Clause 9

Finance (No. 3) Bill – in a Public Bill Committee at 6:30 pm on 10th May 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Clause 9 deals with entrepreneurs’ relief. It increases the lifetime limit for chargeable gains that qualify for entrepreneurs’ relief on capital gains tax to £10 million from 6 April 2011. A lower rate of 10% capital gains tax is available to entrepreneurs. Entrepreneurs’  relief used to be a colloquial term, and it is now enshrined in law. It is available for gains made on disposal of all or part of a business or shares in a company. To qualify for the relief at the rate of 10%, the individual making the gain must be in business—as a sole trader, for example, in a trading, not investment, business—or hold shares in a personal trading company in which they own at least 5% of the shares.

That measure—this is why we will not oppose it—was introduced by the Labour Government at the same time as we implemented a single 18% capital gains tax rate from 2008-09.

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

The right hon. Gentleman says that the measure was introduced by the Labour Government, but it was a dog’s dinner at the time. In the late ’90s, the previous Government had a clear motivator for entrepreneurs—the taper relief measure—and their introduction of the entrepreneurs’ relief a few years ago was a complete mess and, for me as a small business owner at the time, totally confusing. Does he agree that, when the measure was introduced, his Government received many representations about how confusing it was?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

We could discuss every interpretation of dogs and dinner for the duration of the Committee. I say to the hon. Gentleman that, when introduced, the measure gave relief on capital gains tax to entrepreneurs. It put in place a regime. He may have been confused, but it has made some difference.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Well, that is the hon. Gentleman’s view and we can debate it. I fear, however, that if we debated the Budgets of 2008-09, you would call me out of order, Mr Gale. The key point is that a relief of 10% on capital gains tax is available to entrepreneurs. There is a lifetime limit on the amount of gains that can benefit from the relief. The then Labour Government originally set it at about £l million. We increased it to £2 million in April 2010. This Government increased it again to £5 million in their June 2010 Budget, and clause 9 now increases it to £10 million.

It has been announced as a measure to help increase growth, which is something that I am keen to look at. I am particularly keen to look at how we can increase growth among small entrepreneurs. I would be interested to hear from the Minister a measure of the proposals’ outcomes. Will he give an indication of precisely how many people will benefit each year from entrepreneurs’ relief and from the increase in that relief?

The Government’s impact assessment, which was published alongside the Budget, states:

“Currently 25,000 to 30,000 people each year claim Entrepreneurs’ Relief. Of these we estimate a small number will benefit.”

In response to a written parliamentary question, the Minister has said that the Government have made no estimate of the number of new businesses or the amount of new investment that will result from the proposed changes in entrepreneurs’ relief. There is also no difference between the Treasury’s static costing and its behavioural costing; in other words, the Treasury does not expect any extra gains to be made by entrepreneurs as a result  of this measure, which means that there will be no economic impact and no boost to growth. I do not oppose the increase in the lifetime limit for entrepreneurs’ relief, but I am concerned that it will have a limited impact and will be more than offset by the impact on businesses of the stagnation in the economy, the lack of confidence in the economy and the lack of growth.

I would welcome some specific responses from the Minister to these points. How many people are expected to benefit from the change to entrepreneurs’ relief? If the Minister cannot give an exact number, can he say whether it is in the tens, the hundreds or the thousands? How many additional businesses does the Minister expect to be set up as a result of the change to entrepreneurs’ relief? How much additional investment does the Minister expect to bring forward as a result of the changes in entrepreneurs’ relief?

