Schedule 16 - Community investment tax rlief

Finance Bill – in a Public Bill Committee at 10:15 am on 23rd May 2002.

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Question proposed, That this schedule be the Sixteenth schedule to the Bill.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I want to refer to issues arising in schedules 16 and 17 and to point out to the Government some of the concerns raised, mainly by the Law Society. The relief is more of a subsidy than a tax relief and delivering such through the tax system will create complexity for both the Revenue and investors, particularly when the Revenue might not otherwise normally be involved in the provision of such direct grants.

Loan amounts can be repaid over a period and if they are repaid early or transferred relief will be withdrawn. In those circumstances the withdrawal of relief appears to take place from the year before the year in which the event giving rise to the withdrawal occurs and paragraph 42 of the explanatory notes to schedule 16 gives an example. That seems a little unjustified. The withdrawal of relief takes the form of an assessment under schedule D, case VI, for the tax year or accounting period for which the relief was obtained. If the withdrawal relates to the tax year or accounting period for which it was obtained, could not the tax liability for that year simply be reinstated because that might allow other reliefs to be used against that tax liability? An assessment under schedule D, case VI, is less flexible in that context.

Follow-on loans do not in many circumstances achieve tax relief, presumably because there is a danger than if a loan is made to a CDFI a subsequent loan can be made and the sums subsequently lent used to repay the earlier loan. However, the CDFI might need a further loan and the second loan might be far greater

than the original loan. Could that not be dealt with differently by allowing a subsequent loan to gain relief if the former loan is repaid out of profits or available funds of the CDFI? There is a cap on the total loan relief available to a CDFI.

Finally, provisions are included that prevent a CDFI being reconstructed without a disposal of the shares, securities and loans held in that CDFI. Why has that provision been included?

Photo of Michael Jack Michael Jack Conservative, Fylde

I should like to ask the Financial Secretary a number of questions, but I want to say at the outset that I welcome anything that brings investment into what are defined in schedules 16 and 17 as ''disadvantaged areas''.

Paragraph 1 of schedule 16 refers to ''An individual or company'' and I am pleased that the schedule recognises the role of the individual investor. Forgive me if I have misunderstood, but it seems that an individual who wishes to take advantage of the relief can do so only by routing their investment through an approved institution. I should like to know why an individual who may want to make a personal investment into the sort of enterprise that is approved under schedules 16 and 17 might not do so in a straight line--that is, by putting the money into the activity rather than routing it through a financial intermediary. I may have misunderstood and perhaps the Financial Secretary can enlighten me.

I now turn to paragraph 4(2) of schedule 16, in which the phrase ''disadvantaged communities'' is first used. Again, I apologise if I have missed a point in this long and detailed schedule, but what is the definition of ''disadvantaged communities''? I ask that question because within potentially affluent areas there may be communities that are extremely disadvantaged which could benefit from the community-strengthening institutions that are to be invested in, which is one of the purposes of the measure.

The way in which the schedule is drafted gives it an urban feel, but what about rural disadvantaged areas? I am delighted that the body language of the Financial Secretary conveys that rural Britain may also benefit. When he replies, will he explain the definition because European Union schemes to help disadvantaged areas already have delineated zones. The Minister will be aware that there are often fearsome brushfire wars in the Government over where the boundaries of those zones are to be drawn. Changes have taken place since that was last done, and it is important that we have some indication of what disadvantaged areas are. Has the matter been settled, or can it be debated later?

Paragraph 5(3)(a) states that provision can be made by regulation

''for appeals to the Special Commissioners against refusals to grant accreditation''.

It is good that there is an appeals mechanism, but the idea that the provisions are so complex and so difficult that those involved in certain schemes will end up at a special commission hearing makes me question

whether the Treasury or the Government will give us a simple, easy-to-understand explanation that prevents people from taking advantage of sub-paragraph (3)(a). How will the intention be communicated to the investing community?

Paragraph 7 draws our attention to the fact that an

''accreditation has effect for a period of three years beginning on such day as may be specified''.

A project may last longer than three years, however, and my hon. Friend the Member for Arundel and South Downs referred to renewal. I should be grateful if the Financial Secretary would say a word or two about those who invest in, for example, a five-year regeneration project, but where the accreditation, in the initial sense, will last for only three years. If such projects are okay for the first three years and do the same thing in the last two years, would it not be sensible to have a little more flexibility and to proceed project by project, rather than having a fixed five-year period?

