Schedule 16

Finance Bill – in a Public Bill Committee at 5:45 pm on 22nd May 2007.

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Venture capital schemes etc

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I beg to move amendment No. 181, in schedule 16, page 200, line 4, leave out ‘50’ and insert ‘250’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss amendment No. 182, in schedule 16, page 200, line 10, leave out ‘50’ and insert ‘250’.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

This is my first contribution to the work of the Committee. It is a tribute to the excellence and stamina of my hon. Friend the Member for Falmouth and Camborne that we have not had to make more use of those on the substitute’s bench.

These are probing amendments. Our understanding is that there is at present a restriction on the size of companies—from 250 to 500 employees—that can take advantage of the reliefs, and that the Government are imposing this restriction because of limitations set by the European state aid rules. In essence, the purpose of the amendments is to try to establish the Government’s thinking behind the legislation.

The state aid rules are summarised in a set of guidelines that were produced last year, “Community guidelines on state aid to promote risk capital investments in small and medium-sized enterprises”. We understand that the Government must comply with the rules, but we have some questions about them.

A quick reading of the European guidance suggests that Governments have a fair degree of flexibility in interpreting the rules. The first question is why the Government have interpreted the provision in such a restrictive way. Many medium-sized companies will be removed from the provisions on venture capital because of this legislation. Could the Minister explain why he had to interpret the European rules in this way?

It appears that the Government have set the maximum restriction, with a number of employees—50—that is below the present level. On the other hand, it appears that the number of employees has increased for R and D tax credits, which are also governed by European state aid rules. We are trying to understand why the rules should be interpreted in a particularly permissive way for R and D tax credits but in a more restrictive way for venture capital.

The Institute of Chartered Accountants in England and Wales is particularly perturbed by this measure because its judgment, which is based on its research, is that venture capital measures are more helpful than the R and D tax credit in encouraging innovation by this group of companies. The institute cannot understand why the Government have apparently moved in the opposite direction. They have reduced the range from 250, which is the normal threshold for medium-sized companies, to 50, which is the threshold for small companies. What in the guidelines required the Government to make that shift for these provisions but not for the R and D tax credits?

There may be perfectly good legal reasons for the wording in the schedule. We understand that the Government have to comply with the guidelines, but, given that the rules offer some flexibility, we wish to find out from the Minister why he has interpreted them in this way.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 6:00 pm, 22nd May 2007

I want to echo the hon. Gentleman’s comments. We see in the Red Book that the changes to various venture capital schemes have been made in response to the new guidelines on state aid that were published last year. Like him, I am rather surprised that the Government have felt the need to make the changes, as it appears from examining those rules that if a robust case has been made and there is evidence to back it, the EU is prepared to grant exemptions.

For example, in paragraph 5.1(a) of the rules there is a safe harbour whereby an investment below €1.5 million is not deemed to be state aid, and if a  member state can produce evidence of a market failure affecting that limit, state aid can be used in connection with stimulating small and medium-sized enterprises. In paragraph 5.1(b) permission is given for Governments to support schemes providing finance to medium-sized companies. Does the Financial Secretary believe that firms employing 50 full-time equivalents are medium sized? I am not sure whether I would see them as medium-sized businesses.

There are other examples in the state aid rules that would create an exemption allowing the Government to continue with venture capital trusts and perhaps set a more generous level. Will the Financial Secretary clarify whether the Commission has given approval to the VCT rules as set out in the Bill? The Red Book is a little opaque as to whether that permission has been received. It would be useful to know whether it has, and to understand more about the case that the Government employed for retaining the status quo prior to the schedule being introduced. The hon. Member for Twickenham also highlighted, appropriately, the contradiction between this schedule and schedule 15—a more generous number of employees is set for R and D tax credits and a tight number for venture capital schemes.

I congratulate the Treasury, for a change, on other changes made in the schedule. On Report of last year’s Finance Bill I discussed an amendment on the 70 per cent. rule, and we also debated inadvertent breaches. I am grateful to see, a year later, that the Minister has listened to my representations and that those changes are in the schedule.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I welcome the hon. Member for Twickenham to the Committee’s proceedings. If the Liberal Democrats have that sort of quality on the substitutes’ bench, they match Chelsea. It is a pleasure to see him reappear. [Interruption.] Indeed—they did not actually win this year, but there we are.

Why have we interpreted the rules as we have? As we set out in the Budget text, we are required to introduce the employee head count test, on which the hon. Gentleman focused his questions, to meet the requirements of the European state aid obligations. I shall be honest with the Committee: we did not want to introduce the head count test or the new employee limit. We are acting essentially to ensure that we can secure the future of the venture capital schemes.

The corporate venturing scheme, the enterprise investment scheme and the venture capital trusts are important elements in helping to tackle the equity gap, but to continue they need to meet the state aid requirements set out by the European Commission, particularly the new state aid rules on risk capital that were introduced last August. We have spent a good deal of time and effort, particularly since then, on submitting strong evidence about UK market failures in such investment.

