether for business start-ups, small businesses or anything else. Britain needs more investment and more risk taking. We should not be so preoccupied with where the money comes from.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

The hon. Gentleman's re:mark was a little cheap. Is he suggesting that, when the Government amended the business enterprise scheme because of the abuse of property, they were also behaving in a somewhat disgraceful manner?

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

Not at all. I was trying to speak in a friendly and ecumenical spirit, as the hon. Gentleman will learn if he listens on.

The evidence that the Chancellor's idea for venture capital trusts goes back to 1993 demonstrates that the Government have been keen to learn such lessons as have been appropriate from the experience of the business expansion scheme.

It has been said that this is not a business expansion scheme; it is a different approach, but the very fact that it is a different approach suggests that Ministers and officials have learned that there were shortcomings in the BES—that are now widely acknowledged—and they are not repeated in this approach.

Photo of Clive Betts Clive Betts , Sheffield, Attercliffe

Is it not true that exactly the same comments were made by Ministers when the business expansion scheme was introduced? They said that there were no problems, there would be no abuses and there was no need for proper monitoring. All the problems came to the fore many years later, and the Government had to take action, so it is not surprising that the Opposition should be suggesting that the scheme should be reviewed in two years to see whether abuses exist as they did with the business expansion scheme.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

One of the main concerns that emerged from the business expansion scheme was the emphasis on investment in land and stationary property which did not generate development potential or much else in the way of extra activity.

The Opposition seem to have got their knives into property companies, but there are two issues that they have not considered. First, in answer to the hon. Member for Gordon, if someone were dealing only in the buying and selling of land, that would be excluded under the terms of the clause.

Secondly, Opposition Members frequently complain about the need for the Government to do something to boost the construction industry and all the professions related to it. We hear them talk about all the unemployed building workers, but whether a company is engaged in the building of new capital plant or the maintenance of buildings, it is creating jobs in the economy and it will have a real and virtuous effect on the economy, even if the venture capital trusts lead to new companies being created which essentially are involved in property development. I see nothing wrong with that; it creates jobs and economic activity that is recycled into the economy.

The Opposition seem to fail to recognise that riskier ventures—which are, by definition, the ventures that the Government are seeking to promote in the clause—can and do generate higher rewards for some investors prepared to take risks. The higher risk necessarily engenders the higher reward on those occasions when it works out. It seems perfectly proper to spend some £290 million of taxpayers' money on that very good cause.

I am not over-enamoured of tax relief as a general principle. If we were not starting from here, I would prefer a tax system that embodied the minimum tax expenditures and reliefs, lowest possible rates and broadest possible base—but that argument is for another day. As long as we deal in the currency of tax reliefs as a way of encouraging certain forms of activity that are not sufficiently buoyant at present, the scheme represents an effective, targeted and adequately circumscribed approach.

I am surprised that Opposition Members complain that the scheme is full of potential loopholes. It occupies four and a half pages of what is already a long Bill. If hon. Members take the trouble to read them closely, they will find all sorts of caveats and belts and braces, to ensure from the Revenue's point of view that the scheme does not lead to unintended abuse. If it does, we can all be sure that the Revenue will act promptly to close any loopholes in next year's Finance Bill.

I say, not in anger but in sorrow, that, despite all the pretensions of the Opposition parties to be new Liberals, new Labour, new this and new that, a lot of the old thinking was evident in the speeches of Opposition Members. I wish that they would modernise as fast as the small companies being backed by the clause are modernising themselves.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South 5:30 pm, 25th January 1995

This is another Government scheme that has tax perks at its base, and no Conservative Member has challenged that fact. There may be differences at the margin, and from previous, more fundamental schemes, but the proposal is dependent on tax relief for any chance of success. We have been that way before under this Government. However much Conservative Members protest the valid points made from this side of the House, they seem reluctant to address the fundamental issue.

I understand that the tax relief will be backdated to April 1994, presumably because the Chancellor announced the scheme in 1993. The proposal is based on several fragile assumptions. One is that presumably dynamic and go-getting venture capital trusts will be unable to survive unless they enjoy tax relief. That is a dubious proposition. If I were involved in such a trust, I would not be filled with confidence if the Government based their proposals on that assumption.

It is also assumed that the proposed legislation is watertight enough to give the Government some confidence that their proposals will eliminate abuse. Both assumptions raise important questions.

We would not be having this debate were it not for the fact that the financial sector has let down small and medium-sized businesses—if banks and financial institutions had not been racked with such chronic short-termism that they failed that sector. That factor has not been acknowledged in any speeches by Conservative Members.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

If the hon. Gentleman wishes to challenge my remark, I am willing to give way.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

I thought that the one point on which there was a consensus in the Committee is that the equity gap in the UK was first recognised by the Bolton committee more than 30 years ago, and that we are trying to find a solution.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

I am not sure that I am grateful for that intervention. I was making precisely the point that one must question the elements that created that equity gap. I argue strongly that the financial sector has played an important role in creating the investment gap from which small and medium-sized businesses in particular are suffering. Therefore, the Government's faith in the financial sector is touching.

Conservative Members said that the cost of the proposal will be £290 million. I accept that my arithmetic may be wrong, but from the Government's own publications it appears that the cost to the Exchequer over a three-year period is likely to be £680 million—and that figure should be on the record. It is dependent on venture capital trusts achieving their objectives over three years. They may or may not do so, and that will have a considerable effect on the cost to the Treasury. The figure will be high at the start, and may prove incorrect. The estimate is probably on the low side, because it ignores tax perks on capital gains and dividends.

Despite propaganda about the way that the financial sector has created investment, the scheme has the hallmarks of another expensive and . unfounded experiment. My hon. Friends referred to reports that cast serious doubt on the value of tax breaks, including that produced by Warwick university and quoted by my hon. Friend the Member for Oxford, East (Mr. Smith). Such reports cannot be dismissed as irrelevant. They were produced after careful research and consideration, and reached the conclusion that tax relief-based schemes do not deliver the goods.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

Is the hon. Gentleman saying that financial institutions have failed to fill the equity gap, and that he does not like tax relief as a way of dealing with the problem? How does he think the problem should be tackled, if not through the tax system?

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

I cannot remember saying that tax relief cannot be used in a positive way. Perhaps the hon. Gentleman was not listening carefully. I repeat that there is no real evidence to suggest that tax relief-based schemes have worked or will work. It does not matter how much Conservative Members try to manoeuvre or manipulate the argument, because there is evidence to justify our concerns.

When I intervened on the Financial Secretary earlier, I compared venture capital trusts with the business enterprise and enterprise investment schemes. He rightly said that one problem with the BES was that it was not spread widely enough, and that the Government are trying to avoid concentration in the new scheme. That may be true, but schemes based on tax relief do not deliver the goods.

The hon. Member for Orpington (Mr. Horam) presented a different scenario, but I am sure that he is aware, as we are, that his proposals would be anathema to the Government.

Expensive schemes are being put forward with no empirical evidence to justify them. The Government, with their head down, are sailing as if in the Mary Celeste. At the end of the day, they will be discovered with nothing on board. That is why we are concerned.

The Department of Trade and Industry part-sponsored a report entitled "Understanding the Small Business Sector". When considering the business expansion scheme, which I am prepared to argue is ill-fated, it stated that the objective of the scheme is that small and medium-size enterprises should focus on tax breaks as "tax avoidance vehicles". The terms "tax avoidance" or "tax abuse" can be used in whatever way we wish, but a report that was partly sponsored by the Government creates great doubt about schemes that are based on tax relief. Will the Government ever learn?

I turn to the amendments. It is—

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

I am glad that the hon. Gentleman is about to speak to the amendments. Before he does so, will he tell us what approach he would favour? He has not done so yet, although he has told us what he does not favour.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

There is a strong case for the Government to use whatever resources they may have available, but not in the way they propose, which is indirect and possibly extremely expensive. We should be looking to the Government to take direct measures to stimulate investment in an important sector of the economy. There is the distinction between the Government's approach and the one that I would take. I would agree with some of the elements of the approach that would be adopted by the hon. Member for Orpington.

Photo of Mr George Stevenson Mr George Stevenson , Stoke-on-Trent South

No. I think that I have given way enough. I would like to bring my remarks to an end.

We, the Opposition, are saying that there are sufficient doubts about the assumptions that the Government have made to justify support for the amendment. Unless the Financial Secretary can give reasonable assurances that the Government's proposals will not result in tax abuse—I think that everyone recognises that there is potential for that—and that the scheme has a reasonable chance of delivering investment in small and medium-sized businesses that has been so lacking and that we all want to see, it seems sensible to say that, in two years' time, we should be looking again at how the scheme has developed and whether there need to be any changes to make it effective.

Photo of John Butterfill John Butterfill , Bournemouth West

I should preface my remarks by reminding the Committee that the Register of Members' Interests shows that I am an adviser to the British Venture Capital Association. I remind the Committee also that the association has warmly welcomed the proposals for venture capital trusts that we are discussing.

I know that the BVCA would be unhappy if VCTs were used in the way suggested by Opposition Members to create tax shelters or property-based schemes. That would not be attractive to its members to whom I have spoken. The BVCA would certainly not be happy if that were the outcome of our deliberations. At the same time, the BVCA recognises that there is an urgent need, as the hon. Member for Stoke-on-Trent, South (Mr. Stevenson) said, to encourage more investment in venture capital and to make finance available to smaller companies. It believes that a scheme of the nature proposed by the Government is a worthwhile way of achieving that.

There is a difficulty that became apparent during the course of the research undertaken by the Select Committee on Trade and Industry, of which I am a member. The hon. Member for Gordon (Mr. Bruce), who unfortunately is no longer in his place, was a member at the time.

It became clear that there was a funding gap. Many of the large institutions did not feel able to invest directly in very small companies because the costs were, as they saw it, disproportionate. That is why the venture capital industry is one of the fastest growing industries in the United Kingdom, to try to bridge the gap.

In response to the hon. Member for Monklands, East (Mrs. Liddell), I do not think that it is risk-adverse. It makes mistakes, some of which have been well publicised, but on balance it achieves success. The industry has made a worthwhile contribution to the British economy in recent years.

Some venture capital companies are prepared to make low-level investments. For example, 3i will make investments down to £50,000 in individual companies. Many other companies will go down to £250,000, and sometimes to a lower level if they think that a company has an interesting future. Nevertheless, there is a shortage of available funds. Many other financial institutions are reluctant to help provide funds.

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The hon. Member for Stoke-on-Trent, South criticised the banks. It should be recognised that, essentially, the banks borrow money short-term. They take our deposits, and they may have to repay them at short notice. For example, the hon. Gentleman may go to his bank tomorrow and take out everything he has in it, and so may other depositors. The banks are required by law to maintain liquidity levels that make it difficult for them to make long-term investments, and especially risky ones. Their role in life is to take in money in the relatively short term and lend it out in the relatively short term. That lending role is their prime function.

Major investment must surely be made by insurance companies, which have long-term commitments arid long-term money coming in, and by the pension funds. There are difficulties for both in investing in risky ventures. They obviously have a fiduciary duty, especially in the case of pension funds, to their beneficiaries. They can invest only a limited amount of their portfolio, therefore, in high-risk investments.

There is a problem with the funding that is available for venture capital in the United Kingdom. The BVCA tells me that only a small proportion of the total sum that it has been investing in the past year or so has been provided by UK investors. A much greater proportion of its money has come, curiously enough, from overseas investors, especially American pension funds. In the United States, a recent provision encourages pension funds directly to invest in venture capital, in a way that does not happen here.

We may be taking a slightly different route. In the new legislation that we are proposing to introduce for pensions, we are rightly focusing on the need to maintain minimum solvency ratios to protect pensioners. The changes that we are making will make it even more difficult for pension funds to invest in the provision of equity—even equity for major companies—and still more difficult, because of the valuation and yield rules that we shall be introducing, to invest in venture capital. They may have to accept that no money will come in through dividends for the first couple of years, three years or even four years. They may even have to wait much longer than that.

There is fear in the venture capital industry about the very provisions that I support, as chairman of the all-party group on occupational pensions. I am passionately committed to the idea of adequate solvency for pension funds, but that in itself may in future make the provision of money for venture capital much more problematical. It is important, therefore, that we try to stimulate other forms of raising money. The provision of tax incentives is an important way to encourage that.

First, we must encourage the provision of money. Secondly, we must encourage our brightest and ablest managers, who may at present be in major companies, arid perhaps in receipt of high salaries with a comfortable arid secure existence, perhaps even with comfortable share option schemes, to abandon all that and start new enterprises, using their skills to create new wealth for the economy. To tempt those people out, to tempt the capital out, we must provide an incentive. I believe that the incentives that we are providing through the trusts are important in that process.

Opposition Members criticised the fact that we propose rollover relief from capital gains for money invested in that type of activity. I would remind them, as I said earlier, that there is no need at the moment for people to pay CGT unless they particularly want to realise the investment in which their money is located. That location may be secure and unexciting, but as long as they keep it there indefinitely, they will not crystallise their CGT liability.

In my view, it is the minimum requirement if one says to them, "You will not crystallise your capital gain if you put your investment into a venture capital trust," because those people would be penalised if they moved their money from an existing investment into a VCT. Surely that is not what we want to encourage. I would go further and give them exemption from their existing CGT—if that were possible—because then we really would encourage people to move their money into something more dynamic and exciting.

Similarly, I believe that the other tax breaks that are incorporated into the proposals are important in motivating people to undertake what are really quite risky activities. The structure of the trust, too, is important, because in contrast to enterprise investment schemes, where one is investing in a single-company operation, we are encouraging a broader spread of risk. Although all the components of a VCT may be high-risk activities, by spreading the risk over a number of different activities, we minimise to some extent the problems that can arise from total failure of a single company. I applaud that.