I am glad that the hon. Member for Wolverhampton, South-West (Rob Marris) mentioned credit unions and other micro-financial institutions at the community level, because my attention had been drawn to them by paragraph 8. I was delighted when the Financial Secretary said that the Economic Secretary was working on the issue, because those responsible may not want to fund community-based financial institutions through a loan security or a share.

Paragraph 13 is headed ''Pre-arranged protection against risks'' and makes it clear that projects will not be assisted if someone takes out cover against financial failure. The Financial Secretary made an interesting point, however, when he put the issue in a European context. Projects might attract finance from outside the United Kingdom, and it would not be unrealistic for those who provide the money to have a hedging arrangement to cover the financial risk involved in the currency transaction. Would such risk cover prevent a project from being agreed, given that it relates to a different kind of risk, involving a currency element? It would also be interesting to know how the European funds accessed by some projects might be treated under the proposals.

Paragraph 19(4) in part 5 contains words that need a little teasing out. It states:

''The investor is entitled to make a claim for relief for a relevant tax year if--

(a) it appears to him that the conditions for the relief are for the time being satisfied''.

That is an interesting formulation, because it implies that those on both sides of the equation could decide that the conditions were not satisfied. There will be uncertainty if an inspector comes along and says, ''I know that this was a flexible project, but you're not doing what you set out to do.'' Will the Financial Secretary sketch in how the test of whether the conditions are

''for the time being satisfied'' will operate? People would like to think that they will not be subject to all kinds of review once they have gone to the trouble of proving that the scheme is eligible for the three years, as set out in the Bill. I might

be exaggerating the import of those words, but some words of comfort from the Financial Secretary would be helpful.

I have a final, general, point. The measure restricts the amount of investment in residential accommodation that can be assisted—in fact, it expressly excludes it. I could hear business expansion scheme bells ringing loudly in the Treasury when that was drafted. It goes on to restrict the proportion of money that can be invested in property development and commercial property. That is an important area for clarification. In run-down inner-city areas, it is often property-based activity that generates extra economic activity. I am worried that the understandable caution of the Treasury, which previously had its fingers burned by venture-based activity such as business expansion, might be unnecessarily restrictive when property matters are considered.

It is a little disappointing that residential accommodation has also been eliminated. In either an urban or a rural situation, the generation of low-cost social housing might be the route to developing an area and to encouraging the kind of institutional development that the measure seeks to encourage, but which is now expressly excluded. Would the Financial Secretary be kind enough to enlighten us on how this part of the measure is to operate?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury 10:30 am, 23rd May 2002

Let me begin by addressing two philosophical points that have been flung up by the contributions of the right hon. Member for Fylde and the hon. Member for Arundel and South Downs. For the second time today, Opposition Members have suggested that we might have gone down the grant road and have asked why we did not. That represents a fundamental misunderstanding of what we, as a Government, are about. Where regeneration is concerned, history teaches us that grants by themselves are not enough. They literally do not do the business. We are about encouraging the flow of private and commercial capital, with the disciplines that that can bring through the community development finance sector, and the enterprise that it can stimulate. We have learnt—successive Governments have tried it—that grants do not have the same effect. That is why we have chosen our route.

In response to the hon. Member for Fareham, I indicated a number of other things that we are doing to assist the growth of the community development finance sector, when appropriate, some of which involve public expenditure. The Phoenix fund involves an element of public expenditure, which is right and proper. If the sector is to grow and mature, however, it must increasingly be able to attract sustainable private investment.

The community investment tax credit offers community development finance institutions the opportunity, but—I now turn to the point made by the right hon. Member for Fylde—it is no use pretending that growing businesses in disadvantaged areas do not need support. The entrepreneurial spirit is written off by all too many folk, yet all right hon. and hon. Members must know that even in the most

disadvantaged and run-down areas, whether urban or rural, people with good ideas, get-up-and-go and drive still find themselves unable to gain access to capital.

Sometimes, however, it is not only a question of finance, which is why we have chosen this route. Businesses in disadvantaged communities that cannot access mainstream finance also need specialist business support. We have decided to use CDFIs because, with the best will in the world, they will be generally much better placed to deliver than individuals. That is the reason for the bar on individuals. To meet the point made by the right hon. Gentleman, individuals will be able to invest through the enterprise investment scheme.

Photo of Michael Jack Michael Jack Conservative, Fylde

I was putting my remarks forward in the spirit of the Bill's drafting. Is the Financial Secretary happy, for instance, that the lottery has made a grant of £120 million for the regeneration of Wembley stadium?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Oh please! I am not going to fall for that, Mr. Gale. I would soon be out of order were I to share with the Committee my views on Wembley stadium--tempted as I have been, I have kept a complete omerta in relation to that subject on the Floor of the House and in Committee—save to say that the stadium is in my constituency.