Photo of Ian Mearns Ian Mearns Labour, Gateshead

My right hon. Friend has just uttered the words that I was thinking about when it came to this measure. What level of stimulus to the economy will the proposal create? What additional investment will it make into the British economy and into British businesses? I must admit that I am failing to see at the moment—I have not yet seen any evidence from the Government—what additional investment this measure will bring to small, medium or large enterprises.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

That is exactly the point that I want to tease out from the Minister. Whether it was an enjoyable dog’s dinner is a matter for debate, but the key point is that the proposal was put in place and was continually increased under the previous Labour Government, and it has been extended in the most recent Budget under the Conservative-Liberal Democrat Government. The current proposal is to increase entrepreneurs’ relief still further from £5 million to £10 million.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

If my right hon. Friend will forgive me, I have a small observation. In economic terms, it is a moveable feast, because it has been variously described as a dog’s breakfast and a dog’s dinner.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I think we are all ready for it to be a dog’s supper in due course, at which point hopefully we can finally finish today’s debate. If the Minister advances a proposal, as in clause 9, for that relief, he needs to state clearly how many people he expects to benefit during this year and in future years. How many new businesses does he expect to start as a result of the additional amount in clause 9? How will the Government monitor the impact of the change to entrepreneurs’ relief, and what tests are they putting in place to measure its impact across the board?

I ask that again because we have been very outcome-focused in our discussions on previous Finance Bills and in previous discussions with the Minister. When we made changes to the national insurance holiday regime in the National Insurance Contributions Bill before Christmas, the Minister was very clear about the outcomes that he expected from that proposal. He told the Committee that over three years 400,000 new jobs would be created in a range of businesses, and that the Government could monitor and test that. To date, he has been slightly tardy in presenting the figures on that benefit,  but we have secured today that around 3,000 people have been employed as a result of the proposal, almost a year from when it was introduced, and that some 300,000-plus people must be employed in the remaining two years and two or three months of the scheme in order to meet his target. I wished the national insurance scheme well and had no problems with it despite some debate about its application. We wished it well so that we could know its outcomes, and we now have figures for that. I hope to get clarity from the Minister about what the impact of the clause is intended to be on new businesses and business growth as part of the contribution to the business strategy.

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

Is this not about providing an incentive to people who are thinking about taking a risk, and encouraging them to do so by making them financially better off through this measure? We have “Britain’s Got Talent”, football, and “The X Factor.” The clause shows that enterprise in Britain will pay off. We need those people to get up and take the risk.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I have absolutely no problem with that concept, and I am pleased that the hon. Gentleman and I agree on that proposal. The Labour Government introduced entrepreneurs’ relief when they did—dog’s dinner or not—to try and provide such a stimulus and get new jobs created. Today the Committee is being asked to support an increase in entrepreneurs’ relief from £5 million to £10 million. I am not opposed to that increase, but I simply ask the Minister for his assessment of what difference it will make. What jobs and new businesses will that increase create? I accept that he may not have a definitive answer, but it is incumbent on members of the Committee when testing the clause to ask what the outcomes of the legislation are supposed to be.

Photo of Paul Blomfield Paul Blomfield Labour, Sheffield Central

My right hon. Friend puts his finger on the critical point. The Government speak regularly about measuring their decisions on outputs, and we need clarity about what their expectations are of the outputs of a very significant variation in the lifetime limit.

We also need a cost-benefit analysis. What is being lost to the Exchequer through this measure, and in what other ways could that money have been used to help small businesses? I talk regularly to small businesses in my constituency, and as a member of the Business, Innovation and Skills Committee, I have been involved in significant work to look at effective measures to support small businesses and drive economic recovery. The issues raised by businesses, however, are very different and concern access to finance and how they can be supported to get into the export market. Businesses are deeply concerned, for example, by the cuts to UKTI and support for that activity. We need to see what outputs the Government are seeking and measure those against how that money could be used—

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. I appreciate that slightly lengthy interventions may sometimes obviate a speech, but we must ensure that they remain interventions and not speeches.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

My hon. Friend makes an important point that backs up what I am trying to say to the Minister. We do not object to the principle behind the rise from £5 million to £10 million in clause 9. The previous Labour Government also raised the level of support, and benefits will undoubtedly accrue from such a move. However, the Minister has stated in response to parliamentary questions that he has made no estimate of the number of new businesses, or of the amount of new investment that will result from the change to entrepreneurs’ relief. I find it astounding that a Minister brings a proposal to a Committee when he has made no estimate of its impact. How will he know whether the measure will be a success if he has not set a benchmark and target against which to judge it?

