'It shall be the duty of the Treasury to prepare and lay before the House of Commons a report setting out the annual and cumulative cost to the Exchequer of—

(a) implementing the Memorandum of Understanding between the British Venture Capital Association and the Inland Revenue dated 25th July 2003 on the tax treatment of carried interest; and

(b) the deductibility of interest payable on loans for the purposes of calculating corporation tax liability.'.— [Mr. Hoban.]

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

Judging from the number of Members present, this is going to be quite a short debate, but I hope that it will achieve something. I hope that we will move the debate on so that we are all able to take a view about private equity based on the facts, rather than supposition.

By way of background to the debate, it is worth highlighting some of the benefits of private equity to the economy as a whole. Companies backed by private equity firms have increased their work force by an average of 9 per cent. each year for the past five years, whereas FTSE 100 companies increased their work force by an average of only 1 per cent. a year over the same period. Companies backed by private equity firms have increased their sales by 9 per cent. per year—almost double the average for FTSE mid-cap companies. The private equity industry has invested more than £60 billion in 24,000 UK companies over the course of the past 20 years. So, the record is impressive. The value that is created is one of the reasons why many pension funds choose to invest in private equity funds. The returns that they offer help millions of people across the country to receive a decent income in retirement.

It is important that we put the current debate in that context. Over the course of the past few months that debate has been in two stages. In the earlier part of the year, there were concerns about the transparency of private equity—

Order. I remind the hon. Gentleman that this cannot be a general debate about private equity, despite the debates that have taken place here and elsewhere.

Indeed, Madam Deputy Speaker. I thought that it was important, for the sake of those taking an interest in the debate, to set the context in terms of some of the remarks that have been made in recent weeks. Against that clear background, there have been a number of calls from different sources for reviews of private equity and the way in which some of the tax structures work.

Let me quote one example. I hope that the new Prime Minister—as of Wednesday afternoon—has read the remarks about private equity made by the new deputy leader of the Labour party, Ms Harman. I am sure that she is looking forward to working closely with him. She said—

Order. I have already ruled that this is not a general debate about private equity. The hon. Gentleman's remarks must be related to the new Clause.

Indeed, Madam Deputy Speaker. The right hon. and learned Member for Camberwell and Peckham called for action on taxation, which is the point that I am coming to. Several people have called for action on taxation over the past few weeks. Indeed, members of the Treasury Committee have made that a feature of their inquiry on private equity.

New Clause 11 would give the Treasury the opportunity to produce information to help to bring clarity to the debate on private equity. It is important to know the Treasury's estimate of the cost of the tax relief granted to private equity companies and venture capital funds through the application of taper relief on carried interest. The matter is not straightforward, which is why we have asked the European School of Management to examine carefully not only the broad question of private equity, but some of the tax issues. We realise that taper relief is an incentive for people to make long-term investment decisions and to be rewarded for the risk that they have taken.

The treatment of carried interest stems from a memorandum of understanding between the British Private Equity and Venture Capital Association and the Government. The MOU is referred to in the first part of the new clause. That treatment is applied to the carried interest, which is described in the MOU as

"an interest in a partnership which provides that the holder is entitled to participate in the super profit made by the fund".

Super-profit occurs when the return from a fund exceeds various thresholds. In effect, the MOU disapplies income tax rules under the Income Tax (Earnings and Pensions) Act 2003 that usually apply to securities that are acquired as part of employment.

We have a problem understanding the amounts involved. For example, during last week's Prime Minister's questions, Sir Menzies Campbell said

"we are giving a tax break of £6 billion per annum to some of the wealthiest people in the United Kingdom."—[ Hansard, 20 June 2007; Vol. 461, c. 1372.]

I was not quite sure what he meant by that. While the Red Book gives that figure as the value of taper relief, that relief applies to a wide range of transactions and people. Last week, the managing director of Gala Bingo highlighted the fact that all his employees who invest in shares in the business benefit from that taper relief. As part of the debate on private equity, it is important that we get information about the value of tax relief, which would be the purpose of the first part of new clause 11.