I want now to deal with some of the more detailed points raised this morning.

Photo of Mr Roger Casale Mr Roger Casale Labour, Wimbledon

Before my right hon. Friend leaves the philosophical discussion and turns to the details, may I suggest that in today's world we cannot hope to turn around disadvantaged communities only with grants or handouts. We need to look for more imaginative policies. We need to empower people to transform their communities and to give them support, but we also need to put in place measures that will encourage everyone in the community to contribute. We live in a different world from that of the previous Conservative Administration, and we need more imaginative policies such as those suggested by the Government.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I am looking at the approaching hour and I am keen to make some progress. I wish to deal with the specific points raised by the hon. Member for Arundel and South Downs and as many of the points raised by the right hon. Member for Fylde as I can in the time available. The first response is to both their questions, but is especially relevant to the point raised by the right hon. Member for Fylde, who went about the dangerous business of interpreting my body language. The body can deceive, as the hon. Member for Arundel and South Downs knows only too well.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Well, expectation does not always match reality.

If the right hon. Member for Fylde interprets my body language correctly, he will know that the Government believe that disadvantaged communities are not simply to be found in urban areas. There are pockets of rural disadvantage that have languished for many years, and this Government have, with a passion, set about tackling rural disadvantage. That is why we have adopted a scheme that will serve rural areas as much as urban areas. Geographic communities in qualifying areas, either electoral wards or postcode areas, will be selected on the basis of indices of multiple deprivation for England, Scotland, Wales and Northern Ireland. The percentage of each index that will qualify has not yet been finalised. For CDFIs that serve non-qualifying areas, the accreditation process will provide the opportunity to present evidence of disadvantage. For thematic communities, it would be for the CDFI to justify why the community is especially disadvantaged, with reference to published statistics and other evidence relating to characteristics such as age, gender, ethnicity and disability.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East 10:45 am, 23rd May 2002

Can the Financial Secretary confirm that, in Scotland, the disadvantaged areas will be those that are classified as social inclusion partnership areas under Scottish Executive definitions of deprivation?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I would be surprised if most, if not all, of them were not covered by the definition, but we have been careful to avoid either taking the simple European route, which the right hon. Member for Fylde counselled me against, or using any simplistic existing grouping of the sort that my hon. Friend describes. That is why we are using indices of multiple deprivation and why the lists of qualifying area will be revised following any updates to each country's index of deprivation. Scotland will maintain its own index to ensure that it is kept up to date. Lists will be revised so that neither Scotland, Northern Ireland, Wales or England will miss out as the index of deprivation is developed.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I welcome the Minister's comprehensive explanation of the issue of disadvantaged communities. However, like me, the Minister represents a central London seat, and he will know that, even in electoral wards, there are often great disparities. Therefore, might not those areas need to be broken down into smaller units, such as polling districts in electoral wards? Some of the most deprived polling districts in my constituency are in what are considered to be safe Conservative wards, and there is a risk that those small pockets will be swallowed by areas of relative affluence.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

It will be a surprise to the citizens of Wembley and the Welsh Harp ward to be described as living in central London. That is not how it feels to those of us who live there, but I certainly live in a constituency with pockets of deprivation amid wards of relative affluence, albeit it is in outer London. We are satisfied that our approach of assisting CDFIs that

serve geographic, thematic and non-geographic disadvantaged communities will pick up those communities in most need. We have not wedded ourselves to an especially geographic definition, which is why I am satisfied that we will be able to pick up pockets of rural disadvantage too, as we need to tackle their problems.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

The issue is important to those of us who have mixed communities within the boundaries of relatively affluent postcode sectors or wards. Will the Financial Secretary give an idea of what might be the minimum population for a qualifying area?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I am afraid that I cannot and will not at the moment. Final decisions on what areas qualify and the development of draft regulations are the subject of comments and representations that we are receiving from the community development sector. Decisions will be taken in time to meet our proposed timetable for the first round of accreditation, but our present intention is to base the definition on measures of relative deprivation. I shall write to the hon. Member for Fareham as our thinking develops, but I do not want to get into the subject of population size, as it will not assist at this stage of the argument.

For those who are interested in indices of deprivation, I shall say that it is generally accepted that those that we have—they are on 2001 for Northern Ireland, 2000 for England and Wales and 1998 for Scotland—need to be and are subject to review, but they have been designed to provide the best evidence possible of deprivation.