The Labour party suggests that there should be a statutory requirement to review this in two years. Other hon. Members have pointed out that that is a short time horizon in which to assess the success of a new enterprise. As hon. Members who are involved in the venture capital industry will know, most companies are really only just getting off the ground at that stage.

In contrast to what the hon. Member for Monklands, East said, it certainly is not true that companies invest for the long term. 3i, for example, still has almost all the original investments that it made. It is not in there for a quick buck, and that applies to most of the other members of the British Venture Capital Association.

Photo of Mrs Helen Liddell Mrs Helen Liddell , Monklands East

I can appreciate that the hon. Gentleman referred to 3i, but in doing so he emphasises one of the points that I sought to make: large venture capital organisations such as 3i will not go for the small to medium-sized enterprise that needs a small sum of money. The small to medium-sized enterprise is much more vulnerable to short-termism than the larger enterprise.

Photo of John Butterfill John Butterfill , Bournemouth West

I am sorry that the hon. Lady was not in her place when I referred to her speech. She is quite wrong. 3i invests down to a level of £50,000 in individual companies, so it is the worst example that she could give. It goes down to a low level: it is precisely for that reason that I mentioned it. I am sorry that she did not hear my earlier remarks.

Photo of Mrs Helen Liddell Mrs Helen Liddell , Monklands East

I referred to 3i with some feeling, because, in my previous occupation, which was interrupted by the parliamentary by-election .that brought me to this place, one of my jobs was to try to get money from venture capital companies such as 3i, for start-ups that would have a turnover, within one to one and a half years, of £1 million to £1.5 million. Believe me, if I could have got money out of 3i, I would have been a much happier lady than I was when I entered the House.

Photo of John Butterfill John Butterfill , Bournemouth West

I accept that the hon. Lady may find that not every proposal put before 3i or any of the other venture capital organisations is likely to find favour. It is always difficult. One must convince whomever one wants to invest in one's company that it will be a good investment, so I accept that many propositions are turned down.

But an awful lot are accepted, and if the hon. Lady reads 3i's annual report, or those of CinVen, Electra, Candover—or any of the other venture capital organisations—she will see the huge volume of companies that have been assisted. The point that I am making is that what we propose tonight will make that process much easier.

Let us return to the amendment. I do not think that a review in two years is an appropriate time horizon. Nor do I think that it is necessary, for reasons that I shall come to in a moment. I do not think that the proposals suggested by the hon. Member for Gordon are appropriate either, because there is no doubt—I have been advised quite specifically by venture capital organisations—that genuine business activities fell foul of the 50 per cent. rule and were precluded from obtaining funding on that basis. It is certainly no business of any of us tonight to wish to preclude genuine businesses from that support, simply on the basis of an arbitrary rule.

I accept that there is a genuine fear that VCTs might conceivably be used for some form of abuse of the tax system. They might conceivably be used for the same sort of abuse that we saw with the BES. I would be the last to wish that to happen, and the whole of the venture capital industry would be against it.

We have to look at a different climate today. In the 1980s, when BES schemes were popular, property prices, it seemed, were rising for ever, by huge margins every year. Property was the fashionable thing to be in. It was secure. One could not lose one's money. In fact, the longer one held it, the more it would be worth.

I do not think that anybody would pretend that we have the same scenario today. Property values have fallen substantially, whether it is residential property or major commercial property investments. Indeed, the developers of Canary Wharf, people in the City of London and throughout the nation lost huge amounts of money. I do not think that the risk of repeating the BES is very likely, given the present climate for property.

It is conceivable that, if we had a major revival of the property industry, some people might forget the chastening experience that they have had over the past three or four years and seek to go back into it again, but a provision in schedule 14 (12) of the Bill can deal with that. It provides that the Government can make regulations if it seems that they may be necessary as things arise in the future. I ask the Minister to give an undertaking that, if in future it appears that there is some abuse of the kind feared by Opposition Members, he will not hesitate to use those powers to put it right.

I go further. Between now and Report, when we shall have an opportunity to consider the clause again, although we shall have an opportunity to consider the principle of it when we consider clause 60 of the Bill upstairs in Committee—I hope that I will be able to participate—if it becomes clear to the Treasury that all sorts of schemes are gathering place which are primarily asset-based schemes designed for tax avoidance, I hope that my hon. Friend will say that he will look again to see whether something more severe might be required. However, if it becomes necessary, I urge him not to consider the 50 per cent. rule, which caused so many problems in the past.

Photo of Ian Pearson Ian Pearson , Dudley West

I begin by making some wider comments on finance for small businesses and drawing the attention of the Financial Secretary to the second report of the Bank of England on finance for small firms, which was issued recently. I do not know whether he has had an opportunity to read it. The Bank of England always talks in very coded terms about anything that it produces that might be mildly critical. Nevertheless, it has some interesting comments to make on finance for small firms.

In particular, it talks about relationships between small businesses and the banking community—the high street banks. It says: There is still considerable room to improve further both relationships and the level of service provided. That is the strong feeling that I receive from businesses in Dudley, West. They still feel that high street banks offer little alternative. They still find that the banks are extremely risk averse and are not considering cash flow, despite instructions in many cases from head office to do so when deciding on bankable propositions. The banks still very much consider security.

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One reason for that is the performance management targets set by some of the banking industries. I do not know what might be done about that. Setting performance targets to reduce the number of company failures, and so on, creates significant problems. It also creates problems at Government level, particularly when attempts are made to encourage small businesses to be more open and share financial information with banks.

If banks know that a business is in trouble, they will immediately want to pull the plug on it, because they understand that the Inland Revenue and Customs and Excise, as preferential creditors, are competing with each other to put banks into receivership because of their own performance targets.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

In order to bring the hon. Gentleman's point up to date and to give a full picture, does he also agree that, in a recent speech, Pen Kent, the executive director of the Bank of England, to the parliamentary group for engineering development at the House of Commons, of which the hon. Gentleman probably has a copy, said that there is a continued shift away from overdrafts towards term loans in terms of banking support for small and medium sized businesses?

He went on: When we first got involved in this subject, overdrafts were typically around 60 per cent. of all bank lending to small and medium sized enterprises. Now over 60 per cent. is .in the form of term loans. Is not that a message of some reassurance to the hon. Gentleman?

Photo of Ian Pearson Ian Pearson , Dudley West

Yes, it certainly is a message of reassurance. I welcome the growing awareness of the small business community of some of the deficiencies of bank overdrafts and some of the benefits of other financial mechanisms that are open to them—not just term loans, but debt factoring and invoice discounting.

One reason for the great movement away from overdrafts is that many small businesses have seen them as a bad bet, and invoice discounting and debt factoring have provided far more attractive deals. The progress of term loans is welcome, but they are still very much granted on the basis of security rather than the cash flow position of a business.

It is also interesting that the report on finance for small firms comments on business angels and the dangers of the fragmented approach to business angels that currently exist throughout the country. That fragmented approach is equally apparent across a range of financial mechanisms that are available to small firms in Britain. We simply do not have an adequate and coherent package of small business support measures.

As an economist and a previous employee of an economic development and venture capital company, I believe that the case for venture capital trusts rests principally on market failure. Companies that wish to grow are unable to gain access to appropriate forms of finance at acceptable rates. That is a clear example of market failure.

However, venture capital trusts do not address the principal problem of small businesses that wish to grow and require finance—the need for long-term patient capital. I fully endorse the comments made by the hon. Member for Orpington (Mr. Horam) on that.

The venture capital trust legislation is complicated. I am slightly disappointed to see that it defines what is not allowed, leaving a number of grey areas, rather than positively defining what is allowed. As a result, the Opposition are concerned that it gives a licence to fertile City imaginations to devise tax avoidance schemes for the very rich which will do nothing to support growing businesses. I hope that that is not the case, and that the Chancellor will use what power he has to ensure that that is not the case.

The 70 per cent. rule on qualifying holdings in a company does not strike an adequate balance. I would be interested to hear from the Financial Secretary what restrictions, if any, are placed on the remaining 30 per cent. of the funds available to venture capital trusts. As I understand it, there is nothing in the legislation to prevent that money being invested in Pacific rim countries and other stock markets. I do not see why tax incentives should be provided to British taxpayers to allow a proportion of a venture capital trust's funds to be invested in the stock markets of other countries.

The three-year rule in reaching the 70 per cent. criterion creates the danger that money can be invested either in blue chip British companies or in ventures all over the world for a minimum of two years and that then there will be a final rush to meet the three-year criterion for investing in small unquoted businesses. I should like some assurance that that will not be allowed to happen.

The level of 70 per cent. for investing in small and medium sized companies is wrong. Venture capital trusts are likely to be set up with sufficient critical mass in terms of funding, so a level of 80 per cent. overall would be more appropriate.

I appreciate the need for flexibility when buying and selling companies, but with venture capital trusts of £50 million or £100 million that restriction does not apply. The tax incentives that are available mean that, although the shares in the venture capital trust will be tradeable, I would not expect that tradeability to be so significant as to mean that an 80 per cent. criterion would be acceptable.

With regard to the 50 per cent. limit on eligible shares, I appreciate the comments of my hon. Friend the Member for Oxford, East (Mr. Smith) that that might influence deal structures and be insufficiently flexible. However, I assume that most venture capital trusts will probably invest pari passu with other institutions, which will provide other forms of finance, whether it be mezzanine finance, term loans or a range of other financial packages.

That brings me to a point that I want to discuss later in terms of eligibility. Schedule 14 sets out requirements with regard to a company's business and what is a qualifying trade. We have had a useful debate on property. There is a consensus on both sides of the House that no one wants to see VCTs used as primarily asset-backed property schemes.

I fully accept the arguments, and I know of a number of companies requiring development capital whose major assets would be their land and buildings. Therefore, I understand the reasoning behind what the Government are seeking to do. Nevertheless, I see no reason why what is regarded as an investee company should not be defined by its principal business activity, and primarily property-based companies excluded.

I welcome the provision for royalties and licence fees for research and development: I know of a number of organisations that hope to amass funds to invest in new technological inventions and early pre-market trading. I hope, however, that venture capital trusts will also be able to take equity stakes in some of those companies when they reach the trading stage.

The Bill imposes a maximum for qualifying investments in a relevant company. My experience in the venture capital industry suggests that a limit of £1 million in any one company in any one year is too high. There is currently strong competition among venture capitalists for any reasonable proposition requiring development capital of £500,000 or more, as the hon. Member for Beaconsfield (Mr. Smith) pointed out. Given that strong competition and the fact that the money is clearly available—there has been no instance of market failure—I see no compelling reason why tax incentives should be made available for investments above £500,000.

In view of the present structure of VCTs, I anticipate a desire to invest in million-pound projects, which may be part of wider deals. That is not the real purpose of VCTs, which I support: the provision of development finance for those who cannot secure it by any normal means.

I also feel that the gross asset level of £10 million is far too high. The chief executive of the 3i group suggested that it might be worth considering £2 million, and in view of that, £5 million or so strikes me as .much more appropriate. I suspect that the scheme will gravitate towards the financing of more robust businesses that could be funded conventionally—that VCTs will piggy-back on top of larger deals.

There is also a strong indication that VCTs will be used to fund management buy-outs and buy-ins. I have no objection in principle to companies' changing their ownership and management structures in that way, but I feel that such a churning of assets is not the primary purpose of the Bill, which is intended to support businesses that will grow, employ more people and deal with some of the country's unemployment problems.

Photo of John Butterfill John Butterfill , Bournemouth West

Does the hon. Gentleman really think that VCTs will be used extensively to fund management buy-outs? It is fairly simple to finance them in existing circumstances. Complex rules will govern the use of VCTs; will not many of those planning management buy-outs decide that, given the complications, their use is not worth the hassle?

Photo of Ian Pearson Ian Pearson , Dudley West

Not at all. I believe that those who will run VCTs are exactly the people who are likely to provide institutional finance for management buy-outs. I think that they will say, "We will provide you with a £6 million package for your management buy-out, because the company can meet the £10 million criterion. VCT money will provide £1 million, and ordinary institutional venture capital will provide £5 million." I ask the Financial Secretary to impose an embargo on VCT funding of management buy-outs.

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I understand that the financial intermediaries and claims office of the Inland Revenue will be responsible for supervising it; the task would be greatly assisted, and financial probity assured, if regulations were introduced providing for an annual independent valuation of each VCT's unquoted portfolio.

The purpose of VCTs is laudable, but some of the detail is fundamentally flawed. As a result, the money that hon. Members on both sides of the House agree is necessary to support businesses is unlikely to be forthcoming. I expect the risk-reward ratio to prove unfavourably balanced in favour of reward in the long term. I think that VCTs will be used to fund management buy-outs at too high a level, providing deals involving £1 million VCT money as part of a syndicated deal with loan-funding institutions.

VCTs are only part of a piecemeal response to small business finance. A more coherent approach is required, and I welcome the comments in the Bank of England's second report about the need for a White Paper on the subject.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

The hon. Member for Dudley, West (Mr. Pearson) has considerable experience of the market, and he is entitled to ask whether the proposed tax relief is directed specifically towards what we all consider to be the area of market failure. That, I think, is the starting point for the debate: the area of market failure is the equity gap.

Although the equity gap has been identified by countless reports over the years, we have not yet found a satisfactory solution to it. Whether it makes sense to address it by means of the tax system is an interesting question. Like my hon. Friend the Member for Carshalton and Wallington (Mr. Forman), I am not always enthusiastic about creating new tax breaks: on the whole I prefer a broad tax base and low tax rates. First, one man's tax break is another man's tax bill; secondly, there is no doubt that tax breaks affect economic behaviour, and may distort it. They may not achieve what Parliament hopes to achieve.