Photo of Tom Blenkinsop Tom Blenkinsop Labour, Middlesbrough South and East Cleveland

We are almost a year into a coalition Government, and we have seen recent evidence to suggest that many of the Government’s targets have been missed. That is another demonstration of the fact that if we do not measure the effectiveness of a policy, or have some expectation for it, there is no way to judge whether it will be credible or not. We could consider whether the moneys raised by the entrepreneurs’ relief could be recycled into helping start-up businesses.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 6:45 pm, 10th May 2011

I am not going to recommend that my hon. Friends oppose the clause, but it is incumbent on the Minister to give an estimate of the result of the change. On page 22 of the Budget 2011 policy costings document, the static and post-behaviour costings are zero, minus £50 million, minus £70 million, minus £90 million and minus £100 million, showing no growth in jobs and no extra gain in employment as a result of the measure. I hope that the Minister can reassure me by giving me figures today that show that there will be changes in the level of entrepreneurial activity, but his answer to the parliamentary question stated that no estimates had been made, his policy costings document shows no significant gains as a result of the proposal, and his own tax information and impact note states:

“Currently 25,000 to 30,000 people each year claim Entrepreneurs’ Relief. Of these we estimate a small number will benefit.”

A small number could be one, 10, 50 or 100.

We are forgoing taxpayers’ money by way of the proposal, so will the Minister please justify, not just to me and my hon. Friends but to his own hon. Friends, the gains from the measures in clause 9? It is perfectly reasonable to ask that. If he can stand up and say, “We can’t measure the gains; we haven’t measured the gains; we don’t know what the costings are; we don’t believe that the measures will have a significant impact,” I will simply ask why we are forgoing that level of income, when we could, as my hon. Friends for Sheffield Central and for Middlesbrough South and East Cleveland have said, consider using the resource elsewhere, to help to stimulate the very same people in a different way. The argument is not about the principle; it is simply an argument to get the Minister to tell the Committee what he intends to achieve, how and why he intends to achieve it, and how he intends to monitor it.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, clause 9 increases the lifetime limit on capital gains qualifying for entrepreneurs’ relief from the current £5 million threshold to £10 million  from 6 April 2011. The Government want to promote entrepreneurship to support economic recovery and growth in the UK, and increasing the limit to £10 million lowers a barrier for serial entrepreneurs who want to grow their businesses and reinvest in new enterprise, demonstrating the Government’s confidence in the ambition of entrepreneurship in the UK. My hon. Friend the Member for Skipton and Ripon put his figure on the key point, which is that it is about sending a clear signal that the UK is somewhere that welcomes talent, and entrepreneurs who will go out there and create businesses, and further businesses, and in doing so generate jobs and prosperity for many.

Entrepreneurs’ relief provides a 10% rate of capital gains tax on gains made on the disposal of businesses, including shareholdings of greater than 5% of the business for employees or officers. The lifetime limit was set at £1 million when the relief was introduced in April 2008, and was subsequently increased to £2 million in the March 2010 Budget, and to £5 million in the June 2010 Budget. The changes made by clause 9 will affect a small number of serial entrepreneurs and material investors, and the right hon. Member for Delyn is right to refer to the assessment in the tax information and impact note. The changes will allow entrepreneurs to retain a greater proportion of their gains, incentivising them to build their businesses and reinvest in new ventures, and the measure is expected to cost £100 million of forgone tax receipts by 2015-16.

