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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 David Gauke David Gauke The Exchequer Secretary 4:30 pm, 19th October 2010

It is a great pleasure to serve under your chairmanship once again, Mr Caton. I am grateful to the hon. Member for Nottingham East for setting out some of the background to the clause, and I hope to respond to his questions.

As we heard, clause 5 introduces schedule 2, which makes changes to the enterprise investment scheme and venture capital trusts, the two taxpayers’ venture capital schemes. The previous Administration agreed the changes with the European Commission in order to obtain state aid approval for the schemes.

It might be helpful to provide some background to the schemes. They were introduced in 1994 and 1995 respectively to give investors a range of tax reliefs in return for investing in small, higher-risk companies, and they have been successful, supporting investment of £10 billion or so to date. The schemes help such companies, which face particular difficulties in raising finance, to start up and grow by encouraging investment in them. Such companies have never been more essential to the UK’s growth and jobs than they are now.

To make the schemes comply with new state aid rules, various changes have already been made. The previous Government engaged in a two-year process to ensure compatibility with the new rules. Clause 2 introduces four final changes to the conditions that companies must meet. Those changes are set out in the schedule in detail, but briefly, they are as follows: companies benefiting from the reliefs will no longer have to carry on their trade wholly or mainly in the UK, they will have to meet an “in difficulty” test, venture capital trusts may be listed elsewhere in Europe and, although VCTs will have to hold higher amounts of equity, the definition of what constitutes equity will be slightly wider.

The hon. Gentleman asked several questions, including whether the “in difficulty” test for enterprises had expired, rendering the provisions otiose. I can inform the Committee that the guidelines were extended for a further three years by a Commission communication of 9 July 2009. Therefore, the “in difficulty” test for companies continues to apply.

In the context of enterprises in difficulty, he also asked what happens in relation to the other group companies if a company in a group is in difficulties. Essentially, the company to which the rule applies is the  company issuing the shares. The position of other group companies will not generally be relevant. I hope that that provides clarification.

The hon. Gentleman also asked whether a retrospective change could be made, as it might exacerbate the position of a company moving into difficulty if the test were applied. The test applies when the shares are issued. HMRC will not seek to withdraw relief where formal approval has been given and a company subsequently moves into difficulty.

The hon. Gentleman asked about companies resident abroad, in particular those in tax havens. The schemes have always allowed money to be used overseas to some degree. The UK should still get a return on its investment when a UK company reaps the benefit of its overseas investment and, within EU rules restricting foreign investment, is liable to run into problems with the fundamental freedoms. That is why some of the provisions had to be relaxed. HMRC will still look at cases where companies are in difficulty, and at the rules that apply to companies resident abroad and how we get the information. I believe that guidance has been published on how that will be done.

The hon. Gentleman also asked about the threshold change from 30% to 70%, and where the ratio came from. That is required under EU state aid rules, and it was discussed with the European Commission as part of the approval process. The figure of 70% is an EU requirement in such circumstances. I hope that that is helpful and provides the hon. Gentleman with some clarification on the fair questions that he raised.

The clause was put out for consultation and a number of comments were received. As a result, changes have been made to some points of detail. Clause 5 provides certainty for business by ensuring compliance with venture capitalist schemes while allowing flexibility within the rules.