The fact is, however, that we have been living with the equity gap for many years. I consider that we are justified in introducing this new relief, as long as it is focused as the Committee wishes it to be. It should be focused on smaller investments. There is, I think, a consensus in the Committee that venture capitalists are normally able to provide amounts of £500,000 or more, and that therefore the level should generally he below that.

Why does it matter? It matters because, as some growing small businesses are unable to obtain the equity finance that they deserve, they must go to the bank--but the cost of bank finance makes it unsuitable for a rapidly growing business, and in certain circumstances may cripple it. It makes much more sense for at least the fixed as opposed to the working capital of a business to be financed by equity, although long-term bank debt is certainly a possibility. That is what the new relief is all about.

Obviously, one has to try to find a satisfactory balance that will provide a sufficiently attractive tax incentive to bring in investment that would not otherwise accrue. At the same time we must try to ensure that the scheme is not so attractive that all sorts of tax avoidance experts abuse it. In practice, it is difficult to strike such a balance.

I agree with my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) that in such circumstances it makes sense for the Government to provide in the schedule a provision to allow the Treasury to change by regulation the definition of a qualifying investment. That means that if there is evidence of the kind of abuse that some Opposition Members obviously fear, it can be dealt with quite quickly. The Revenue is quite capable of dealing speedily with such abuses. It can issue a press release which states that the law will change from the date of that release and, under the schedule, it can table regulations quite soon thereafter to put the matter beyond doubt.

That is important because we must avoid the marketing of venture capital trusts principally for tax reasons. Far too many people went into business expansion schemes for the wrong reasons and many of them got their fingers burned. They may have received tax relief, but that is not much use to people who lose all their money. Many of the schemes were not viable and lost a great deal of money. That is unsatisfactory for taxpayers and the Treasury, and it is certainly unsatisfactory for the economy because we are debating means to grow businesses. We are not debating any old small business but growth businesses. We are trying to identify businesses with real growth potential which can be encouraged by venture capital to grow and create jobs quite quickly.

Venture capitalists say that there are three requirements for a satisfactory investment. First, one obviously needs money. Secondly, satisfactory management is required and, thirdly, there must be a sensible business proposition. In practice, it is often difficult to find . satisfactory management. Some business propositions are clearly much more attractive than others and, in practice, shortage of capital is not normally a problem. At the moment capital comes from the United States rather than from the United Kingdom because UK institutions feel that they have enough invested in venture capital.

Generally, there is no shortage of capital, but particularly there is a shortage of amounts of £500,000 and below, and that is the area on which the new scheme needs to be focused. It should be made clear that that is the scheme's object.

Photo of Mr David Shaw Mr David Shaw , Dover

My hon. Friend says that there is no shortage of venture capital, but surely there is a shortage of venture capital provided by private individuals. There has been far too much investment by institutions in high-risk areas and the individual who may also bring management skills to a company has not been given the opportunity to invest. Does my hon. Friend agree that we need an increase in the proportion of such venture capital rather than to have just institutional investment?

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

I entirely agree. People talk about capital gains tax, which has a very narrow base. My hon. Friend will know that many institutions pay no capital gains tax. It was quite possible to have a venture-capital backed company in which the only investor paying capital gains tax was the person who worked in it and managed it. Because all the other investors were tax exempt institutions they did not pay capital gains tax. That is indefensible, and it shows how unsatisfactory is the present capital gains tax regime. I agree with my hon. Friend that for people who take a considerable risk it is right that after a period of five years, during which they will have their money locked up, they should be able to take advantage of capital gains tax relief. That is an important aspect of the issue.

Another aspect which has perhaps not been sufficiently emphasised has been compared with the business expansion scheme. It is that under the business expansion scheme tax relief on the up-front investment was 40 per cent. The maximum relief in this instance will be 20 per cent. and that significant difference means that only half of the investment will be tax-deductible. That considerably changes the balance about which I spoke.

Photo of Mr David Shaw Mr David Shaw , Dover

It has gone too far.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

My hon. Friend thinks that it may have gone too far, but it changes the balance of advantage between the two aspects which I described. We need an attractive arrangement to bring in investors. My hon. Friend may feel that offering only 20 per cent. may make it difficult to persuade individuals to come in. However, offering 40 per cent. under the BES created the difficulty that people were able to say to prospective investors, "Look, you can simply eliminate your entire tax liability in relation to the amount which you invest in this company."

Relief of 20 per cent. is the right level at which to start and if it is found that it is insufficient to attract people we could have a look at increasing it. The fundamental difference between the two schemes will change the balance considerably.

The Liberal Democrat amendment seeks to eliminate property development. If I have understood it correctly—and the legislation is complex—property investment and property dealing are already excluded. Therefore, it is property development that the amendment seeks to exclude. The hon. Member for Gordon (Mr. Bruce) suggested that property development did not create any new economic wealth. It seems to me that if somebody builds a factory or a warehouse he adds to the total of the nation's assets. There is often considerable risk involved in that. The property may be pre-let but it will often be speculative. A large warehouse may be built and only afterwards will an effort be made to let it.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

Perhaps I could clarify the matter. I did not say that property development per se was incapable of creating wealth but that the simple appreciation of property value was a paper transaction that did not create wealth. The Government introduced restrictions last time because it was non-productive.

Photo of Mr Tim Smith Mr Tim Smith , Beaconsfield

My hon. Friend the Member for Bournemouth, West dealt satisfactorily with that point. Over the past few years the property market has been transformed, to the point where the idea that one can make a fast buck out of property has gone. I cannot believe that the hon. Gentleman is seriously advising his friends to invest in property. Perhaps he knows something that we do not, but I cannot see that.

The Government have inflation so effectively under control that we are in a new environment, but it is difficult to persuade people of that. For over 30 years we have had a culture of inflation and people are finding it difficult to become accustomed to the new environment. I am not sure whether the hon. Member for Gordon made that point earlier. People will not make money simply out of the appreciation of property or any other asset over the next few years. That is not a threat. However, if the hon. Gentleman turns out to be right there is provision in the Bill to deal with that at the moment at which the Treasury feels that action is appropriate.

The difficulty with the hon. Gentleman's proposition, which I think he said he had taken from the business expansion scheme, is that it precludes some genuine business propositions and commercial arrangements from being eligible under the scheme. It is again a question of balance but we should not accept the Liberal Democrat amendment and allow such schemes to be advanced.

The hon. Member for Oxford, East (Mr. Smith) tried to encourage us to impose a time limit of two years. That is not necessary because it is open to us to reconsider the matter. We consider these matters when we are debating the Finance Bill each year. It will be some time before a venture capital trust is launched. There will have to be a stock market flotation to raise the capital and it will be some time before the cash can be invested because nobody will rush into that: the money will be invested only when satisfactory investments come along.

The period of two years in the amendment is totally unrealistic because the average time will be considerably less than that. Imposing a two-year limit would be premature. We need more time to review matters as they develop. If there is abuse in the meantime the provisions in the Bill will deal with it.

Photo of Clive Betts Clive Betts , Sheffield, Attercliffe

A consensus exists among hon. Members on both sides of the Committee that the short-termism of the financial markets and the so-called equity gap are a problem. There has not been much dissent from the fact that that issue must be dealt with, as we need to get more investment into our industry.

I was interested in the comments of the hon. Member for Bournemouth, West (Mr. Butterfill) on the pensions industry. I agree that that is one of the industries that should be looking long term. People have their investments in their pensions and that involves a long period. We should accept that the short-term requirement of investment managers in that industry—to show how high up the performance league table they can come each year—causes concern, and militates against the long-term approach that should be taken.

6.30 pm

Some of the Bill's requirements are being considered in another place. The hon. Gentleman is right to say that they are a cause for concern in relation to the investment side of the pensions equation. I hope that, at some stage, consideration will be given to the potential effects of the legislation. The issue may have been lost in the concerns that people rightly have about people receiving a proper pension when they retire.

All the issues are being considered separately. It is generally accepted that a problem exists in relation to the equity gap, short-termism and the lack of investment, especially in small companies, and it is recognised that small companies will be the vehicle for growth and jobs—a growth in employment is likely to come from that sector—but where is the overall strategy to which the various mechanisms, ideas and suggestions may relate? That worries me. Where is the Government's overall approach, which identifies, deals with and proposes a range of measures that can be taken to deal with this real and pressing problem in the next few years?

Earlier, in response to the hon. Member for Orpington (Mr. Horam), my hon. Friend the Member for Monklands, East (Mrs. Liddell) drew attention to the fact that the proposal contains no specific assistance to companies that are just starting up. That omission should be dealt with. It would presumably be dealt with if the Government had an overall strategy that identifies the range of issues that need to be solved, and that produces a range of mechanisms and solutions to the problems. Many issues, such as that of start-ups, do not get a look in and are not properly dealt with because the Government approach the matter by producing one single mechanism and claim that it will address the equity gap problem.

Tax relief has been mentioned by a number of hon. Members. I do not think that Opposition Members are objecting to the principle of tax reliefs. However, it is our duty, as the Opposition, to raise the question of whether tax reliefs are effective. I agree to a great extent with some of the comments made by the hon. Member for Beaconsfield (Mr. Smith), but we must be careful, when dealing with tax reliefs, that we do not introduce to the market distortions whose impact we cannot predict.

In the Committee that considered the Finance Bill last year, the then Chief Secretary to the Treasury said that a good case had to be made for tax reliefs to be introduced, and that one had to be clear about what their impact would be. All too often, it is believed that tax reliefs can be introduced and that no real cost is involved.

If, however, the Government pay money in the form of grants or subsidies, they must be much more careful because such public expenditure is taxpayers' money. Effectively, tax reliefs are exactly that. They use the public's money. As the hon. Member for Beaconsfield said, tax reliefs are someone else's tax increase or someone else's service cut, if the Government choose not to raise extra tax to fund the relief that they are introducing. We must be careful to ensure that we know what impact tax reliefs will have.

The Opposition's concern is that the scheme before us may generate a lot of activity. The Government are forecasting the tax relief level that they will take into account in their public expenditure accounts. The Opposition ask how one can be sure that that tax relief will achieve for the British people a benefit that makes the tax relief worth while. We have a right to ask that question and to receive a detailed answer to it.

How can we be sure that the schemes that are introduced will not generate an increase in the productive capacity of the economy and an increase in jobs? The schemes might lead simply to property development that is aimed, not at producing more manufacturing capacity, but at taking advantage of the tax relief. How can we be sure that, if the schemes improve and increase our manufacturing base, that would not have happened without the tax relief?

My hon. Friend the Member for Dudley, West (Mr. Pearson) made the point that venture capital is available for some schemes at present, so we cannot be sure that venture capital that would have gone into schemes before the change will not simply go into the same schemes, but with the benefit of tax relief. Those questions must be dealt with. The Government must convince us if we are to acknowledge that the scheme is worth while.

On VCTs, the Financial Times said: The chancellor had barely sat down after last months's Budget before Rothschild Asset Management said it would set up a venture capital trust". Two articles in the Financial Times used the words: The chancellor had barely sat down". If Rothschild Asset Management said that it would set up a venture capital trust when the Chancellor had "barely sat down", either it knew something about the nature of the scheme before the Chancellor's Budget speech—I would not like to imply that that was the case—or the scheme was such an obvious benefit in terms of tax relief and an easy make that the company got in before it considered the nature of investments. That is our worry. Such companies are not sitting down and examining the nature of the investment and whether it is a good risk, because they know that there is easy money to be made.

We become a bit more worried when, within a matter of weeks, an organisation that apparently believes that it is going to do very well out of the Government's scheme appoints a senior member of the governing party to its board. Somehow, that does not fit comfortably and easily with the Government's comment that the proposal is all about real jobs for real people in manufacturing. It is certainly about one job for one high-profile member of the Conservative party in an asset management company. It caused concern that that organisation believed so quickly that benefits existed.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

On real jobs and the equation always with manufacturing, does the hon. Gentleman realise that only 20 per cent. of all people employed are employed in the manufacturing sector? The difference is that they are producing a great deal more per man and per woman.

Photo of Clive Betts Clive Betts , Sheffield, Attercliffe

I accept that not all jobs are in the manufacturing sector and that many real jobs are in the service sector. I was questioning whether it was a real job when an ex-Minister was involved in activities in the House for the benefit of a certain organisation, and then got a job with that organisation. The term "real job" should not be applied to such a job.

Our concerns are reinforced by the fiasco of the business expansion scheme. We would be a lot more reassured if the Government, who introduced that much-derided scheme, had recognised the problems quickly and had done something about them quickly. Everyone else saw the problems with the BES. Everyone else could see that the money was going into property development. The Government, however, sat there for year after year, and Finance Bill debate after Finance Bill debate, and refused to act.

Therefore, we are naturally concerned when the same Government claim that their proposed new scheme will not be the same as the BES. They say that we will not have the same problems and that, if problems arise, they will act on them. What confidence can the Opposition have that the Government will be as good as their word, when we know from past experience about their reaction when property development was the name of the game, when the scheme was abused, and when no real risk existed because the scheme included guaranteed exits?

I accept that that particular loophole will be closed under the proposals, but property development is still a cause for concern. The property market may not be in a healthy state at the moment. It is interesting to hear Conservative Members talk about the impact of Government policies on that market but, unfortunately, it is not only they and some of their colleagues on the investment side but individual home owners who have suffered. Nevertheless, there is the possibility of a return to better days and the potential for the scheme to be abused.