The measure is part of the plan for growth that supports investment in enterprise and in innovative small and medium-sized enterprises. It complements the reforms that the Government are undertaking in enterprise investment schemes and venture capital trusts, to encourage investment in high-growth-potential businesses. It is, in part, about sending a signal that the UK is a good place in which to do business.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I fail to see how we can ensure that, during the time that an individual entrepreneur gains the relief, investment can be secured to create new jobs and growth in the British economy. Someone taking a cynical view might say that over a period of time it is basically an avoidance measure.

Photo of David Gauke David Gauke The Exchequer Secretary

This is a low rate. As we have heard, the principle of entrepreneurs’ relief was brought in by the previous Labour Government. It is narrow in its application, and it is precisely aimed at people who have a significant shareholding and are actively involved in a particular business.

Yes, we have made a cautious estimate. We are not making great claims for the dynamic benefits in revenue terms that the relief will bring. We are taking a cautious approach, but in the context of the other steps that we are taking to encourage entrepreneurship and enterprise, it is another useful step in sending a clear signal to businesses and entrepreneurs that the UK is a place where it is worth making a go of it.

I suspect that from time to time we all meet businesspeople in our constituencies and elsewhere. The day after the Budget I met a businessman in Northern Ireland who had retired, got bored and decided that, although he had made several million pounds in his career, he was going to set up another business. Two or  three years on, that business was thriving; it was a great success. It was employing some 50 people and was about to employ a further 200 or so. That is an example of the type of behaviour that I am sure we all want to encourage.

By lifting the lifetime limits of the entrepreneurs’ relief, we are sending out a signal to that type of person that the UK is a place where they can do business. There are younger entrepreneurs who can choose where they want to be located. They may go to the US, where there is much going for the business environment, but the UK is becoming a more competitive place because of this change, which I hope will be supported across the board.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I have one question for the Exchequer Secretary. He has just helpfully told the Committee that the relief will cost some £100 million of lost tax income. Has an estimate been made of how many people will benefit from that £100 million of entrepreneurs’ tax relief? Presumably, if he has assessed that it costs £100 million, it could be 100 people at a £1 million each, it could be two people at £50 million each or it could be 200 people at £500,000 each. What is the estimate? That is all I have been asking all the way through. What are the outcomes for the clause? If he cannot give us those figures, perhaps he will reflect on them and write to members of the Committee in due course.

Photo of David Gauke David Gauke The Exchequer Secretary

The first point is that entrepreneurs’ relief was introduced only in 2008, so we have few data. It is difficult to make assessments in this area, which is why we have been cautious in doing it. The impact of doubling the limit will be monitored through the information collected from tax returns. We will be able to make a more accurate assessment as time goes on.

We are taking a cautious approach. It will be a relatively small number of people, but they are exactly the type of people who create jobs and prosperity and who can ensure that the UK economy grows in the years ahead. It is worth pointing out that the relief is just what organisations such as the British Private Equity and Venture Capital Association sought in their Budget representations. They wanted a lifting of the £5 million lifetime gain to encourage greater aspiration for growth. That is something that we all want, and it is supported by business groups such as the CBI and the FSB.

The relief, along with other measures that we are taking, is sending a clear signal that the UK is a good place in which to do business. That is important for the recovery of the UK economy.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

We are gaining an awful lot of information from the Minister, and I am very grateful, but given that this is a relatively new measure, and we do not yet know the full lifetime impact of it, does he not think that the doubling of the allowance from £5 million to £10 million is an adventurous thing to do? [ Interruption. ] No, I am being serious, because I really do think that down the line we might see many more people benefiting from it, but a significant reduction of tax for the Exchequer.

Photo of David Gauke David Gauke The Exchequer Secretary

Those who will be able to benefit from entrepreneurs’ relief are—exactly as it says on the tin—entrepreneurs. They are the type of people who will be  able to go out there and create jobs and businesses. We all meet such people in our constituencies and elsewhere. The country should welcome them. We should encourage them, having had one successful business, to get out there and have a second successful business. That is what the clause is about. It is an important signal, which I hope the Committee will support.