I would be keen for the Treasury to publish how much it has raised through private equity in capital gains tax in each year since 1997 and the impact that the MOU has had on the amount taken. Given that the Treasury is conducting a review on carried interest, I assume that it has such information at its fingertips. It would be beneficial to the entire debate on private equity if that information was published so that people could gain an understanding of the true extent of the problem. It would also be helpful if there was a way of analysing from the Government's figures the time that the carried interest had been held to determine whether private equity investors hold for the long term. At the moment, the taper relief kicks in after two years. The period for which private equity holders are holding carried interest beyond that cut-off point is a matter of contention. Will the Economic Secretary share with us the terms of reference of the Treasury's review of the matter?

The other aspect of tax relief that has recently caused concern, which has been cited by the Transport and General Workers Union in the context of the acquisition of Boots by Kohlberg Kravis Roberts, is the fact that interest paid on money used to fund an acquisition is subject to tax relief, as is any money borrowed by companies. It is important that we know the extent to which private equity is using a relief that is available to all businesses that are owed money. Such information would bring clarity to the debate that is taking place not only in the House, but elsewhere. While the Red Book tells us the value of the taper relief, it does not give information about the general tax relief or the extent to which the private equity industry takes advantage of that. However, earlier this year, the Economic Secretary announced a Treasury review on the interest treatment of certain loans, so perhaps he will be able to share information with the House to inform the broader debate on that tax relief.

As you indicated, Madam Deputy Speaker, this is a narrow debate. However, it is important that we have such information so that the wider debate, which has been characterised by generating more heat than light, can take place in the context of that information.

I support new Clause 12, which seems helpful. It cannot be wrong to request information about a matter that is a little obscure and not especially transparent. I thus welcome the search for entitlement.

The measure is brave, in a Sir Humphrey way, given that the Conservative Shadow Chancellor gave a pretty robust defence of the tax privileges of private equity firms at their annual dinner. Some Conservative Members really know about the business. Mr. Hands wrote a toughly worded letter to the Financial Times last week in which he defended the status quo. I do not know whether the purpose of the new clause is to row back from that. However, as I understand it, the starting point of the Conservative party is that it wishes to defend the existing regime.

On the other hand, there is some consensus that things are happening that need to be looked at again. I certainly interpreted the Economic Secretary's comments, when he spoke at the London School of Economics at the beginning at March, as showing a willingness to consider at least the second issue raised in the new clause—interest relief. I am sure that the Economic Secretary will not mind me quoting what he said—in fact, I am sure that he will say it again:

"Today, I can announce that the Government will review the current rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals".

That is half of the problem that is described in the new clause, and I am sure that we would all agree about that. The meat of the problem, and the area that I think that we are debating, is the bit of the tax-privileged status of private equity that relates to taper relief.

Of course, as Mr. Hoban acknowledged, those concerned with private equity are merely one group of people who currently benefit from that relief, and I am inclined to ask, "Why pick on them?" After all, there are other groups who benefit from the relief in a similar way, and no more or less reputably. I read in the Evening Standard today that Madonna has just bought her sixth £1 million-plus house. I do not know what her tax status is; if she is a British taxpayer, she will presumably be able to benefit from taper relief, if she holds that property as an investment for a period of years. It is not just those with private equity who benefit from taper relief.

To understand the nature of the problem that the hon. Member for Fareham raised, we need to go back to Parliament's decision, in 1998, to introduce such an approach to capital gains tax. I think that I have the advantage of being the only person in the Chamber who took part in that debate; it was opened by Mr. Robinson, and the reply was given by the Conservative spokesman, the then Member for Arundel and South Downs, who left the House in unfortunate circumstances, and Mr. Heathcoat-Amory. As I remember it, I said pretty much the same as the Conservatives at the time, which was that we had a good system of capital gains tax, which was introduced by the noble Lord Lawson. It was simple and clear, and it applied the same rate for capital gains tax and for income tax. It was straightforward, so why introduce complicated taper provisions that could eventually be taken advantage of by the group that we are discussing and others?

Several arguments were advanced. The first was that if we create a differential, and if there is a 40 per cent. rate on one hand and a 10 per cent. rate on the other—that is roughly the magnitude of the difference between income tax and capital gains tax—of course people will look for ways of exploiting that, and that is exactly what the British Private Equity and Venture Capital Association sought to do in its memorandum. If it had not done it, other groups would have done it in a different way. Moreover, the Conservatives and my party argued that there was no justification for the suggestion that the measure would change business behaviour. Indeed, what was forecast by the Opposition parties is exactly what has happened. Groups of people have taken advantage of that very generous provision, which, as the hon. Member for Fareham says, has cost more than £6 billion, and there is not a great deal of evidence that it has changed business behaviour in any way that has contributed to national economic welfare.