The Government say that we should not worry because, as is too often the case, schedule 14(12) states: The Treasury may by order amend this Schedule for any or all of the following purposes"— that is, the businesses and trades that qualify for the purposes of venture capital trusts. Conservative Members may draw comfort from the fact that the Treasury can change the rules to deal with any anomalies or abuses but we worry that the Treasury, run by the Conservatives, might change the rules to benefit even further their friends who might be seeking tax relief and a quick buck through such a scheme. If the scheme can be altered one way—loopholes can be tightened—it can equally be altered in the opposite way without reference to the House. Pure speculation in land assets could be allowed through modification by the Treasury without reference to, or the approval of, hon. Members.

I also seek reassurance from the Financial Secretary on a matter that is not made clear in the Bill. Although there are limits on the amount that can be invested in one particular company by a venture capital trust, and although there is a limit to the assets of a company that can be owned by a venture capital trust—a limit of 15 per cent., as I understand it—is there anything to prevent two venture capital trusts, owned by the same organisation, acting in concert and between them owning 30 per cent. of a particular company' assets? Or can an organisation establish more than one venture capital trust and, in so doing, breach the rules set out in the Bill for one VCT? If there is no such restriction, it means that there is a loophole and someone will walk through it before too long. I would appreciate the Financial Secretary's comments.

We are suggesting a two-year limit not because we believe that the scheme will not work but because previous Government action in this sphere leads us to be cautious. We want to be assured that there will be a proper monitoring arrangement and that Ministers will not walk away and pretend that everything will be fine once the legislation is passed; they must ensure that we get proper reports and that the Government are held to account for the expenditure of public money. That is absolutely right and proper.

The Financial Secretary has already forecast the amount of tax relief that he believes will be given under the scheme. We have a right to be concerned and ask who will benefit. Surely some assessment has been made of the income levels of those who will benefit. I do not say that because we are against people on high incomes and for those on low incomes. We are rightly concerned to ensure that when tax relief is offered and when potential benefits are available, it is not only one section of the community that receives them. Will such benefits be available for smaller investors? What is the Government's view at this stage of who will receive tax relief from VCTs when they are established? The Government have a duty to give us some idea of the work that they have done. What are their plans?

The Government have listed the industries and trades that will not qualify for investment under the scheme but where do they anticipate that the money will be invested? What part of our economy's capacity will be enhanced? How many and what sort of jobs will be created? Ministers will probably shrug and say that they do not have such information, but why not? It should be available if public money is being spent. If the Government were putting forward a scheme for grants, they would be able to explain the expenditure involved and the number of jobs to be created.

Photo of John Butterfill John Butterfill , Bournemouth West

The hon. Gentleman must appreciate the fact that we do not know how much money is being spent until we know how much money is forthcoming. The two things are interrelated, so how can the Government possibly know?

Photo of Clive Betts Clive Betts , Sheffield, Attercliffe

The Government are proposing to spend public money on a large scale. They would be highly critical of us were we to propose such expenditure without being able to explain how it was to be spent and what the consequences were going to be. We are asking for strict monitoring of the scheme, and the two-year period is included in the amendment to establish a definite limit on the time within which information must be made available, not so that the scheme can be stopped but so that it can be reviewed to ascertain how effectively it is working. I hope that the Financial Secretary will take our suggestion seriously.

We are not saying that we want to stop the scheme but we have suspicions and concerns. Let the Government reassure us that they have planned how the scheme will work and that there are to be proper reports and monitoring so that it can be amended in the event that it does not work as the Government claim that it will.

Photo of Mike O'Brien Mike O'Brien , North Warwickshire 6:45 pm, 25th January 1995

It is common ground among the parties that there is a need for investment in small firms. The question is whether the venture capital trust is the best way to achieve it.

In its second report on finance for small firms, the Bank of England referred to the fact that bank finance available to small firms fell 5.1 per cent. to £37.2 billion between December 1993 and June 1994. As has already been said, the equity gap is a failure of the free market and VCTs are an attempt by the Government to intervene in the market to deal with that failure. It is interesting that the way in which the Government choose to intervene is by creating circumstances in which the well-off will pay less tax. That is certainly how the media have identified the prime appeal of the VCT—a big tax avoidance scheme. It is legal, but is it in the public interest?

On 15 January, the Observer ran a story with the headline "Taxfree Trusts for the Adventurous Investor". Most of the article was about the advantages available to the person who became involved with a VCT. In December 1994, the magazine Small Company Investor asked: Will you need to pay capital gains tax again? "Maybe not" was the answer. Media focus appears to be on the tax benefits, but the issue of the equity gap remains. The venture capital trust is at least an attempt by the Government to deal with it.

We need to help small businesses and to get the capital to them to create jobs and prosperity. In its report, the Bank of England raised the issue of how to do that. Those involved often find that it is not viable for venture capitalists to invest relatively small sums of equity. Typical professional venture capital investments are certainly in excess of £250,000 and early-stage and start-up finance, for example, accounted for only £69 million, or 6 per cent. of the total invested by British Venture Capital Association members in 1993. Clearly, therefore, we need a way to channel investment.

In its first report on financing small businesses, the Bank of England dealt with the role of the so-called "business angels", venture capital providers who link up with particular enterprises, often contributing their expertise and adopting a hands-on approach. However, the problem identified by the Bank of England is that, although banks such as NatWest have launched two pilots for national business angel networks, the majority of existing business introduction services remain fragmented and unco-ordinated. There are numerous business introduction magazines and, of course, the training and enterprise councils in different parts of the country provide services that are often useful. But we need a comprehensive business angel network to reduce costs and to simplify the process of making deals.

That leads me to the point made by my hon. Friend the Member for Sheffield, Attercliffe (Mr. Betts). The Government need to have a more comprehensive approach to the problem of small businesses, ensuring that the equity gap is bridged by not only looking at one solution to the problem but addressing issues such as the need for a business angel network. At the moment, the Government have not shown that they are adopting a much broader approach. In his winding-up speech, will the Financial Secretary say what the Government are proposing to do about the business angel network?

There is clearly a need for investment and the question is whether venture capital trusts are the way in which to encourage it. I accept that it is right in certain cases to give tax breaks to encourage investment, but it is important that it is done with caution to ensure that the Exchequer uses those subsidies to best effect because, as Conservative Members have said, one person's tax concession is another person's tax increase. The business expansion scheme has raised questions about the use of tax breaks and the Government should therefore be prepared to answer openly and clearly questions about the way in which this new venture of theirs will deal with the concerns raised.

How much will the VCT scheme really cost? The Government estimate that it will cost £150 million in 1995–96, £290 million in 1996–97 and £240 million in 1997–98—a total cost of about £680 million. Does that include relief on capital gains tax and income tax relief? If the figures do not include those two, what is the overall figure? What is the actual loss to the Exchequer?

When the Government lost the vote on VAT on fuel, the Chancellor was most definite in the argument that, even if relatively small sums of tax were involved, it was essential that the Government should be able to account for them and say how that money was to be raised—hence the 4 per cent. increase in beer prices and the various other tax increases.

I have always taken the view, as I know the Chairman of the Public Accounts Committee has, that the loss from not imposing the VAT increase was probably within the margin of error of any Budget. After all, last year, the Chancellor must have had at least a margin of error of £4 billion because of the way in which the public sector borrowing requirement panned out. Given that the loss of revenue due to the VAT vote was much less, the Chancellor was well within the margin of error and need not have increased those taxes on beer and so on.

If the Chancellor felt that it was essential to come up with clear figures for the loss of revenue from extra VAT on fuel, surely he must provide clear figures of exactly how much money is being conceded in the VCT tax relief. Will the Financial Secretary also tell us what analysis the Government have done on the defects in the business expansion scheme? How can the faults that arose at various stages in that scheme, which required some remedy, be avoided in the VCT scheme? How will the Government ensure that?

Are such high tax concessions really necessary to get the venture capital trusts going? They are very large concessions and the Financial Secretary has not properly justified the size of them. Would not venture capital trusts be workable without such large tax concessions? That is a legitimate question that Labour Members should ask.

What calculations has the Treasury done on the possible diversion of capital that is currently invested in small businesses? If a person who is considering investing in a small business goes to his financial adviser to find out the best way in which to invest and says that he is thinking of becoming a business angel and getting involved in direct investment, what risk is there that the financial adviser will tell him that, from a tax point of view, it is best to get involved in venture capital trusts and to try to get the tax concessions available?

The business would presumably have to apply to the venture capital trust scheme to get the investment that it needed and, obviously, judgments would have to be made by the venture capital trust investors. They may decide to invest in less risky businesses than the business in which the potential business angel was thinking of investing. Therefore, will the Financial Secretary state the Treasury's calculation of the potential diversion of investment? Again, that is a legitimate question that needs to be answered.

Will the Financial Secretary set out exactly which trades will qualify? The Bill says which trades will not qualify by excluding particular types of businesses. Will he try to define to some extent his target qualifying companies? Will he also set out clearly his thinking on venture capital trusts and property-backed schemes? He appears not to want entirely property-backed schemes and I accept that. He referred to those schemes in his earlier speech, but he did not set out clearly the Treasury's exact attitude to schemes that involved property. A great deal more detail is required.

What about residential homes for the aged? Does the Financial Secretary intend to include them in the scheme or to exclude them? It was not clear from his earlier reply exactly what his view was. He said, as I remember, that he had not had notice of many people seeking to exploit the venture capital trusts with residential homes in mind Is it his intention that the scheme would be available for such uses if people chose to use it for that purpose?

Does the Financial Secretary agree that the legislation is extremely complicated? While it appears that two investment trust groups, Murray Johnstone and Rothschild Investment Management, have said that they are interested in VCT, will not the complicated legislation deter investors from getting too involved in the scheme?

Why did the Government settle on restricting income tax relief to companies with initial growth assets of between £1 million and £10 million per annum? Why not extend the limits above and below those figures? There is greater availability of finance for the larger companies and we need to tackle the smaller-scale investment of around half a million pounds. Will the Government set out how they reached the conclusion that those two levels were appropriate, so that we may at least have some understanding of Government thinking?

The key issue for Labour Members is this: if the main focus of venture capital trusts becomes tax avoidance rather than investment, what will the Government do about it? Clearly, the media have identified venture capital trusts in that way so far. The Government must take into account why that has taken place. If it appears that VCTs will go the way of the business expansion scheme, how do the Government plan to deal with that?

I repeat that I agree that investment in small firms needs to be enhanced. The Government say in the Red Book that they intend to boost overall investment across the economy to 11 per cent. in the next year—a tremendous boost given that the current level is around 3 or 4 per cent. It is certainly nowhere near 11 per cent. That target of 11 per cent. has an awful lot of wishful thinking about it and a certain aura of unreality. Likewise, I suspect that venture capital trusts embrace a combination of wishful thinking and a lack of reality about the market. That is why the amendment to limit venture capital trusts to two years initially gives us an important chance to review the scheme in future—an opportunity that the House ought to have.

Photo of Denis MacShane Denis MacShane , Rotherham

In preparing myself for this interesting debate—I have enjoyed the exchanges—I turned to the spiritual father of venture capital in this country, Lord Lawson, the former Chancellor of the Exchequer. In his memoirs, he says that by 1993 the business expansion scheme and other start-up schemes had been brought to an end, which could be justified because the UK had by then a venture capital industry equal to that of any in the world". If that is the case and if, as the hon. Member for Carshalton (Mr. Forman) said, the Bank of England in the form of Mr. Pen Kent said yesterday that the banks are now far more co-operative, lending more generously and moving from overdrafts to loans, how come we need venture capital schemes? In the middle of what the Government say is a boom, with everything going unbelievably, wonderfully, incredibly well for the economy, how come we need the schemes?

7 pm

The term "tax break" has been used as often by Conservative Members as by Opposition Members in this debate on venture capital, so the queries raised by Opposition Members come into focus. If I may paraphrase Humbert Wolfe after Hilaire Belloc You shouldn't need to bribe or twist The British venture capitalist Just provide a tax break or two And you will see what he can do". There is a problem in my constituency, and the deputy chairman of the Conservative party, Mr. John Maples, who was heavily involved in the Wellington BES in the 1980s, is giving evidence in a court case involving a lot of people who lost their jobs. Mr. Maples advised Virginia Wade, Michael Parkinson and others to put their money into a scheme and it has now emerged that a great deal of money has been lost.

Conservative Members have said that venture capital initiatives often become adventure capital initiatives, and although it is hoped that real money may be made, a lot of money can be lost, too. The core lesson of the 1980s was that we need more supervision. What worries some Opposition Members is not the tax write-offs for the deputy chairman of the Conservative party or for rich sport and television personalities, but cases such as that in Rotherham, where 55 people lost their jobs and are now on the dole without any security at all.

If we have identified an equity gap—what the Macmillan committee as long ago as 1929 called the finance gap—it needs to be dealt with, but Opposition Members have genuine reservations about whether the venture capital proposals in the Bill will do that. I certainly want more investment in Rotherham, but I am in regular contact with Rotherham business men, with the economic partnership and with Business Link, and they all tell me that venture capitalists need to target the lower end of the market.

Apparently, venture capitalists have little interest in the kinds of small businesses that want to get going in Rotherham. They need a quicker turnround. There seems to be some contradiction in the debate, because although it seems that, even before the Chancellor sat down after his Budget speech, Rothschild was ready to put a venture capital trust into operation, Conservative Members who are experts and have declared their interest have said that such schemes take a year or two years to get going. The message from Rotherham is, please can that be done quickly and at a much lower cost?