Our situation is not necessarily the same as that of other European states, particularly as we have a mature market. Of course, the state aid risk capital rules, with some flexibilities, are designed to apply across Europe. We argued that we need national policy measures if we are to respond to the structural problems affecting our national capital markets. The Commission did not  accept our argument that the additional provision that we wanted to make in all areas for mid-size companies—the sort of provision that is set out in these amendments—would be compatible with the Common Market.

If we were to persist with that approach or, indeed, if we were to amend the Bill in the way that the amendments suggest, it would bring the continuation of these schemes into question. Therefore, we will continue to propose amendments and to discuss the matter. I hope that, in conjunction with the industry, we can collate further evidence that might encourage the Commission to make greater use of the flexibilities that can be found within the rules that it introduced last year. For the moment, our schemes need to be judged as compliant by the Commission by August this year. Because of our detailed discussions with the Commission, particularly in the past 12 months, I am confident that we will get clearance. However, we have not formally had it yet.

Finally, I welcome the comments of the hon. Member for Fareham on our amendments about the inadvertent breaches and the 70 per cent. rule. He did indeed raise those points in our discussions last year, and I took them seriously. They were raised by others as well and we have had the chance to examine them over the past 12 months. For that reason, I am glad that we have able to cover them in the Bill.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

Will the Minister comment on the further point that both the hon. Member for Fareham and I have raised, which is: if the Commission was so tough on the 50-employee rule, why were the Government allowed to move in the opposite direction on the R and D tax credits scheme? Does a different set of principles apply, or is there an inconsistency in the Commission?

Photo of John Healey John Healey The Financial Secretary to the Treasury

The rules that we are trying to meet in the three schemes are set out in the state aid risk capital rules, which were introduced by the Commission in August last year. They clearly apply to this policy territory, but they do not apply in the same way to the R and D tax credits. The changes that we are making to the R and D tax relief scheme are being made not because we are required or encouraged to do that by the Commission, but because we have established that there is evidence of under-investment in innovation and research and development by mid-size companies. It is an area of the economy that we want to support, and in which we want to see greater activity. There is clear evidence and a clear policy purpose for what we are proposing in the R and D tax credits. The circumstances that apply there are different from those that apply to venture capital and EIS schemes.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I want to acknowledge that the Government have confirmed on the record that they approached the Commission and pushed as hard as they could on this point. We have accepted in this short exchange the potential for damage to middle-level companies in the industry, which is a particular problem for regional funds that are struggling to establish themselves. However, I accept what the Government say. It was pointed out to me that the Chartered Institute of Taxation has accepted that the Government have done the best that they can. The Institute of Chartered Accountants in England and Wales was a little more sceptical, but I accept the  Minister’s word that he has tried and that this is the most that can be done within the rules. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I beg to move amendment No. 165, in schedule 16, page 205, line 39, leave out from beginning to ‘for’ and insert—

‘(1) Paragraph 29 of Schedule 15 to FA 2000 is amended as follows.

(2) In sub-paragraph (3),’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss Government amendments Nos. 166 to 174 and 159 to 164.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I shall be brief, unless members of the Committee want to dwell in detail on any of these measures. Government amendments Nos. 166 to 174 concern paragraphs 9 to 11 to schedule 16 and are designed to bring two improvements that will benefit companies seeking to raise finance under the enterprise investment scheme, the corporate venturing scheme and the venture capital trust scheme.

Government amendments Nos. 159 to 164 attempt to achieve the same thing in relation to the enterprise management incentives legislation. They provide first for the transfer of relevant intangible assets within a corporate group structure to newly incorporated subsidiaries, thus providing a greater flexibility for the venture capital schemes. Clause 60 makes the equivalent changes to the enterprise management incentives legislation. The changes have been welcomed by the Enterprise Investment Scheme Association—Opposition Members will be familiar with its chairman, who is doing a good job—and respond to a good dialogue that we have with the sector in recent months.

We have also had good discussions with interest groups that have raised further technical points, so we have tabled amendments to ensure that some technical changes to the legislation mean that it achieves its objectives. I commend these amendments to the Committee.

Amendment agreed to.

Amendments made: No. 166, in schedule 16, page 206, line 2, leave out from ‘company’ to end of line 3 and insert

‘throughout a period during which it created the whole or greater part (in terms of value) of the intangible asset.”

(3) After sub-paragraph (6) insert—

“(7) If—

(a) the issuing company acquired all the shares (“old shares”) in another company (“the old company”) at a time when the only shares issued in the issuing company were subscriber shares, and

(b) the consideration for the old shares consisted wholly of the issue of shares in the issuing company,

references in sub-paragraph (3) to the issuing company include the old company.”

9A In paragraph 86(2) (substitution of new shares for old shares), after “Schedule”, in the first place it occurs, insert “(except paragraph 29(7))”.’.

No. 167, in schedule 16, page 206, line 9, leave out from ‘company’ to end of line 10 and insert

‘throughout a period during which it created the whole or greater part (in terms of value) of the intangible asset.”,’.

