I welcome you to the Chair, Sir John.
I was making the point that the changes proposed in the clause have been warmly welcomed by the venture capital industry. I had offered one quote as confirmation of that and will offer another. Senior consultants at Ernst & Young reckon:
''These changes will provide a considerable boost for cash-starved firms looking for investment capital.''
I turn to a couple of specific points raised by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) and the remaining point of principle raised by the hon. Member for Arundel and South Downs (Mr. Flight).
On the word ''issued'' as used in the clause, there is a difference between shares that are allotted and those that are issued, as my hon. Friend loyally pointed out. The provisions for venture capital relief are determined by reference to the date on which shares are issued, not the date on which they are allotted, so it is entirely appropriate that the changes made by schedule 19 take effect according to the date of issue.
I turn to the general point of principle that was troubling the hon. Member for Arundel and South Downs, who said that the changes may look appealing but, at first sight, particularly with the interplay between capital gains tax deferral abolition and the increase in income tax relief, the venture capital industry is concerned that it will lose out in the long term. I understand that the industry must plan ahead and that the valuable tax incentives offered to it are an important part of that planning. More than half the responses to the consultation on the changes were in favour of replacing capital gains tax incentives with enhanced income tax relief, with approximately one third taking a contrary view.
The most common benefit cited for enhanced income tax relief was that that would lead to a less volatile form of funding than CGT-based incentives because of the dependence of CGT accruals on cyclically affected asset markets and, therefore, the capital gains that investors would have reason to look to shelter in VCTs. The other benefit often cited was that income tax relief was likely to be simpler and
more attractive to a younger and broader range of investors.
The challenge facing us is that industry professionals have told us, and published data on investment via VCTs demonstrate, that in recent years levels of VCT investment in small companies have fallen. Our analysis, plus the views of industry, show CGT deferral relief to be a factor in that. Investors cannot make use of it unless they have capital gains that they want to shelter. On the day after the Budget in March, the Financial Times commented that
''VCTs are often used as a shelter for capital gains, but this has been their undoing over the past three years.''
We sought to deliver in the clause a kick-start to revive the industry, and we have done that by shifting the tax incentive towards income tax relief. We have limited the relief to two years because it is generous, and no member of the Committee would dispute that.
Referring to my hon. Friend's earlier answer to my question about ''issue'' versus ''allotment'', what is to stop a venture capital company issuing shares during that two-year window but not allotting them until much later, thereby getting around the window that the Economic Secretary seeks to impose?
Generally, as my hon. Friend is probably aware, allotting takes place before issuing, so the sequence is usually the other way round. Because the Bill specifies the date of issue, that is the relevant date at which the provisions apply.
Decisions on what will happen in two years will be based on evidence of the effect of the changes that we seek to make in the Bill, on what we learn from our continuing discussions with the venture capital industry and, importantly, on the direction that the industry itself takes. It is impossible to say with any certainty at this point what we should do in two years. The industry is flexible: it is continually looking for new ways to make its offering attractive. It is only right, therefore, that the Government should retain some of the same flexibility within the clear and constant objective of improving access to capital for small, growing companies.
The approach that we adopt in the Bill appears to be right in the eyes of a number of commentators. It attempts to balance the objectives and concerns that I have explained to the Committee. I end my remarks with a comment from Mark Fox of the British Venture Capital Association, who said after the Budget:
''The reforms will go a long way to helping VCTs invest in smaller and more entrepreneurial businesses''.
On that basis, I commend the clause to the Committee.
I want to respond on two issues, to reinforce my point. The very genuine concern of what I would call the heavy part of the early stage venture capital industry is that although the changed incentive—the 40 per cent. income tax relief—has obvious attractions to people, it is virtually the same as the old business expansion scheme incentive, which led to the construction of schemes that were of a short-term, tax shelter nature. Serious long-term early stage venture capital investment is tricky. It is not
surprising that, in the short term, an industry tends to welcome anything that might deliver more money to manage. That should be the case, because otherwise no one would have any capital gains left to defer.
However, there is a serious risk that the structuring of venture capital funds will be driven down a route that is bad news in all sorts of ways. That route will discredit such funds and it will not, above all, channel money to early stage venture capital, which is where the famous gap tends to exist. The Economic Secretary should not be entirely persuaded by the BVCA or one or two other bodies. There is a serious danger. I am aware from my own knowledge of the industry that, quite understandably, people are now looking at structuring tax shelter vehicles out of the incentive.
The second point, which surprised me, is that I had understood from other discussions that the new regime was an experiment on the part of the Government and that, as I said earlier, they might intend to revert to the old regime. However, the Economic Secretary made it clear that, as far as this Government are concerned, the ending of CGT deferral is permanent, and its revival is not under consideration.
The Economic Secretary made it clear that the very generous 40 per cent. is for two years only. I have to make the obvious point that if we end up with a 20 per cent. income tax incentive, that will be the death of venture capital trusts and the move will amount to a rather subtle phasing-out of the whole VCT incentive. I am afraid that there is no other interpretation of what the Economic Secretary said at the beginning of his speech. I do not think that the industry understands that that is the situation. It thinks either that the 40 per cent. is likely to be there for ever, or that we will revert to the old regime if markets go up and people have got lots of capital gains. However, if this Government were, unfortunately, still in power, we would end up with just a 20 per cent. income tax incentive, and the message would go out loud and clear to the industry: ''Forget VCTs. They're being phased out, mate.''
I accept the hon. Gentleman's point about genuine concerns and his caution, which is based on his experience, especially on the question of long-term incentives to hold investments. There is a genuine debate about the most effective way to put in place the right incentives to allow the flow of funds to continue through VCTs. However, let me be clear on one point. The clause is not the first part of some sort of phasing-out of support for VCTs. It is not in any way a slackening of our commitment and support for the role that they play.
The challenge that we face, which I have tried to explain, is to kick-start the low levels of funding that have been routed through VCTs over the last two or three years. There is a concern about the long-term effect of CGT deferral relief amplifying the structural peaks and troughs that we have experienced with VCT funding. I have tried to explain very clearly that we shall introduce the new income tax relief at 40 per cent. for two years. Before the end of that period, we shall have to make decisions about what we will do beyond
that. Those decisions will be made in light of the impact that the new package of incentives appears to be having on the industry and on levels of investment. They will also be informed by the opinions that we receive from the industry and by developments during the next couple of years in what is a very flexible and fast-moving industry.
With regard to the assessment, if the policy is seen to be working and introducing new money into VCTs in two years' time, is the Minister saying that that will be a significant factor in encouraging the Government to continue the higher rate of relief?
It is a shame that the hon. Gentleman was not here for the start of the debate. Self-evidently, our major objective, which is shared by the Committee, is to ensure the highest possible level of investment for small, generally risky, companies being routed through VCTs as one of the streams of potential funding. The purpose of our proposals is to try to improve on the investment of the last couple of years, which will be a decisive factor and a continuing objective in any decisions that we make. I made it clear before the break—which was the point of my gentle admonishment of the hon. Gentleman—that we would make decisions on what should happen before the end of the two years, not afterwards, as the hon. Gentleman suggested.
Question put and agreed to.
Clause 89 ordered to stand part of the Bill.