In my constituency I have been told that the venture capital trusts do not have a customer-friendly feel to them. The rate of return that they expect—generally 30 per cent.—is very high, which illustrates the short-termism and the lack of what is known as patient or stakeholder capitalism, whether venture or otherwise, in the United Kingdom economy. Indeed, as has already been said, in 1992 as much as 60 per cent. of NatWest's lending, excluding personal mortgages, was for less than one year. That shows the impatience and the "wham, bam, get out" approach of so many lending institutions in this country. My constituents in Rotherham are affected by all that.

It is not only the review period that is missing—although if Mr. Maples is planning to put more money into the new schemes being set up, let us have a review so that he and other investors can be protected. We also need venture capitalists much closer to the base where British business has to be carried out.

It is interesting that all the Conservative Members who have spoken have lived within commuting distance of the City. I should like there to be some form of ring-fencing that would help to turn venture capital trusts towards the needs of the regions. Every other country has regional banks in some form. The United States, which was the source of venture capital trusts before they were put into effect in this country, has laws which do not allow banks to operate outside their own state. There is no all-American venture capital trust industry, but a Californian industry, an Oregon industry, one in Texas, one in Massachusetts, and so on. That is what we desperately lack—an orientation that will take the money outside the hothouse growth areas protected by the Government, notably in the south-east.

We could also consider the activities of the Prince of Wales's Youth Business Trust, which does wonderful work in Rotherham. The prince is responsible for 17,500 start-ups in Rotherham, at exactly that small business level, with perhaps one or two individuals trying to make a go of it. Those are people such as the managers leaving a company who were mentioned by the hon. Member for Bournemouth, West (Mr. Butterfill), and those who have lost their jobs and have the initiative and the get-up-and-go to start out on their own. On the whole I am a republican, but I find it strange that we have to turn to the royal family to get small businesses going in this country because the banks and the venture capitalists have let them down so disastrously.

Finally, we could consider introducing an export element into the equation. I am struck by what happened in Korea in the 1970s and 1980s when no company, whatever its size, got credit unless it could prove that there was an export element in its business. I am not sure whether that would be possible, but perhaps we could think about it for a future Finance Bill.

Photo of Malcolm Chisholm Malcolm Chisholm , Edinburgh Leith

Every time I have spoken in the House in the past two weeks I have been asked to be brief. I hope that that is because I have been speaking towards the end of debates, and not for any other reason.

The Opposition have a record of real concern about investment in our economy, the lack of which is one of the main problems, if not the most important problem, in the economy now. We are therefore interested in any measures designed to increase investment, including investment in small businesses. However, we have at least four concerns about the proposal before us.

Our first concern is the sheer scale of tax reliefs available and the consequent loss of money to the Exchequer. We are told that that will be £680 million over the next three years, but that calculation assumed 27 per cent. tax relief, and it has already been asked whether that was an underestimate. The amount of tax relief available is astounding. Initially it can be up to 60 per cent.—that actually applies to £200,000, because although a person can invest no more than £100,000 in a venture capital trust the same person can also put £100,000 into an enterprise investment scheme. On Second Reading I quoted from "BESt Investment", which was full of exclamation marks because it could not believe how many tax reliefs and tax breaks there would be. It asked whether anybody would ever have to pay capital gains tax again.

Secondly, we worry about the type of investment into which the money will go. It has been said that much venture capital money goes into management buy-outs, and those do not appear to be excluded. However, an even more serious worry exists about property, which was mentioned by various hon. Members. An explanation was given by the Financial Secretary of the abolition of the interest in land rule, but we are still worried about the type of companies that will now be brought in—companies that will have a big interest in land and property. As other hon. Members said, there is no specific exclusion of property. Why is there not? People will be suspicious that that is what the money will be used for if a specific exclusion is not written in.

It is also a fact that only 70 per cent. of the money has to go into qualifying holdings, so 30 per cent. of the money can be invested in literally anything, whether in this country or abroad. That is surely unacceptable when there is massive tax relief.

The third worry is about the displacement effect. Will the money go into the new investments and come out of other investments? My hon. Friend the Member for Oxford, East (Mr. Smith) quoted from a magazine Small Company Investor, which graphically illustrated how experts thought that money would go into property-related investments and come out of the small businesses which needed it.

The fourth worry is about whether investment will be targeted at the companies that need it. That was first mentioned by my hon. Friend the Member for Dudley, West (Mr. Pearson), who is an expert in those matters. He said that the companies that needed help were the ones that were starting up—the small companies. He asked why the £1 million limit and the £10 million limit were not reduced, because investment was not properly targeted.

I fear that that badly targeted device is all that appears to have emerged from the great review about which we heard last year of ways to channel savings into investment. The key problem remains of how small companies can obtain long-term finance—long-term loans. Other major investment issues are totally ignored by the Finance Bill.

I suppose that we should be grateful that we have got anything, because in the Budget, when he argued against capital allowances, the Chancellor said that he did not think that we should distort investment decisions. I am all in favour of distorting investment decisions when investment is not being made, but I am afraid that this measure is the only thing that is included in the Finance Bill. The rest of the Bill is a vacuum. We should have measures to encourage investment throughout the economy. The missing subject is dividends, which the previous Financial Secretary was considering until Lord Hanson told the Government that he was a socialist; then he stopped doing it.

I urge hon. Members to support our amendments tonight, because they provide that, if the measure goes through, at least we shall be able to review it in a couple of years' time and discover how it is working. We are also asking for specific exclusions of property, so that we do not create a second business expansion scheme.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

I am grateful to my hon. Friend the Member for Edinburgh, Leith (Mr. Chisholm). The reason why we ask him to be brief is that we know that he can make his arguments extremely well briefly, which he does time and again——and I say that not only because he happens to be one of my next-door neighbours in an Edinburgh constituency.

The debate has been extremely useful. On few occasions that I have witnessed in the eight years I have been a Member has the House spent so much time discussing directly problems which affect so many of our constituents, and also a problem that is fundamental to the future development of the economy.

There is no difference between the two sides of the House on the principle of venture capital trusts. We all agree that it is desirable, and from time to time necessary, to use fiscal incentives to ensure that investments are made in the sectors where we need it.

The difference between us is threefold. First, we believe that the Government need to consider other sectors, which have been mentioned on both sides of the House. Secondly, we believe that there must be safeguards to ensure that, if one gives a tax incentive, one does not end up subsidising undesirable behaviour, such as the behaviour that occurred when the business expansion scheme was set up. In that respect, too, there was common ground on both sides of the House. The difference between the two sides is that those who support the Government do not appear to accept that there is a case for ensuring that there should be safeguards in relation to venture capital trusts.

I suppose that the third difference between us is that we believe that the Government have given fiscal incentives in undesirable ways, such as the business expansion scheme, but the Government will not accept that the taxpayer's money has thereby been poured down the drain. I shall perhaps discuss that later.

7.15 pm

The Minister appeared reluctant to accept that there is no difference of principle between us, so we should perhaps not spend too much time trying to make differences where none exist. Perhaps British industry as a whole will welcome the fact that there is cross-party support for the principle of encouraging investment in what is known as the investment gap, which has been identified by almost every hon. Member who has contributed to the debate.

However, I took exception when the Minister said that because no one was focusing on granny farms, as he put it, that was all right. In support of his proposition, he cited the fact that Rothschild's supported the Government. What a surprise—Rothschild's supports the Government. I am sure that a bank such as Rothschild's, which has no fewer than 14 times been the recipient of public largesse, either as an adviser to the Government or as an underwriter of its flotation schemes, should say, "Well done the Government for coming up with that scheme."

Indeed, as my hon. Friends the Member for Sheffield, Attercliffe (Mr. Betts) and for Rotherham (Mr. MacShane) said, if venture capitalists do take great care in assessing the risks and evaluating the projects before them, it is scarcely surprising that the Chancellor hardly sat down after his Budget statement before our old chums at Rothschild's announced that they were going to set up a venture capital trust. They could not have known what was in the Budget, could they? How on earth would they know what a surefire bet it was—unless, of course, they had the amazing foresight of the noble Lord Archer of Weston-super-Mare?How could Rothschild's say so confidently that it was going to set up a venture capital trust unless it had made an evaluation of the type of tax breaks available and knew that, no matter what the risk, no matter what venture it backed, it was guaranteed to obtain a suitable return?

I do not think that the Minister can rely on Rothschild's for support, therefore, and I believe that both he and Conservative Members generally, today of all days, would do well to be very quiet about Rothschild's and the Conservative party, for reasons that people outside and inside the House will understand.

The main subject to which successive hon. Members drew attention was the funding gap between quoted companies and small businesses, many of which are funded by family money or by bank overdraft. As my hon. Friend the Member for Dudley, West (Mr. Pearson) said, that is starting to change; nevertheless, there is obviously a funding gap and we welcome the fact that the Government are tackling it.

I want to take up an argument that the hon. Member for Gordon (Mr. Bruce) made about property. I think that we all accept that if inflation remains low—a big "if'—obviously property will not be the kind of bet that it was in the past 30 or 40 years. However, in my travels around the City of London I have been surprised how many people tell me that they are getting back into property again. We all remember the property collapses of the 1970s, the late 1980s and the early 1990s; yet people are getting back into property because it is regarded as a major asset in a portfolio.

I do not think that we can take it for granted that, simply because inflation is low at the moment, the bad examples that the BES scheme threw up when it was in force will not return. I think that the hon. Member for Bournemouth, West (Mr. Butterfill) conceded as much in his contribution. Although he said that he believed that it was unlikely that property speculation would become a problem again, none of us can rely on that being the case for ever. That appears to be another reason to support the Opposition amendment, which says that we should review the scheme in a couple of years' time.

Several Conservative Members have said that two years is not long enough to evaluate the schemes, and I accept that. I am not asking for schemes to be considered after two years, but obviously in the two-year period we shall have a pretty good idea if we notice the bad old habits re-emerging. If, as we have suggested, and on the basis of the many articles that have been mentioned, people do regard the scheme as a honeypot for tax avoidance and if we notice bad habits returning, it is surely right to ensure that taxpayers' money is not used to subsidise wholly undesirable behaviour.

As Conservative Members never tire of telling us, it is not the Government's money, but the taxpayer's money. They should think long and hard about using taxpayers' money to subsidise behaviour that most Members on both sides of the House find objectionable. Granny farming is not an activity that should be encouraged in general, and it certainly should not be encouraged by subsidy.

It was interesting that the hon. Member for Orpington (Mr. Horam) and my hon. Friend the Member for Monklands, East (Mrs. Liddell) made similar arguments. I wondered whether the hon. Member for Orpington was having second, or perhaps third thoughts, and reverting to his original beliefs as he rightly drew attention to the fact that there is a problem with start-up finance, as did my hon. Friend the Member for Monklands, East, who has considerable experience in that sector. The hon. Member for Orpington argued that it is sometimes difficult to obtain funding for projects of less than £2 million.

I have an annual debate with the hon. Member for Bournemouth, West on the subject of his various interests. Each year, he is a member of the Finance Committee. I would advise him not to make the British Venture Capital Association his only port of call as the authority that no business need go without funds. Of course, that association has a view, but it is not the only one. As has been said, there is a funding gap and the Government should tackle that problem.

Photo of John Butterfill John Butterfill , Bournemouth West

I am sure that when he reads my speech carefully the hon. Gentleman will see that I did not make that association my only point of reference. I referred specifically to the report of the Select Committee on Trade and Industry—of which I am a member—which looked into the matter in great depth.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

The hon. Gentleman mentioned one or two other points, but he put considerable weight on that association. However, we shall return to the subject.

As usual, the hon. Member for Carshalton and Wallington (Mr. Forman) made an informed and highly enjoyable speech—apart from the silly crocodile tears that he wept over whether we were new or old Labour or new or old Liberal. Closing tax loopholes is a matter of right or wrong, not new or old. Our concern is not to open a mammoth tax loophole without adequate safeguards.

I emphasise that we all agree that Government intervention may be necessary where there is market failure. We must surely all also agree, however, that if fiscal incentives are to be used it is essential for the Government to ensure that those incentives achieve their intended aim and are not abused. That was the point behind the campaign launched by Labour to close tax loopholes. We are not against high rewards for those who undertake high risks, but we are against high rewards for low risk.

I commend to the Minister the contribution of my hon. Friend the Member for Dudley, West, who knows a thing or two about such matters. I also commend to him the suggestions made by others of my hon. Friends, including my hon. Friends the Members for Warwickshire, North (Mr. O'Brien) and for Rotherham.

One or two hon. Members spoke about the tax avoidance industry. I wish that Conservative Members would pay more attention to that industry. Tax avoidance is wholly legitimate; we are all entitled to reduce our tax bills and are obliged to render unto Caesar only that which is due to Caesar. That does not mean that we should help the tax avoidance industry. Conservative Members sometimes seem to regard that industry like piracy: it demonstrates the entrepreneurial spirit and they cannot bring themselves to criticise it or get in its way.

Photo of Mr Nigel Forman Mr Nigel Forman , Carshalton and Wallington

Does the hon. Gentleman recognise that it is the very complexity of many Finance Bills which creates the opportunities that many of us wish to eliminate?

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

Absolutely. Although it is not a declarable interest, I am happy to declare a sort of interest in that I am a member of the Institute for Fiscal Studies committee set up to examine the complexities of taxation. I cannot remember which Conservative Member represents that party on the committee.

Photo of Alistair Darling Alistair Darling Shadow Spokesperson (Treasury)

My response to the sedentary intervention of my good colleague the shadow Chief Secretary is that I am not going to sort them all out myself: I shall report back to him so that he can sort it out in two years' time when he is sitting in the Treasury along with the Japanese tourists or whoever else happens to populate it then.