To conclude, we think that we are sending the clearest signal that the Government have confidence in the ability of entrepreneurs in the UK to succeed and contribute to the recovery of the UK economy.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I do not want to prolong the discussion, but it is worth putting it on the record that when asked the direct question, “How many people do you expect to benefit from the provisions of clause 9?”, the Exchequer Secretary could not give a definitive answer. He can give a definitive figure of £100 million in lost income, but he cannot say how many people will benefit. In view of that, it seems—dare I say it?—an ill-thought-out proposal to expand the lifetime limit from £5 million to £10 million.

Photo of David Gauke David Gauke The Exchequer Secretary

Will you vote against it?

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I gave the Exchequer Secretary an assurance earlier that we would not, but I will give him another assurance. He can tell his officials to start to prepare answers to the questions that we will table over the next 12 months about the impact of the numbers on this particular clause and on the impact of entrepreneurs’ allowance generally. As long as I hold the post of shadow Treasury Minister, I will table a regular question to ask how many individuals and businesses have benefited, and to what extent each individual business has benefited from the clause. The Exchequer Secretary would expect nothing less. It is taxpayers’ money that is being forgone. It will potentially create jobs, and we encourage that.

We want to improve on the dog’s dinner that the hon. Member for Skipton and Ripon said that we introduced, but ultimately we need to know what the outcomes of public policy are, and the Exchequer Secretary has failed lamentably to tell us.

Photo of Richard Harrington Richard Harrington Conservative, Watford

I do not understand how the Treasury can answer the shadow Minister’s question. People start businesses and sometimes it takes years for them to decide to sell, so they would not pay the capital gains tax. It does not all happen very quickly. From what I understand, the reason for the clause is to encourage people to set up businesses. Unless there are people at the Treasury with the skills of Nostradamus or some great teller of the future, I do not understand how they can answer the question.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I will give way not only to the hon. Member for Watford but to any member of the Committee at any time, because it is my style to allow challenges in Committee. If the Government have assessed that the proposal will cost £100 million in lost revenue, they must have assessed that on the basis of what the take-up will be. I have asked the Exchequer Secretary how many businesses will take advantage of that take-up, based on the assessment of £100 million, and the answer was that it is a bit of a fluid suggestion and they will have to look at it in the longer term, because they do not quite know. They have put in a figure of £100 million. In the estimates that they put before the Committee in the budget policy costings, they have said that they do not expect extra gains to be made by entrepreneurs as a result of the measure. That means there is no economic impact or boost to growth in their own assessment, so the relief is potentially a hand-out to a number of entrepreneurs—we do not know how many—as a reward for their entrepreneurship. In principle, we can debate that and agree or disagree, but I want the Exchequer Secretary to tell the Committee how many will benefit over what period of time. If he puts a figure down of £100 million, presumably that is not just plucked out of the air by Treasury officials and given to the Exchequer Secretary to say to the Committee, “It is £100 million.” It must be based on something.

While we do not oppose the clause today, we will return to the impact of it, because that £100 million of lost income could have been used for something else to create jobs, or it could be a simple hand-out to people as their reward for creating jobs, and we do not know what the impact is. All I am asking is that the Exchequer Secretary tells the Committee how many new jobs he expects to be developed as a result of this stimulus, where those new jobs are likely to be, whether the costings show that there are extra gains in entrepreneurship across the country and how many people benefit from that approach. I am sorry to say that I am disappointed in his answer. That is the nature of opposition and the nature of government sometimes. I have been where he sits and he has been where I sit, and we know that that is the position. I will return to the matter with parliamentary questions, but I will give the Exchequer Secretary his clause today without pressing it to a Division. We will return to it and he had better start preparing the answers to my questions.

Question put and agreed to.

Clause 9 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Mr Goodwill.)

Adjourned till Thursday 12 May at Nine o’clock.