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Clause 5

Part of Finance (No. 2) Bill – in a Public Bill Committee at 4:30 pm on 19th October 2010.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 4:30 pm, 19th October 2010

Many members of the Committee will no doubt wish to comment on what are quite technical matters, and your forbearance in the Chair would be most appreciated, Mr Caton. I know that you will be fair and reasonable at all times and in all your rulings.

Clause 5 facilitates the introduction of schedule 2 on venture capital schemes. As hon. Members know, venture capital trusts give tax breaks to individuals investing in small unlisted trading companies. They offer a set of tax advantages, including, for instance, 30% income tax relief on the costs of investment up to about £200,000, a capital gains tax exemption on disposals and tax-free dividend payments. The typical venture capital trust involves a group of between 20 and 40 companies.

Currently, all venture capital trusts are companies listed on the main market of the London stock exchange. Government Members will be particularly pleased to hear that the provisions in the Bill appear to be largely driven by the need to align UK legislation with wider European Union regulations on venture capital trusts. No doubt Government Members are all good pro-Europeans, and it is healthy to see that they are taking a harmonising approach in their legislation. In particular, the regulations concern shares in venture capital trusts and the markets in which they are listed.

At present, regulations under the Income Tax Act 2007 require that the ordinary share capital be included in the official UK list. Clearly, and quite rightly, that can, to a degree, be construed as a barrier to the free movement of capital. Accordingly, the clause changes arrangements so that shares can instead be admitted for trading on any European Union regulated market. As I said, that is commendably pro-European. By allowing listing on any European Union market, and indeed any European economic area market, as set out in the Official Journal of the European Union notices annually, the new rules will, I hope, ensure the greater transparency and interoperability of schemes across national boundaries.

The schedule makes a number of other technical changes to venture capital schemes. It includes changes that regulate the composition of venture capital trusts’ eligible shareholdings and it redefines the minimum criteria required. In particular, the clause introduces a  financial health check to ensure that tax reliefs would be granted only if there was a good prospect of the business remaining a going concern. That applies to shares in companies that it would be reasonable to classify as being in difficulty, which would exclude them from qualifying. That is quite an interesting innovation in policy and tax law. Obviously, it will probably be the focus of much comment and debate today.

The Opposition agree that it is necessary to align and harmonise the regulatory arrangements for venture capital trusts and enterprise incentive schemes in the wider European Union context. We also concede that it is a sensible and rational change to have a financial health check; that is certainly worth while. However, I want to probe the Minister on several aspects of the operation of the clause.

First, the Bill states:

“The issuing company is ‘in difficulty’ if it is reasonable to assume that it would be regarded as a firm in difficulty for the purposes of the Community Guidelines on State Aid”,

which were listed under the reference 2004/C 244/02. However, I am told that the Institute of Chartered Accountants pointed out that those guidelines appear no longer to have effect—a point that I think came up on Second Reading. Therefore, there could be an anomaly in the Bill, in that the particular reference to the community guidelines on state aids may be otiose and create a situation in which the guidelines have lapsed. I would be grateful if the Minister clarified whether those guidelines are still effective.

Will the Minister also precisely define the financial health check? Will it be applied, for instance, to a group of companies, and perhaps a newly created subsidiary of firms? Many hon. Members will know that corporate law is complicated. Many companies and firms are quite creative in how they can spur a series of enterprises and roll operations within various groupings of undertakings. I am concerned; if one part of a firm or group does not pass the financial “firm in difficulty” test but the larger part does, or vice versa, how will the operation of the test work? It is not clearly defined in the legislation.

In particular, I am intrigued by the steps in the Bill that allow Her Majesty’s Revenue and Customs to apply the financial health check rule retrospectively, or at least in hindsight to withdraw the relief, possibly after a difficulty has occurred, potentially compounding the problems of small and medium-sized enterprises that otherwise might well have been able to make ends meet and continue as a going concern. I am anxious that the rules should not magnify the financial difficulties of a company if it is just getting by on or above the border line, especially if there is retrospective operation of the rules. I would be grateful if the Minister walked the Committee through the process of the judgment taken by regulators, companies and investors in applying that financial health check.

A recent guide by Chancery chartered accountants stated that, as is self-evident, within the cluster of 20, 30 or 40 companies often grouped in venture capital trusts, one or two selected by that venture capital trust manager will typically fold, while others will prosper. If it is part and parcel of the normal chain of events in venture capital trusts for firms to be in difficulty, I would like to learn a little more from the Minister about how the whole tax relief arrangements for that venture capital trust might be treated.

As a subsidiary to a set of technical questions, I am also interested to know whether the Minister can say how the rules will apply to overseas holding companies—for instance, companies resident in tax havens. In those circumstances, how will information about the financial health and viability of those firms be discerned, gathered and communicated? Clearly, there is often less transparency in those overseas holding arrangements than in the UK.

I refer the Minister to paragraph 2 of schedule 2, where a set of threshold changes is suggested, with a 70% threshold for eligible shareholders. As the current arrangement provides a regulated level at 30%, I want to understand from where that ratio derived. That is, obviously, a significant change to make in one go.

I am sorry to fire so many questions at the Minister in quick succession. There are several other points that I would like to address, but if he thinks about the questions that I have asked, I will be grateful.