The need for investment in this country is crucial—no one has denied that—but I wish to return to the issue which appears to separate the two sides: the need for safeguards. Conservative Members and the Minister said that we should not pay too much attention to what happened with the business expansion scheme. I have a quotation on which the Minister might wish to reflect. It comes from an interesting speech that was made a couple of years ago. It states: Think back six years. The yuppie revolution was in full swing . . . But it was built on sand. The wheeler-dealer was the man of the moment. The best returns were to be found in trading financial assets. Demand for property seemed inexhaustible. Money inevitably flowed towards these apparently sure-fire winners. But the system"— the business expansion scheme— was giving the wrong signals. Far from being sure-fire winners, many were, in fact, sure-fire losers. We can see them today marked by To Let boards outside brand-new buildings that will never make a return for the people who built them.The absence of a proper return matters to the developer, but it also matters to the rest of us, because the resources that were attracted, like moths to a lamp-bulb, to the lure of easy money are resources that have been wasted. No one in the Labour party said that. Conservative Members will remember who said it, because it was none other than the Secretary of State for National Heritage when he was Financial Secretary to the Treasury.

Conservative Members may wish to reflect on the fact that those words were said by a member of the Cabinet, and perhaps one of the most decent and informed people to be sidelined in the Cabinet reshuffle. Indeed, he may have been sidelined not only because he set up a committee to look into the long-term and short-term attitudes in the City, before Lord Hanson said that that had to stop, but because he was astute enough to say that resources that were attracted like moths to a lamp-bulb, to the lure of easy money have been wasted. The case is made for our amendment by a member of the Conservative Cabinet. Conservative Members can surely learn from the mistakes that they made quite recently—not long ago in their 16-year span—with the business expansion scheme.

We are anxious to ensure that investment and entrepreneurial spirit is encouraged and that where there is a gap in the market the Government use all their powers to fill it, but we cannot and will not support a device which is likely to give rise to yet another tax break. I suspect that the present Government are responsible for creating more tax breaks than any other Government in history. That is partly because some Conservatives are, by inclination, attracted to such breaks and partly because some of them have connections with people in the tax avoidance industry.

The public interest demands that if public money is to be spent there must be safeguards in the public interest to ensure that money is directed to those sectors which need investment and have a high risk. They could include high-tech sectors and the very sectors in which Britain has not, historically, been able to compete. It seems that hon. Members on both sides of the House have tonight recognised that gap and the fact that far more needs to be done.

With our amendment we are merely asking for an assurance that the Government will not create a huge tax break for people who do not deserve it. Conservative Members are right to say that people are entitled to take advantage of the tax system, but it should never be a function of the Government or of the House simply to nod something through while knowing full well that there is a substantial risk that it will create the mother of all tax breaks. It is for that reason that we tabled our amendment.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

I wish to press the Minister on the subject of property. The issue has been debated, but I am not convinced that all aspects of it have been taken into account. We are trying to ensure that, at the start, the right signals are given to show that venture capital trusts are designed to divert money, by tax efficient means, into productive investment.

Despite the debate about the state of the property market and the intervention of one or two Conservative Members, I must repeat that the problem in the past has been that investing simply in the management of existing properties on the basis of speculation about their value, while it may be a perfectly legitimate business and has, at times, been profitable, does not add to the sum total of real wealth. However, it can be the source of a great deal of attracted, diverted, tax-ubsidised investment.

The property market is currently in a more complex state than it has been for some time. One cannot say that the property market is globally depressed, as some sectors are performing reasonably well. There is no doubt that a well-managed property portfolio has every prospect of attracting a return that is significantly better than the rate of inflation. That being so, clearly the added benefit of a tax incentive is likely to encourage the promotion of more such portfolios.

In recent years, I have been a very small investor in a unit trust-related property fund which, throughout the recession, has not only out-performed the property market but out-performed the general index, even in the depths of the property recession. It did so because it was astutely managed and well targeted. I do not criticise that, but I criticise the fact that such funds should be encouraged for purely tax-relief purposes.

An ironic, contradictory, but equally valid point is that a tax incentive might provide the reassurance to secure a property portfolio and give it extra underpinning. Having a tax investment built in might allow people to hedge their bets. On both counts, I think that the Government are in danger of opening up a very good scheme to speculative investment which will be unproductive and which could divert a great deal of money away from the Treasury and from the businesses which need it. For that reason, I believe that the Committee should accept the amendment, and I hope that the Government will rethink their position.

Photo of George Young George Young The Financial Secretary to the Treasury 7:30 pm, 25th January 1995

I agree with the hon. Member for Edinburgh, Central (Mr. Darling): it has been a good debate, with hon. Members starting from the common position that there is a problem which needs to be addressed. I shall deal with the major questions raised during the debate and I write to those hon. Members whose questions I do not reply to directly.

The hon. Member for Edinburgh, Central referred to my right hon. Friend the Secretary of State for National Heritage who was, quite rightly, promoted from the Treasury to the Cabinet in the July reshuffle. His reference to my right hon. Friend being "sidelined" is one of the most preposterous things that I have heard in the Chamber for many years. I hope that the hon. Gentleman will be "sidelined" in due course—if that is how he interprets it.

I agree with some of the things that the hon. Member for Gordon (Mr. Bruce) said. There has been a cultural shift, but there has also been a change in the perception of property and property development in the past 10 years. That is one reason why investments are less likely to go into those sectors. I shall return to that matter in a moment.

On his point about the interest in the land issue, perhaps the hon. Gentleman should read the Revenue Law Committee memorandum written by the Law Society entitled "Revenue Law Reform". It states: Many bona fide trading companies, although not property-based, will not satisfy the requirement that the value of their interest in land does not exceed half the value of the company's assets as a whole. Further, although the test may initially be satisfied, it may inadvertently be breached subsequently during the relevant period. Although the effect will be to exclude asset-backed companies, the restrictions will extend more widely than this". In other words, it says that the rule which the hon. Gentleman wants to apply could exclude a company manufacturing widgets which happens to own its own factory. That cannot be right.

My hon. Friend the Member for Orpington (Mr. Horam) identified the opportunities for small companies presented by the structural changes in the economy. He will be reassured to know that the enterprise investment scheme has already provided help for start-ups. Approximately 30 per cent. of schemes funded so far under the EIS have been start-ups, and they have raised an average of £80,000, which hits the target that my hon. Friend identified.

The hon. Member for Monklands, East (Mrs. Liddell) asked why there was nothing in the Bill to help business angels. That assistance was provided in the Finance Act 1994 which introduced the enterprise investment scheme designed specifically for business angels. The hon. Lady is quite right: there is a role for them, but I think that their role is focused more accurately on the EIS rather than on the venture capital trust scheme in this Finance Bill. More than 50 per cent. of the enterprise investment schemes reported to Inland Revenue have involved business angels.

I am afraid that the hon. Member for Stoke-on-Trent, South (Mr. Stevenson) is just unreconstructed. There is a risk of being committed in theory to the principle of VCTs but then undermining and qualifying that commitment to such an extent that one is left with very little.

My hon. Friends the Members for Carshalton and Wallington (Mr. Forman) and for Bournemouth, West (Mr. Butterfill) made informed speeches correctly identifying the gap in funding that the VCT meets. I shall respond to their anxiety—I think that it was the main anxiety to come through the debate—about what we shall do if the investment goes into schemes about which hon. Members have expressed reservations.

I can tell the Committee, and in particular my hon. Friend the Member for Bournemouth, West, that we shall keep the VCT scheme under close review. If there is evidence of the scheme being used for tax avoidance purposes or if a disproportionate amount of funds is invested in low-risk activities we shall not hesitate to take action to prevent that occurring. We shall make immediate use of the power included in schedule 14 to add to the list of non-qualifying activities if the need arises. I hope that that also gives some comfort to the hon. Member for Gordon.

The hon. Member for Dudley, West (Mr. Pearson) asked a number of questions and I think it will be easier if I reply to him in writing as some of them were highly technical and the Committee would like to make progress.

There have been extensive consultations about the scheme. It is a worthwhile proposal which has been welcomed by those who will operate it. There is a real need for small businesses to access the funds and I think that the Committee should make progress and put the scheme into action.

Question put, That the amendment be made:—
The Committee divided: Ayes 242, Noes 321.

