asked Her Majesty's Government:

How their policies encourage entrepreneurship in small and medium-sized enterprises, particularly in relation to taxation.

My Lords, since 1997, the Government have introduced tax incentives for venture capital and cuts in corporation tax, as well as targeted measures such as R&D tax credits and simplification of VAT administration. The UK now has a business environment that encourages entrepreneurs, with levels of regulation among the lowest in the OECD.

My Lords, I thank the Minister for his reply. I declare an interest as a fund manager of a fund management company set up in 1996. Having encouraged smaller businesses to incorporate with favourable measures in the 1999 and 2002 Budgets, why did the Government remove a major part of the benefits of doing so in the last Budget?

My Lords, the Government have removed an anomaly that had become apparent. I assume that the noble Lord is referring to what is commonly known as the 19 per cent provision. I should remind him that that applies only to money taken out in dividends. Therefore, money that is invested in the business or is left in the business to provide cover is not taxed in that way. I should have thought that that was an encouragement to responsible entrepreneurship.

My Lords, the Minister will be aware that at the time of the Budget the Chancellor announced that a wide-scale review of the taxation of small businesses would take place later in the year. Rather than making one change now and a whole raft of further changes that might interact taking place or being proposed in a relatively short period of time, would it not have been more sensible to delay the proposed change on the distribution to non-corporates, in the case of small business, until that review had taken place?

My Lords, I do not think so. Both kinds of small business are going very well. Since 1997, there has been an increase of 117,000 businesses registered for VAT and an increase of 169,000 in self-employment. When both registered and non-registered businesses, and both incorporated and non-incorporated businesses, are going well, it is right to have a review, but when it should take place is not critical.

My Lords, the Treasury Committee in Another place pointed out that it was widely predicted that small businesses would incorporate in order to take advantage of the small company tax regime created by the Government only two years ago. Does the Minister believe that the U-turn on this policy is a sign of incompetence by the Government or can he offer a more benign explanation?

My Lords, it is entirely responsible that we should encourage small businesses to continue to invest by retaining their profits in the business and to continue to protect themselves by protecting their reserves rather than using a loophole to pay dividends simply to avoid tax.

My Lords, does the Minister accept that a large number of self-employed taxi drivers were advised by their accountants to set up companies? They spent a bit of money doing so. Now they have to spend a lot more in order to undo the arrangement. Do the Government think that that is helpful to self-employed taxi drivers?

My Lords, I do not have any information on self-employed taxi drivers, but I have no reason to doubt what the noble Baroness, Lady Carnegy, says. The same argument applies to taxi drivers as to anyone else.

My Lords, is my noble friend aware that today we had an agreeable lunch—not he and I, but others—with small business representatives? We make up the largest all-party group in Parliament, which shows that there is a great interest in small businesses. Does the Minister agree that the key and central point for young people developing companies for the future is skills? Is the Minister satisfied that we are on the right path in relation to skills for young people?

My Lords, in view of what I have been saying about our support for small businesses, I am sorry that I was not invited to that agreeable lunch. Of course, my noble friend is right about skills. As he will recognise, the encouragement of skills training has been—I was going to say, "at the heart", but that is a horrible cliche—of great importance to the Government since the beginning.

My Lords, how can small businesses plan their affairs when tax advantages that are given to them are withdrawn, particularly when the so-called loophole is created by the Government themselves?

My Lords, I have become a bore on this subject. I spent 30 years running a small business and I did so throughout the Thatcher and Major governments. During that time, the real threats that we faced were economic insecurity, high rates of interest and extreme variations in market conditions nationally, internally and internationally. I think that the noble Lord, Lord Northbrook, will agree—certainly, any responsible and honest small business person will agree—that these conditions, which are far more important, have improved substantially over the past seven years.

My Lords, given the importance to the old, to the young and to local communities of owner-occupied small shops, do the Government have any plans to encourage the survival of these entities, which are still under great pressure from the large multiples?

My Lords, I should not cite family interests, but on Saturday morning my elder son opened his own shop for the first time. I have some cards in my pocket for anyone interested in timber blinds. The noble Lord, Lord Phillips, has a point. However, I am not adequately briefed on it so, if I may, I shall write to him.