It is absolutely right that we look afresh at the relief, not simply in relation to private equity, but in relation to the whole, large-scale, far-reaching and extremely generous tax concession. In my view, we should go back to the regime that applied in 1997, which was perfectly satisfactory. That is the basis on which we have argued for getting rid of the whole taper relief arrangement, rather than simply singling out the part of it that applies to private equity. I suspect that I would go a great deal further in reforming the system than the Conservative Front-Benchers would, but none the less, their new clause, which I understand to be probing and a pursuit of information, seems entirely sensible and worth supporting.

I am happy to respond to the debate on the new Clause, and on proposals for a report to Parliament on the costs to the taxpayer of the tax treatment of carried interest and the deductibility of interest payable on loans. I am happy to respond in the spirit in which Mr. Hoban spoke to his new clause. I think that he was seeking to probe our thinking on some tax issues in advance of the pre-Budget report, while trying to avoid being drawn into too wide a discussion on the merits or otherwise of private equity, and the views of deputy leadership candidates—or victors—on the subject. I am happy to respond in that spirit.

Dr. Cable quoted from a speech that I gave in March, in which I set out in detail our views at the time on the private equity debate. Since then, there has been a great deal of further debate in the newspapers, and there looks set to be a very interesting report from the Treasury Committee, which held its evidence-gathering sessions in recent weeks. I will read just one quote from that speech, as it will set the context, and show that I accept and agree with many of the points that the hon. Member for Fareham made. I said:

"Private equity, like any other form of ownership, has good and bad aspects—and it has features of both long-termism and short-termism. But the evidence does not suggest that Government has any intrinsic reason either to "favour" private equity or to do the opposite.

Our aim should be to support economic dynamism and long-term investment and job creation. And the Government's objectives in the field of private equity should be no different from its objectives in relation to any other form of ownership: to promote an environment of long-term, sustainable business success, underpinned by a strong culture of clear disclosure to, and engagement with, underlying investors. This is the way to ensure that "good" long-term investment propositions prosper."

Everything that we are doing in the field of private equity is in the context of that overall objective.

The hon. Member for Fareham will not be surprised that I am not going to support his proposals for a further report. That is not because I am averse to reports but because rather a lot of reports on this issue are already on the table or being prepared. I have already referred to the forthcoming report by the Treasury. In my speech in March, I mentioned a report already provided by the Financial Services Authority into private equity's potential systemic implications for the stability of financial markets. On disclosure and transparency, Sir David Walker is chairing an independent working party to develop a voluntary "comply or explain" code to improve private equity's transparency and levels of disclosure. The hon. Gentleman mentioned a review that I have promised for the pre-Budget report of the rules that apply to the use of shareholder debt where it replaces the equity element in highly leveraged deals. There is also the forthcoming report on improving the UK environment for enterprise and venture capital commissioned by the Shadow Chancellor from the European School of Management, which is to report by early autumn before the Treasury taxation reviews conclude.

In other words, there are a rather a lot of reports coming up. Before the pre-Budget report and following the shadow Chancellor's review, we will want to take stock across the piece and respond properly to recommendations by the Treasury Committee, as we always have in other policy areas. I am not sure that another report is necessary.

The hon. Member for Fareham tried to draw out some of our thinking on these tax issues. Both aspects of the new clause relate to the tax treatment of the private equity industry. As I have already said, the Government do not believe that one form of ownership should be inherently preferred over another. Rather, our aim should be to support economic dynamism and long-term investment and job creation. That is also the objective of our tax system. We do not believe that private equity should be favoured in a particular way, including in tax terms. Therefore, the capital gains tax treatment available for gains arising from carried interest and corporate tax deductions for interest—the two aspects mentioned in the new clause—is available to all taxpayers, not only to private equity investors in any preferential way compared with any other investor.