Division No. 49][7.34 pm
AYES
Adams, Mrs IreneField, Frank (Birkenhead)
Ainger, NickFisher, Mark
Ainsworth, Robert (Cov'try NE)Flynn, Paul
Allen, GrahamFoster, Rt Hon Derek
Anderson, Donald (Swansea E)Foulkes, George
Anderson, Ms Janet (Ros'dale)Fraser, John
Armstrong, HilaryFyfe, Maria
Ashton, JoeGalbraith, Sam
Barnes, HarryGalloway, George
Baron, KevinGapes, Mike
Battle, JohnGeorge, Bruce
Bayley, HughGerrard, Neil
Beckett, Rt Hon MargaretGilbert, Rt Hon Dr John
Bell, StuartGodman, Dr Norman A
Benn, Rt Hon TonyGodsiff, Roger
Bennett, Andrew FGolding, Mrs Llin
Benton, JoeGordon, Mildred
Bermingham, GeraldGraham, Thomas
Berry, RogerGrant Bernie (Tottenham)
Betts, CliveGriffiths, Nigel (Edinburgh S)
Blair, Rt Hon TonyGriffiths, Win (Bridgend)
Blunkett, DavidGrocott, Bruce
Boateng, PaulGunnell, John
Boyes, RolandHall, Mike
Bradley, KeithHanson, David
Bray, Dr JeremyHardy, Peter
Brown, N (N'c'tle upon Tyne E)Harman, Ms Harriet
Burden, RichardHattersley, Rt Hon Roy
Byers, StephenHenderson, Doug
Caborn, RichardHeppell, John
Callaghan, JimHill, Keith (Streatham)
Campbell, Mrs Anne (C'bridge)Hinchliffe, David
Campbell, Ronnie (Blyth V)Hodge, Margaret
Campbell-Savours, D NHoey, Kate
Canavan, DennisHome Robertson, John
Cann, JamieHood, Jimmy
Chisholm, MalcolmHoon, Geoffrey
Church, JudithHowarth, George (Knowsley North)
Clapham, MichaelHowells, Dr. Kim (Pontypridd)
Clarke, Eric (Midlothian)Hoyle, Doug
Clelland, DavidHughes, Kevin (Doncaster N)
Clwyd, Mrs AnnHughes, Robert (Aberdeen N)
Coffey, AnnHughes, Roy (Newport E)
Cohen, HarryHutton, John
Connarty, MichaelIllsley, Eric
Corbett, RobinIngram, Adam
Corbyn, JeremyJackson, Glenda (H'stead)
Corston, JeanJackson, Helen (Shef'ld, H)
Cousins, JimJamieson, David
Cox, TomJanner, Greville
Cummings, JohnJones, Barry (Alyn and D'side)
Cunliffe, LawrenceJones, Lynne (B'ham S O)
Cunningham, Jim (Covy SE)Jones, Martyn (Clwyd, SW)
Cunningham, Rt Hon Dr JohnKaufman, Rt Hon Gerald
Dalyell, TamKeen, Alan
Darling, AlistairKennedy, Jane (Lpool Brdgn)
Davidson, IanKhabra, Piara S
Davies, Bryan (Oldham C'tral)Kilfoyle, Peter
Davies, Rt Hon Denzil (Llanelli)Lestor, Joan (Eccles)
Davies, Ron (Caerphilly)Lewis, Terry
Denham, JohnLiddell, Mrs Helen
Dixon, DonLitherland, Robert
Dobson, FrankLloyd, Tony (Stretford)
Donohoe, Brian HLlwyd, Elfyn
Dowd, JimLoyden, Eddie
Dunnachie, JimmyMcAllion, John
Dunwoody, Mrs GwynethMcAvoy, Thomas
Eagle, Ms AngelaMcCartney, Ian
Enright, DerekMacdonald, Calum
Etherington, BillMcFall, John
Evans, John (St Helens N)McKelvey, William
Ewing, Mrs MargaretMackinlay, Andrew
Fatchett, DerekMcMaster, Gordon
McNamara, KevinRooney, Terry
MacShane, DenisRoss, Ernie (Dundee W)
McWilliam, JohnRowlands, Ted
Madden, MaxRuddock, Joan
Mahon, AliceSalmond, Alex
Mandelson, PeterSheerman, Barry
Marshall, David (Shettleston)Sheldon, Rt Hon Robert
Marshall, Jim (Leicester, S)Shore, Rt Hon Peter
Martlew, EricShort, Clare
Maxton, JohnSimpson, Alan
Meacher, MichaelSkinner, Dennis
Meale, AlanSmith, Andrew (Oxford E)
Michael, AlunSmith, Llew (Blaenau Gwent)
Michie, Bill (Sheffield Heeley)Soley, Clive
Milburn, AlanSpearing, Nigel
Miller, AndrewSpellar, John
Mitchell, Austin (Gt Grimsby)Squire, Rachel (Dunfermline W)
Moonie, Dr LewisSteinberg, Gerry
Morley, ElliotStevenson, George
Morris, Rt Hon Alfred (Wy'nshawe)Stott, Roger
Morris, Estelle (B'ham Yardley)Strang, Dr. Gavin
Morris, Rt Hon John (Aberavon)Straw, Jack
Mowlam, MarjorieSutcliffe, Gerry
Mudie, GeorgeTaylor, Mrs Ann (Dewsbury)
Mullin, ChrisThompson, Jack (Wansbeck)
Oakes, Rt Hon GordonTimms, Stephen
O'Brien, Mike (N W'kshire)Tipping, Paddy
O'Brien, William (Normanton)Turner, Dennis
O'Hara, EdwardVaz, Keith
Olner, BillWalker, Rt Hon Sir Harold
O'Neill, MartinWalley, Joan
Orme, Rt Hon StanleyWardell, Gareth (Gower)
Pearson, IanWareing, Robert N
Pickthall, ColinWatson, Mike
Pike, Peter LWelsh, Andrew
Pope, GregWicks, Malcolm
Powell, Ray (Ogmore)Wigley, Dafydd
Prentice, Bridget (Lew'm E)Williams, Rt Hon Alan (Sw'n W)
Prentice, Gordon (Pendle)Williams, Alan W. (Carmarthen)
Prescott, Rt Hon JohnWilson, Brian
Primarolo, DawnWinnick, David
Purchase, KenWise, Audrey
Randall, StuartWorthington, Tony
Raynsford, NickWray, Jimmy
Reid, Dr JohnWright, Dr Tony
Robertson, George (Hamilton)Young, David (Bolton SE)
Robinson, Geoffrey (Co'try NW)
Roche, Mrs BarbaraTellers for the Ayes:
Rogers, AllanMr. Jon Owen Jones and
Rooker, JeffMs Tessa Jowell
NOES
Ainsworth, Peter (East Surrey)Biffen, R Hon John
Aitken, Rt Hon JonathanBody, Sir Richard
Alexander, RichardBonsor, Sir Nicholas
Alison, Rt Hon Michael (Selby)Booth, Hartley
Allason, Rupert (Torbay)Boswell, Tim
Alton, DavidBottomley, Peter (Eltham)
Amess, DavidBottomley, Rt Hon Virginia
Arbuthnot, JamesBowis, John
Arnold, Jacques (Gravesham)Boyson, Rt Hon Sir Rhodes
Arnold, Sir Thomas (Hazel Grv)Brandreth, Gyles
Ashby, DavidBrazier, Julian
Atkins, RobertBright, Sir Graham
Atkinson, Peter (Hexham)Brooke, Rt Hon Peter
Baker, Rt Hon Kenneth (Mole V)Brown, M (Brigg & Cl'thorpes)
Baker, Nicholas (North Dorset)Browning, Mrs Angela
Baldry, TonyBruce, Ian (Dorset)
Banks, Matthew (Southport)Bruce, Malcolm (Gordon)
Banks, Robert (Harrogate)Burns, Simon
Bates, MichaelBurt, Alistair
Batiste, SpencerButcher, John
Beith, Rt Hon A JButler, Peter
Bellingham, HenryButterfill, John
Bendall, VivianCampbell, Menzies (Fife NE)
Beresford, Sir PaulCarlile, Alexander (Montgomery)
Carlisle, John (Luton North)Hampson, Dr Keith
Carlisle, Sir Kenneth (Lincoln)Hanley, Rt Hon Jeremy
Carrington, MatthewHannam, Sir John
Carttiss, MichaelHargreaves, Andrew
Cash, WilliamHarris, David
Channon, Rt Hon PaulHarvey, Nick
Chapman, SydneyHaselhurst, Alan
Chidgey, DavidHawkins, Nick
Churchill, MrHawksley, Warren
Clappison, JamesHayes, Jerry
Clark, Dr Michael (Rochford)Heald, Oliver
Clarke, Rt Hon Kenneth (Ru'clif)Heath, Rt Hon Sir Edward
Clifton-Brown, GeoffreyHeathcoat-Amory, David
Coe, SebastianHendry, Charles
Colvin, MichaelHicks, Robert
Congdon, DavidHiggins, Rt Hon Sir Terence
Coombs, Anthony (Wyre Forest)Hill, James (Southampton Test)
Coombs, Simon (Swindon)Horam, John
Cope, Rt Hon Sir JohnHordern, Rt Hon Sir Peter
Couchman, JamesHoward, Rt Hon Michael
Cran, JamesHowarth, Alan (Strat'rd-on-A)
Currie, Mrs Edwina (S D'by'ire)Howell, Sir Ralph (N Norfolk)
Curry, David (Skipton & Ripon)Hughes, Robert G (Harrow W)
Davis, David (Boothferry)Hughes, Simon (Southwark)
Day, StephenHunt, Rt Hon David (Wirral W)
Deva, Nirj JosephHunt, Sir John (Ravensbourne)
Delvin, TimHunter, Andrew
Dicks, TerryHurd, Rt Hon Douglas
Dorrell, Rt Hon StephenJack, Michael
Douglas-Hamilton, Lord JamesJackson, Robert (Wantage)
Dover, DenJenkin, Bernard
Duncan, AlanJessel, Toby
Duncan Smith, IainJohnson Smith, Sir Geoffrey
Dunn, BobJohnston, Sir Russell
Durant, Sir AnthonyJones, Gwilym (Cardiff N)
Dykes, HughJones, Nigel (Cheltenham)
Eggar, Rt Hon TimJones, Robert B (W Hertfdshr)
Elletson, HaroldJopling, Rt Hon Michael
Emery, Rt Hon Sir PeterKellett-Bowman, Dame Elaine
Evans, David (Welwyn Hatfield)Kennedy, Charles (Ross, C&S)
Evans, Jonathan (Brecon)Key, Robert
Evans, Nigel (Ribble Valley)Kilfedder, Sir James
Evans, Roger (Monmouth)King, Rt Hon Tom
Evennett, DavidKirkhope, Timothy
Faber, DavidKirkwood, Archy
Fabricant, MichaelKnapman, Roger
Fenner, Dame PeggyKnight, Mrs Angela (Erewash)
Field, Barry (Isle of Wight)Knight, Greg (Derby N)
Fishburn, DudleyKnight, Dame Jill (Bir'm E'st'n)
Forman, NigelKnox, Sir David
Forth, EricKynoch, George (Kincardine)
Foster, Don (Bath)Lait, Mrs Jacqui
Fowler, Rt Hon Sir NormanLamont, Rt Hon Norman
Fox, Sir Marcus (Shipley)Lang, Rt Hon Ian
Freeman, Rt Hon RogerLawrence, Sir Ivan
French, DouglasLegg, Barry
Gale, RogerLeigh, Edward
Gallie, PhilLennox-Boyd, Sir Mark
Gardiner, Sir GeorgeLester, Jim (Broxtowe)
Garel-Jones, Rt Hon TristanLidington, David
Garnier, EdwardLightbown, David
Gill, ChristopherLilley, Rt Hon Peter
Gillan, CherylLloyd, Rt Hon Sir Peter (Fareham)
Goodlad, Rt Hon AlastairLord, Michael
Goodson-Wickes, Dr CharlesLuff, Peter
Gorman, Mrs TeresaLyell, Rt Hon Sir Nicholas
Gorst, Sir JohnLynne, Ms Liz
Grant, Sir A (SW Cambs)MacGregor, Rt Hon John
Greenway, Harry (Ealing N)MacKay, Andrew
Greenway, John (Ryedale)Maclean, David
Griffiths, Peter (Portsmouth, N)Maclennan, Robert
Grylls, Sir MichaelMcLoughlin, Patrick
Gummer, Rt Hon John SelwynMcNair-Wilson, Sir Patrick
Hague, WilliamMaddock, Diana
Hamilton, Rt Hon Sir ArchibaldMadel, Sir David
Hamilton, Neil (Tatton)Maitland, Lady Olga
Mans, KeithSmith, Sir Dudley (Warwick)
Marlow, TonySmith, Tim (Beaconsfield)
Marshal, John (Hendon S)Speed, Sir Keith
Marshal, Sir Michael (Arundel)Spencer, Sir Derek
Martin, David (Portsmouth S)Spicer, Sir James (W Dorset)
Mates, MichaelSpicer, Michael (S Worcs)
Mawhinney, Rt Hon Dr BrianSpink, Dr Robert
Mayhew, Rt Hon Sir PatrickSpring, Richard
Merchant, PiersSquire, Robin (Hornchurch)
Mills, IainStanley Rt Hon Sir John
Mitchell, Andrew (Gedling)Steen, Anthony
Mitchell, Sir David (NW Hants)Stephen, Michael
Moate, Sir RogerStern, Michael
Molyneaux, Rt Hon JamesStewart, Allan
Monro, Sir HectorStreeter, Gary
Montgomery, Sir FergusSumberg, David
Nelson, AnthonySweeney, Walter
Neubert, Sir MichaelSykes, John
Newton, Rt Hon TonyTapsell, Sir Peter
Nicholls, PatrickTaylor, Ian (Esher)
Nicholson, David (Taunton)Taylor, John M (Solihull)
Nicholson, Emma (Devon West),Taylor, Matthew (Truro)
Norris, SteveTaylor, Sir Teddy (Southend, E)
Onslow, Rt Hon Sir CranleyTemple-Morris, Peter
Ottaway, RichardThomason, Roy
Page, RichardThompson, Sir Donald (C'er V)
Paice, JamesThompson, Patrick (Norwich N)
Patnick, Sir IrvineThumham, Peter
Patten, Rt Hon JohnTownsend, Cyril D (Bexl'yh'th)
Pattie, Rt Hon Sir GeoffreyTracey, Richard
Pawsey, JamesTredinnick, David
Peacock, Mrs ElizabethTrend, Michael
Pickles, EricTrimble, David
Porter, Barry (Wirral S)Trotter, Neville
Porter, David (Waveney)Twinn, Dr Ian
Portillo, Rt Hon MichaelTyler, Paul
Powell, William (Corby)Vaughan, Sir Gerard
Rathbone, TimViggers, Peter
Redwood, Rt Hon JohnWaldegrave, Rt Hon William
Rendel, DavidWalden, George
Renton, Rt Hon TimWalker, Bill (N Tayside)
Richards, RodWallace, James
Waller, Gary
Riddick, GrahamWard, John
Rifkind, Rt Hon MalcolmWardle, Charles (Bexhill)
Robathan, AndrewWaterson, Nigel
Roberts, Rt Hon Sir WynWatts, John
Robertson, Raymond (Ab'd'n S)Wells, Bowen
Robinson, Mark (Somerton)Whitney, Ray
Roe, Mrs Marion (Broxbourne)Whittingdale, John
Rowe, Andrew (Mid Kent)Widdecombe, Ann
Rumbold, Rt Hon Dame AngelaWiggin, Sir Jerry
Ryder, Rt Hon RichardWilletts, David
Sackville, TomWilshire, David
Sainsbury, Rt Hon Sir TimothyWirrterton, Mrs Ann (Congleton)
Scott, Rt Hon Sir NicholasWolfson, Mark
Shaw, David (Dover)Wood, Timothy
Shaw, Sir Giles (Pudsey)Yeo, Tim
Shepherd, Colin (Hereford)Young, Rt Hon Sir George
Shepherd, Richard (Aldridge)
Shersby, MichaelTellers for the Noes:
Sims, RogerMr. Derek Conway and
Skeet, Sir TrevorDr. Liam Fox.

Question accordingly negatived.

Question put, That the clause stand part of the Bill:—
The Committee divided: Ayes 319, Noes 242.