No. 168, in schedule 16, page 206, line 12, at end insert ‘, and

(c) after subsection (5C) insert—

“(5D) If—

(a) the company mentioned in section 293(1) (“the issuing company”) acquired all the shares (“old shares”) in another company (“the old company”) at a time when the only shares issued in the issuing company were subscriber shares, and

(b) the consideration for the old shares consisted wholly of the issue of shares in the issuing company,

references in subsection (5) above to the company mentioned in section 293(1) include the old company.”

(1A) In section 304A of that Act (acquisition of share capital by new company)—

(a) in subsection (3), after “Chapter” insert “(except section 297(5D))”, and

(b) in subsection (4), after “Chapter” insert “(except section 297(5D))”.’.

No. 169, in schedule 16, page 206, line 18, at end insert—

‘(2A) In section 576K of that Act (share loss relief: substitution of new shares for old), after subsection (3) insert—

“(4) Nothing in subsection (2) applies in relation to section 195(7) of ITA 2007 as applied by section 576B(7) above for the purposes mentioned in section 576B(8).”’.

No. 170, in schedule 16, page 206, line 23, at end insert—

‘(3A) In section 146 of that Act (share loss relief: substitution of new shares for old), after subsection (2) insert—

“(3) Nothing in subsection (2) applies in relation to section 195(7) as applied by section 137(7) for the purposes mentioned in section 137(8).”’.

No. 171, in schedule 16, page 206, line 29, leave out from ‘company’ to end of line 30 and insert

‘throughout a period during which it created the whole or greater part (in terms of value) of the intangible asset.”,’.

No. 172, in schedule 16, page 206, line 31, at end insert ‘, and

(c) after that subsection insert—

“(7) If—

(a) the issuing company acquired all the shares (“old shares”) in another company (“the old company”) at a time when the only shares issued in the issuing company were subscriber shares, and

(b) the consideration for the old shares consisted wholly of the issue of shares in the issuing company,

references in subsection (4) to the issuing company include the old company.”

(5) In section 249 of that Act (substitution of new shares for old shares)—

(a) in subsection (2), after “Part” insert “(except section 195(7))”, and

(b) in subsection (4), after “Part” insert “(except section 195(7))”.’.

No. 173, in schedule 16, page 206, line 37, leave out from ‘company’ to end of line 38 and insert

‘throughout a period during which it created the whole or greater part (in terms of value) of the intangible asset.”’.

No. 174, in schedule 16, page 206, line 39, at end insert—

‘(4) After that subsection insert—

“(7) If—

(a) the relevant company acquired all the shares (“old shares”) in another company (“the old company”) at a time when the only shares issued in the relevant company were subscriber shares, and

(b) the consideration for the old shares consisted wholly of the issue of shares in the relevant company,

references in subsection (4) to the relevant company include the old company.”’.—[John Healey.]

Photo of John Healey John Healey The Financial Secretary to the Treasury 6:15 pm, 22nd May 2007

I beg to move amendment No. 175, in schedule 16, page 210, line 27, leave out ‘wholly for money’ and insert ‘,

(aa) the consideration for the disposal does not consist wholly of new qualifying holdings’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss Government amendments Nos. 176 to 180.

Photo of John Healey John Healey The Financial Secretary to the Treasury

Quite simply, the amendments would enable venture capital trusts to dispose of investments that they have held as qualifying holdings for a period of at least six months for cash without jeopardising their approval status for the following six months. The change has been widely welcomed by commentators across the industry. The director general of the Association of Investment Companies, for instance, said:

“We have had an extremely constructive dialogue with the Government over this issue and are delighted with this decision.”

The amendments would widen the scope of the disregard rules to cover disposals made wholly or partly for consideration other than cash and have again been warmly and widely welcomed by representatives from the sector. I commend them to the Committee.

Amendment agreed to.

Amendments made: No. 176, in schedule 16, page 210, line 35, after ‘disposal’ insert ‘(but see subsection (3A))’.

No. 177, in schedule 16, page 210, line 37, leave out ‘money obtained from’ and insert ‘any monetary consideration for’.

No. 178, in schedule 16, page 210, line 41, at end insert—

‘(3A) If the consideration for the disposal includes new qualifying holdings, subsection (2)(a) has effect as if the reference to the holding were to the appropriate proportion of the holding (the value of which is that proportion of the value of the holding, determined in accordance with subsection (3)).

(3B) The appropriate proportion is— TC — NQH TC

where—

TC is the market value (at the time of the disposal) of the total consideration for the disposal, and

NQH is the market value (at that time) of the new qualifying holdings.’.

No. 179, in schedule 16, page 211, line 4, at end insert—

‘(4A) “New qualifying holdings” means shares or securities which (on transfer to the company) are comprised in the company’s qualifying holdings.’.

No. 180, in schedule 16, page 211, line 7, at end insert—

‘(6) Nothing in this section applies in relation to disposals between companies that are merging (within the meaning of section 323).’.—[John Healey.]

Schedule 16, as amended, agreed to.