Let me deal first with carried interest. The hon. Member for Fareham referred to a memorandum of understanding published in 2003. To set that properly in context, a previous memorandum of understanding had been produced in 1987 by the Inland Revenue and the British Private Equity and Venture Capital Association, which made it clear that carried interest would continue to be taxed to capital gains, not income. During the 2003 Finance Bill debate on this issue, which neither I nor the hon. Member for Fareham will remember—I am sure that my hon. Friend Rob Marris was not only there but commented on the explanatory notes—concern was expressed, particularly by the former Member for Arundel and South Downs, that changes being introduced to schedule 22, covering the whole range of employment-related securities, might have a negative impact on the capital gains tax treatment of venture capital.

As a result of those debates, the memorandum of understanding that had been agreed in 1987 was re-examined and a new one, again agreed between the Revenue and the British Private Equity and Venture Capital Association was published. It provided guidance to the industry, but, importantly, did not affect the operation of the law in the Finance Act 2003.

That memorandum of understanding confirms that returns received through carried interest should, in law, in the circumstances that it sets out—in plain vanilla form, which is a technical tax term that means "in a simple and straightforward way"—be taxed as capital gains. No concessions were made to the private equity industry at the time, but the memorandum of understanding clearly set out how the underlying legislation applied in the case of carried interest. It set that out in a way that would apply to any taxpayer who received such employment-related securities.

Is my hon. Friend saying that the memorandum of understanding of 25 July 2003 was instigated or drawn up at the behest of Howard Flight, who was then the hon. Member for Arundel and South Downs?

Yes. There is no controversy about that. In those Finance Bill debates, concern was expressed that the schedule might have an adverse impact on the venture capital industry. Consequently, a memorandum of understanding was drawn up to give guidance to make it clear that, on the basis of the proper application of the law to all taxpayers and investors, including the private equity industry, some of the fears expressed would not be realised.

Clearly, since then the salience of and media interest in such issues have increased. That applies especially to the way in which business asset taper relief is available to taxpayers who make gains on business assets. The hon. Member for Twickenham explained the genesis of the business taper relief and his principled position on opposing it. I could describe his position as almost Lawsonesque in its consistency—the former Chancellor of the exchequer Nigel Lawson strongly believed that capital gains should be taxed at 40 per cent., not a lower rate. He believed that any lower rate between the top rate of income tax and capital gains tax would lead inevitably to avoidance. I understand the Lawsonian views that the hon. Member for Twickenham expressed. I take them at face value, not simply because he needs the £5 billion or so to pay for the tax cuts that he wants to promise others.

We have always perceived the purpose of the business taper relief as an important means of encouraging investment and rewarding serial entrepreneurs, business angels and venture capitalists, who are prepared to take risks in growing companies. We probably agree with Conservative Members about that.

There are no special rules for private equity fund managers and we do not collect information on the specific tax reliefs that private equity fund managers receive. It is therefore not possible to identify the particular gains that are made on carried interest or to disaggregate the proportion of the cost of the overall relief, which is approximately £4.78 billion in 2006-07. If we produced the report that the hon. Member for Fareham requested, it would make less interesting reading than he might like.

However, I believe that the hon. Gentleman raised the matter because he wants to know the direction of the review. As he knows, although an effective capital gains regime is vital to encourage enterprise and stimulate investment and entrepreneurship, it must also distinguish between employment reward and capital gains and ensure that a proper balance is struck. Indeed, the Shadow Chancellor made the same point when announcing his review last week. He said:

"As leading members of the private equity industry acknowledge, if it looks like income then it would be peculiar not to tax it like income... But if it looks like genuine risk-taking and entrepreneurship then we should do everything to encourage it."

I agree with that sentiment.

That is why we are currently reviewing the taxation of a range of employment-related securities, which private equity and non-private equity companies alike use to ensure that the distinction is correctly drawn. If it reassures the hon. Member for Fareham and makes it easier for him to withdraw the motion, I assure him that we will provide an update on that review, too, at the time of the pre-Budget report. I shall make sure that, while avoiding excessive bureaucratic duplication and even more reports, we provide such an update on those issues at the time of the pre-Budget report.

On the issue of corporate tax deductions for interest payments, I can confirm that the goal of the Treasury review that I announced earlier this year is to determine whether the rules that apply to private and non-private equity investments alike are working as intended. That review is looking at the way in which the rules are working in the light of market developments but, as I said in my March speech, the deductibility of interest as a business expense for tax purposes is a fundamental principle of our tax system. We are not reviewing the basic principle that interest should in general be treated as a business expense and is deductible for taxable profits for companies in any form of ownership. However, we aim to ensure that where shareholder debt replaces the equity element in high-leverage deals, it does so consistent with our intention that interest on debt should be tax deductible. Equity, however, is treated differently, to make sure that we are as consistent as possible in our aim of providing a level playing field. As I said, the review will be published at the time of the pre-Budget report.