Division No. 51][8.03 pm
AYES
Adams, Mrs IreneChurch, Judith
Ainger, NickClapham, Michael
Ainsworth, Robert (Cov'try NE)Clarke, Eric (Midlothian)
Allen, GrahamClelland, David
Alton, DavidClwyd, Mrs Ann
Anderson, Donald (Swansea E)Coffey, Ann
Anderson, Ms Janet (Ros'dale)Cohen, Harry
Armstrong, HilaryConnarty, Michael
Ashton, JoeCorbett, Robin
Barnes, HarryCorbyn, Jeremy
Barron, KevinCorston, Jean
Battle, JohnCousins, Jim
Bayley, HughCox, Tom
Beckett, Rt Hon MargaretCummings, John
Beith, Rt Hon A JCunliffe, Lawrence
Bell, StuartCunningham, Jim (Covy SE)
Benn, Rt Hon TonyCunningham, Rt Hon Dr John
Bennett, Andrew FDalyell, Tam
Benton, JoeDarling, Alistair
Bermingham, GeraldDavidson, Ian
Berry, RogerDavies, Bryan (Oldham C'tral)
Betts, CliveDavies, Rt Hon Denzil (Llanelli)
Blair, Rt Hon TonyDavies, Ron (Caerphilly)
Blunkett, DavidDenham, John
Boateng, PaulDixon, Don
Boyes, RolandDobson, Frank
Bradley, KeithDonohoe, Brian H
Bray, Dr JeremyDowd Jim
Brown, Gordon (Dunfermline E)Dunnachie, Jimmy
Brown, N (N'c'tle upon Tyne E)Dunwoody, Mrs Gwyneth
Bruce, Malcolm (Gordon)Eagle, Ms Angela
Burden, RichardEnright, Derek
Byers, StephenEtherington, Bill
Caborn, RichardEvans, John (St Helens N)
Callaghan, JimFatchett Derek
Campbell, Mrs Anne (C'bridge)Field, Frank (Birkenhead)
Campbell, Menzies (Fife NE)Fisher, Mark
Campbell, Ronnie (Blyth V)Flynn, Paul
Campbell-Savours, D NFoster, Rt Hon Derek
Canavan, DennisFoster, Don (Bath)
Cann, JamieFoulkes, George
Carlile, Alexander (Montgomery)Fraser, John
Chidgey, DavidFyfe, Maria
Chisholm, MalcolmGalbraith, Sam
Galloway, GeorgeMadden, Max
Gapes, MikeMaddock, Diana
George, BruceMahon, Alice
Gerrard, NeilMandelson, Peter
Gilbert, Rt Hon Dr JohnMarshall, David (Shettleston)
Godman, Dr Norman AMarshall, Jim (Leicester, S)
Godsiff, RogerMartin, Michael J (Springburn)
Golding, Mrs LlinMartlew, Eric
Gordon, MildredMaxton, John
Graham, ThomasMeacher, Michael
Grant, Bernie (Tottenham)Meale Alan
Griffiths, Nigel (Edinburgh S)Michael, Alun
Griffiths, Win (Bridgend)Michie, Bill (Sheffield Heeley)
Grocott, BruceMilburn, Alan
Gunnell, JohnMiller, Andrew
Hall, MikeMitchell, Austin (Gt Grimsby)
Hanson, DavidMoonie, Dr Lewis
Hardy, PeterMorley, Elliot
Harman, Ms HarrietMorris, Rt Hon Alfred (Wy'nshawe)
Harvey, NickMorris, Estelle (B'ham Yardley)
Hattersley, Rt Hon RoyMorris, Rt Hon John (Aberavon)
Henderson, DougMowlam, Marjorie
Heppell, JohnMudie, George
Hill, Keith (Streatham)Mullin, Chris
Hinchliffe, DavidOakes, Rt Hon Gordon
Hodge, MargaretO'Brien, Mike (N W'kshire)
Hoey, KateO'Brien, William (Normanton)
Home Robertson, JohnO'Hara, Edward
Hood, JimmyOlner, Bill
Hoon, GeoffreyO'Neill, Martin
Howarth, George (Knowsley North)Orme, Rt Hon Stanley
Howells, Dr. Kim (Pontypridd)Pearson, Ian
Hoyle, DougPickthall, Colin
Hughes, Kevin (Doncaster N)Pike, Peter L
Hughes, Robert (Aberdeen N)Pope, Greg
Hughes, Roy (Newport E)Powell, Ray (Ogmore)
Hutton JohnPrentice, Bridget (Lew'm E)
Illsley, EricPrentice, Gordon (Pendle)
Ingram, AdamPrescott, Rt Hon John
Jackson, Glenda (H'stead)Primarolo, Dawn
Jackson, Helen (Shef'ld, H)Purchase, Ken
Jamieson, DavidRandall, Stuart
Janner, GrevilleRaynsford, Nick
Johnston, Sir RussellReid, Dr John
Jones, Barry (Alyn and D'side)Rendel, David
Jones, Jon Owen (Cardiff C)Robertson, George (Hamilton)
Jones, Lynne (B'ham S O)Robinson, Geoffrey (Co'try NW)
Jones, Martyn (Clwyd, SW)Roche, Mrs Barbara
Jones, Nigel (Cheltenham)Rogers, Allan
Jewell, TessaRooker, Jeff
Kaufman, Rt Hon GeraldRooney, Terry
Keen, AlanRoss, Ernie (Dundee W)
Kennedy, Charles (Ross,C&S)Rowlands, Ted
Kennedy, Jane (Lpool Brdgn)Ruddock, Joan
Khabra, Piara SSalmond, Alex
Kilfoyle, PeterSheerman, Barry
Lestor, Joan (Eccles)Sheldon, Rt Hon Robert
Lewis, TerryShore, Rt Hon Peter
Liddell, Mrs HelenShort, Clare
Litherland, RobertSimpson, Alan
Lloyd, Tony (Stretford)Skinner, Dennis
Llwyd, ElfynSmith, Andrew (Oxford E)
Loyden, EddieSmith, Llew (Blaenau Gwent)
Lynne, Ms LizSoley, Clive
McAllion JohnSpearing, Nigel
McAvoy, ThomasSpellar John
McCartney, IanSquire, Rachel (Dunfermline W)
Macdonald, CalumSteinberg, Gerry
McFall JohnStevenson, George
McKelvey, WilliamStott, Roger
Mackinlay, AndrewStrang, Dr. Gavin
Maclennan, RobertStraw, Jack
McMaster, GordonSutcliffe, Gerry
McNamara, KevinTaylor, Mrs Ann (Dewsbury)
MacShane, DenisTaylor, Matthew (Truro)
McWilliam, JohnThompson, Jack (Wansbeck)
Timms, StephenWigley, Dafydd
Tipping, PaddyWilliams, Rt Hon Alan (Sw'n W)
Turner, DennisWilliams, Alan W (Carmarthen)
Tyler, PaulWilson, Brian
Vaz, KeithWinnick, David
Walker, Rt Hon Sir HaroldWise, Audrey
Worthington, Tony
Wallace, JamesWray, Jimmy
Walley, JoanWright, Dr Tony
Wardell, Gareth (Gower)Young, David (Balton SE)
Wareing, Robert N
Watson, MikeTellers for the Ayes:
Welsh, AndrewMr. Archy Kirkwood and
Wicks, MalcolmMr. Simon Hughes.
NOES
Ainsworth, Peter (East Surrey)Coombs, Simon (Swindon)
Aitken, Rt Hon JonathanCope, Rt Hon Sir John
Alexander, RichardCouchman, James
Alison, Rt Hon Michael (Selby)Cran, James
Allason, Rupert (Torbay)Currie, Mrs Edwina (S D'by'ire)
Amess, DavidCurry, David (Skipton & Ripon)
Arbuthnot, JamesDavis, David (Boothferry)
Arnold, Jacques (Gravesham)Day, Stephen
Arnold, Sir Thomas (Hazel Grv)Deva, Nirj Joseph
Ashby, DavidDevlin, Tim
Atkins, RobertDicks, Terry
Atkinson, Peter (Hexham)Dorrell, Rt Hon Stephen
Baker, Rt Hon Kenneth (Mole Valley)Douglas-Hamilton, Lord James
Dover, Den
Baker, Nicholas (Dorset North)Duncan, Alan
Baldry, TonyDuncan Smith, Iain
Banks, Matthew (Southport)Dunn, Bob
Banks, Robert (Harrogate)Durant, Sir Anthony
Bates, MichaelDykes, Hugh
Batiste, SpencerEggar, Rt Hon Tim
Bellingham, HenryElletson, Harold
Bendall, VivianEmery, Rt Hon Sir Peter
Beresford, Sir PaulEvans, David (Welwyn Hatfield)
Biffen, Rt Hon JohnEvans, Jonathan (Brecon)
Body, Sir RichardEvans, Nigel (Ribble Valley)
Bonsor, Sir NicholasEvans, Roger (Monmouth)
Booth, HartleyEvennett, David
Boswell, TimFaber, David
Bottomley, Peter (Eltham)Fabricant, Michael
Bottomley, Rt Hon VirginiaFenner, Dame Peggy
Bowis, JohnField, Barry (Isle of Wight)
Boyson, Rt Hon Sir RhodesForman, Nigel
Brandreth, GylesForth, Eric
Brazier, JulianFowler, Rt Hon Sir Norman
Bright, Sir GrahamFox, Sir Marcus (Shipley)
Brooke, Rt Hon PeterFreeman, Rt Hon Roger
Brown, M (Brigg & Cl'thorpes)French, Douglas
Browning, Mrs. AngelaFry, Sir Peter
Bruce, Ian (Dorset)Gale, Roger
Burns, SimonGallie, Phil
Burt, AlistairGardiner, Sir George
Butcher, JohnGarel-Jones, Rt Hon Tristan
Butler, PeterGarnier, Edward
Butterfill, JohnGill, Christopher
Carlisle, John (Luton North)Gillan, Cheryl
Carlisle, Sir Kenneth (Lincoln)Goodlad, Rt Hon Alastair
Carrington, MatthewGoodson-Wickes, Dr Charles
Carttiss, MichaelGorman, Mrs Teresa
Cash, WilliamGorst, Sir John
Channon, Rt Hon PaulGrant, Sir A (Cambs SW)
Churchill, MrGreenway, Harry (Ealing N)
Clappison, JamesGreenway, John (Ryedale)
Clark, Dr Michael (Rochford)Griffiths, Peter (Portsmouth, N)
Clarke, Rt Hon Kenneth (Ru'clif)Grylls, Sir Michael
Clifton-Brown, GeoffreyGummer, Rt Hon John Selwyn
Coe, SebastianHague, William
Colvin, MichaelHamilton, Rt Hon Sir Archibald
Congdon, DavidHamilton, Neil (Tatton)
Conway, DerekHampson, Dr Keith
Coombs, Anthony (Wyre For'st)Hanley, Rt Hon Jeremy
Hannam, Sir JohnMoate, Sir Roger
Hargreaves, AndrewMonro, Sir Hector
Harris, DavidMontgomery, Sir Fergus
Haselhurst, AlanNelson, Anthony
Hawkins, NickNeubert, Sir Michael
Hawksley, WarrenNewton, Rt Hon Tony
Hayes, JerryNicholls, Patrick
Heald, OliverNicholson, David (Taunton)
Heath, Rt Hon Sir EdwardNicholson, Emma (Devon West)
Heathcoat-Amory, DavidNorris, Steve
Hendry, CharlesOnslow, Rt Hon Sir Cranley
Hicks, RobertOttaway, Richard
Higgins, Rt Hon Sir TerencePage, Richard
Hill, James (Southampton Test)Paice, James
Horam, JohnPatnick, Sir Irvine
Hordern, Rt Hon Sir PeterPatten, Rt Hon John
Howard, Rt Hon MichaelPattie, Rt Hon Sir Geoffrey
Howarth, Alan (Strat'rd-on-A)Pawsey, James
Howell, Sir Ralph (N Norfolk)Peacock, Mrs Elizabeth
Hughes, Robert G (Harrow W)Pickles, Eric
Hunt, Rt Hon David (Wirral W)Porter, Barry (Wirral S)
Hunt, Sir John (Ravensbourne)Porter, David (Waveney)
Hunter, AndrewPortillo, Rt Hon Michael
Hurd, Rt Hon DouglasPowell, William (Corby)
Jack, MichaelRathbone, Tim
Jackson, Robert (Wantage)Redwood, Rt Hon John
Jenkin, BernardRenton, Rt Hon Tim
Jessel, TobyRichards, Rod
Johnson Smith, Sir GeoffreyRiddick, Graham
Jones, Gwilym (Cardiff N)Rifkind, Rt Hon Malcolm
Jones, Robert B (W Hertfdshr)Robathan, Andrew
Jopling, Rt Hon MichaelRoberts, Rt Hon Sir Wyn
Kellett-Bowman, Dame ElaineRobertson, Raymond (Ab'd'n S)
Key, RobertRobinson, Mark (Somerton)
Kilfedder, Sir JamesRoe, Mrs Marion (Broxbourne)
King, Rt Hon TomRowe, Andrew (Mid Kent)
Kirkhope, TimothyRumbold, Rt Hon Dame Angela
Knapman, RogerRyder, Rt Hon Richard
Knight, Mrs Angela (Erewash)Sackville, Tom
Knight, Greg (Derby N)Sainsbury, Rt Hon Sir Timothy
Knight, Dame Jill (Bir'm E'st'n)Scott, Rt Hon Sir Nicholas
Knox, Sir DavidShaw, David (Dover)
Kynoch, George (Kincardine)Shaw, Sir Giles (Pudsey)
Lait, Mrs JacquiShepherd, Colin (Hereford)
Lamont, Rt Hon NormanShepherd, Richard (Aldridge)
Lang, Rt Hon IanShersby, Michael
Lawrence, Sir IvanSims, Roger
Legg, BarrySkeet, Sir Trevor
Leigh, EdwardSmith, Sir Dudley (Warwick)
Lennox-Boyd, Sir MarkSmith, Tim (Beaconsfield)
Lester, Jim (Broxtowe)Speed, Sir Keith
Lidington, DavidSpencer, Sir Derek
Lightbown, DavidSpicer, Sir James (W Dorset)
Lilley, Rt Hon PeterSpicer, Michael (S Worcs)
Lloyd, Rt Hon Sir Peter (Fareham)Spink, Dr Robert
Lord, MichaelSpring, Richard
Luff, PeterSquire, Robin (Hornchurch)
Lyell, Rt Hon Sir NicholasStanley, Rt Hon Sir John
MacGregor, Rt Hon JohnSteen, Anthony
MacKay, AndrewStephen, Michael
Maclean, DavidStern, Michael
McLoughlin, PatrickStewart, Allan
McNair-Wilson, Sir PatrickStreeter, Gary
Madel, Sir DavidSumberg, David
Maitland, Lady OlgaSweeney, Walter
Mans, KeithSykes, John
Marlow, TonyTapsell, Sir Peter
Marshall, John (Hendon S)Taylor, Ian (Esher)
Marshall, Sir Michael (Arundel)Taylor, John M (Solihull)
Martin, David (Portsmouth S)Taylor, Sir Teddy (Southend, E)
Mawhinney, Rt Hon Dr BrianTemple-Morris, Peter
Mayhew, Rt Hon Sir PatrickThomason, Roy
Merchant PiersThompson, Sir Donald (C'er V)
Mills, IainThompson, Patrick (Norwich N)
Mitchell, Andrew (Gedling)Thurnham, Peter
Mitchell, Sir David (NW Hants)Townsend, Cyril D (Bexl'yh'th)
Tracey, RichardWells, Bowen
Tredinnick, DavidWhitney, Ray
Trend, MichaelWhittingdale, John
Trotter, NevilleWiddeoombe, Ann
Twinn, Dr IanWiggin, Sir Jerry
Vaughan, Sir GerardWilletts, David
Viggers, PeterWilshire, David
Waldegrave, Rt Hon WilliamWinterton, Mrs Ann (Congleton)
Walden, GeorgeWolfson, Mark
Wood, Timothy
Walker, Bill (N Tayside)Yeo, Tim
Waller, GaryYoung, Rt Hon Sir George
Ward, John
Wardle, Charles (Bexhill)Tellers for the Noes:
Waterson, NigelMr. Sydney Chapman and
Watts, JohnDr. Liam Fox.

Question accordingly agreed to.
Clause 64 ordered to stand part of the Bill.