I will move on—hon. Members will excuse me, because we must make some progress—to some of the specific and detailed points made by the hon. Member for Arundel and South Downs, which have been of concern to the Law Society. Rather than go through each in turn, I would like to write to him specifically on them, which would save considerable time. However, I want to explain why the accreditation period is three years when the holding period for investment is five years. That general point needs addressing.

Experience from the Phoenix fund that supports the CDFIs suggested that three years was an appropriate time horizon for fund-raising and loan-planning activities on CDFIs. That period will be adopted for accreditation. It ensures that during the lifetime of any tax advantage investment, an accredited CDFI will have to apply for re-accreditation, thus deterring any possible abuse of the credit. No genuine CDFI that achieves accreditation, and then continues to function in the way suggested by the right hon. Member for Fylde and according to its published business plan, should have any difficulty in achieving further accreditation after three years.

An interesting point was raised about hedging and pre-arranged financial risks. Such risks are standard for commercial lending, so that should provide no bar to accreditation.

The right hon. Gentleman should not read too much into the involvement of the appeal commissioners. No great difficulties are expected. As he knows, the use of special commissioners is not unusual for tax measures

because when there is even a remote possibility of dispute, some means must be provided to resolve the dispute.

The right hon. Gentleman is right to raise the question why we should allow any non-residential property development, on which we reflected for some time. We recognise that business and social enterprise cannot grow without suitable premises and other infrastructure. That has often been in short supply in the communities that we seek to help, which is why we decided to allow up to half the money that a CDFI raises through CITC to be invested in non-residential property development. CDFIs have been supportive of that approach to property.

We restricted property investment, however. During consultation, much interest was shown in the question and we had extensive discussion with CDFIs. The great danger that we had to take into account was that allowing too great a proportion of CDFI investments into property would create a distortion and make it difficult to raise money for anything but property. That is always the danger—the right hon. Member for Fylde is right. That is why I assented when he referred to the business expansion scheme, but many lessons have been learned from that, and learned the hard way.

A balance must be struck, and our proposals provide a fair and reasonable balance between the needs of investors, CDFIs and the enterprises that we seek to help. They strike a balance in terms of property and across the board, so I hope that the Committee gives them a fair wind.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will the Minister give us more information on the relationship between the five-year loan period and three-year accreditation period? I may be misreading the schedule, but paragraph 9(3) states that

''the loan must not have been made on terms that allow any person to require'' repayment within five years. If someone wants to invest in a CDFI, I would expect the investor to say, ''If accreditation isn't renewed, I shall want my money back.'' Although we want to encourage people to make loans, that would seem to fall foul of paragraph 9(3). Will the Minister explain the relationship?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Yes, we do want to encourage people to make loans, but I would not put on the juxtaposition the interpretation that my hon. Friend the Member for Wolverhampton, South-West puts on it. Having a five-year period would not be of much assistance to an investor who makes an investment in year two or later, as there would still be accreditation during the holding period. The tax incentive recognises a number of risks and loss of accreditation is one of them.

The juxtaposition that my hon. Friend described will not have the effect that he fears. People will have to make a judgment, and it is right that they should consider all relevant factors when they make that judgment. The thrust of the legislation is not to protect people from the consequences of the decisions that they make. It is not to create a situation in which

people do not look to make a commercial gain. That is what is so exciting about this—it is motivated by the desire to make a profit. If one is motivated in that way, one has to make a judgment and take into account the various risks that one's profit rewards one for taking. The measure, with its risks and its profits, is designed to promote that spirit of enterprise in our most disadvantaged communities. I hope that that response gives the Committee the assurance that it needs to enable it to give the clause its wholehearted backing and move on.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 11:00 am, 23rd May 2002

In the round, we wish CDFIs well and success. The Minister slightly misinterpreted my point. There is no doubt that venture capital incentives from the public sector have had a poor record and that harnessing private sector venture capital expertise for the benefit of deprived areas is a sensible approach.

My point was that a tax credit is being used for what amounts to a subsidy—an understandable justification. That makes it complex for both the Revenue and investors. Venture capital trusts, for example, have been relatively successful because they have been relatively simple, and I hope that the complexities inherent in using the tax system will not act as a drag on the success of this scheme. That is related to the issue of the three-year and five-year periods.

If we want the measure to succeed, the tax rules need to be as clear and straightforward as possible, but it is difficult conceptually to ensure that for a measure that in reality provides a subsidy. However, we wish the measure well. Let us hope that the outstanding issues will be ironed out satisfactorily.

Question put and agreed to.

Schedule 16 agreed to.

Schedule 17 agreed to.