The hon. Member for Fareham wondered whether or not Government Members were sending mixed messages about private equity. From the Treasury's point of view, we have sent a clear message: we believe that private equity can play an important role in the economy by driving change, and by promoting employment and investment. There are some bad private equity deals, however, in exactly the same way that there are some poorly performing public companies. It is much better to look at the conditions to support long-term investment than take a particular view on private equity. I responded to an Adjournment Debate introduced by a potential leadership candidate— that candidacy did not last very long—on those matters, so we have debated those issues fully in the House. I do not think that Ministers or the Treasury have sent mixed messages, but the same could not be said of Opposition Members. The shadow Chancellor's review was reported by the Financial Times on 22 June under the headline, "Tories back higher taxes for private equity". The article continued:

"The Conservatives have signalled they would support higher taxes for private equity executives, increasing the political momentum for a clampdown this autumn."

The BBC website reported:

"Mr. Osborne's inquiry appears to blur the traditional left-right political divisions, with the Tories appearing to be tougher on the super-rich than Labour."

In his speech earlier this year to the British Private Equity And Venture Capital Association—I think that that the hon. Member for Twickenham referred to that—the shadow Chancellor said:

"Listen to the critics and you would think that the only winners were a secretive bunch of millionaires. But the real winners are the millions of people with pensions invested in the funds that invest in you...The importance of your contribution to our economy is, I believe, rightly reflected in the tax treatment that you receive...I will speak up for your industry and the wealth it creates. I will not make any moves that discriminate against the private equity industry."

Perhaps we should reconsider our position—perhaps a report should be published, although the shadow Chancellor's report will be issued before the pre-Budget report, so there will be plenty of time to reflect on its findings. It is often said that the Opposition parties are good these days at spin, but either they have contradicted the shadow Chancellor's speech in March or the FT misunderstood the story. In any case, given the number of reports that have been published, I do not think that we will gain enlightenment from a further report. Instead, I encourage hon. Members to look forward to the report by the Treasury Committee with interest. We will respond on all those matters at the time of the pre-Budget report. On that basis, I suggest that the House reject the new Clause.

I will take no lessons from the Economic Secretary on spin. We have seen quite enough of his handiwork in the past few weeks. He ought to stick to his job as Economic Secretary, rather than engaging in media management or trying to give lessons to others.

The hon. Gentleman was a little disappointing in his remarks. We share some common ground. We both recognise that the reliefs specified in my new Clause are available to all, not exclusively to private equity. However, we are in danger of having a debate in an information vacuum. Questions are being asked about how much the reliefs are worth. There were questions in the Treasury Committee last week, when the people from private equity firms were asked how much capital gains tax was being paid. It would have been helpful if that information were available. Without it, it is difficult for that debate to take place in a rational and well reasoned fashion. The information would provide a context or framework. There is no point in pushing for a report which would consist of a series of blank pages.

In the debate about private equity, we should be careful about drawing the wrong conclusions, reading headlines, not substance, or being distracted by other issues. It is regrettable that the information is not available. The Treasury Ministers may be sending out a clear message, but I am not sure it is the same message as is being given out by their colleagues on the Back Benches or in other positions in Government. No doubt that will all change after Wednesday, in its own inimitable style.

We need to make sure that a proper debate takes place. The fact that the information is not available should be made clear to all the participants. I hope members of the Treasury Committee will read this brief debate and understand the constraints under which everyone is working in the debate. The Minister rightly pointed out the continuation of the memorandum of understanding from a treatment agreed in 1987, and he spoke about the Lawsonian purposefulness of Dr. Cable.

Of course, the distinction between income and capital has become more important as the capital gains tax reforms made by the Chancellor have unfolded, so it has become a much more important issue when one can be taxed at 10 per cent. and one at 40 per cent. Although the MOU has been around for 40 years, it has been brought into sharper focus as a consequence of those changes. It therefore behoves us all to think carefully about it.

Given that there is nothing to be said in the report, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.