VALUE-ADDED LOAN STOCKS (Hansard, 14 July 1981)

§ Sir Brandon Rhys Williams
I beg to move, That the clause be read a Second time.
The object of the new clause is to make possible the issue by companies of value added loan stocks. The dividend and redemption terms of such a stock would be tied to the value added by the company year by year. I also propose that the service of such a stock, and the premium payable on eventual redemption, should be regarded as a prior charge on the business in calculating the amount that it would have to pay as corporation tax.
The clause seeks to provide a stimulus for investment in the private sector. I know that my right hon. Friend the Financial Secretary has lately maintained that there is a steady flow of investment in the private sector. He has compared the situation now with the level of investment in real terms five years ago. However, most people believe that five, 10 or 20 years ago the level of investment in Britain was too low, with the result that our competitors have been pulling ahead all the time. For example, in Japan and other countries that are invading our markets, the level of investment is much higher now than it is in the United Kingdom.
It is commonplace to hear bankers and managements blaming each other for this situation. The bankers and the institutions blame managements because they do not come forward with suitable schemes that would attract finance which, they say, is readily available if suitable schemes 1095 are suggested. On the other hand, companies complain that the money is not being offered on acceptable terms and, therefore, although they have splendid projects with which they would like to go ahead, they cannot get the necessary finance. As a result, the situation is one of mutual recrimination and impasse.
The ways in which a company can finance its expansion in the present situation all have serious disadvantages. Many private sector companies know themselves to have sound businesses. They believe that they should be investing in expansion or in new methods, but they cannot expand their bank debt any more, and it would be imprudent to try to finance a long-term investment on the basis of a bark debt, which inevitably is relatively short term. An issue of debentures, which before the war might have been thought to be a suitable method, is so expensive in the present state of the capital market that it places on a company a heavy burden of interest which few managements are willing to undertake.
It is open to companies to raise money on commitments related to the retail price index. I do not count myself a shrewd investor, but most people, I think, would be wary of a company that became heavily committed to the service of debt related to the RPI, because that is an index that contains elements outside the company's control, and who can tell what will happen to the RPI with the passage of the years? It does not seem to me a suitable means by which companies can raise funds from the market.
It is difficult for a number of managements to raise further capital through the equity market, because they cannot in all conscience say with certainty what profit they can hope to achieve if they succeed in raising the funds to finance the investment they have in mind. Trade union agitation could become more aggressive if the level of business revived. Money that the company had planned to use to service the dividend would have to go out as wages, because of trade union pressure which the company might not be in a position to resist.
Alternatively, the expansion of the business might take the company increasingly into export markets, where exchange rates and other terms of trading might be difficult to anticipate. Managements would be imprudent to make long-term forecasts with the confidence that the investors would expect if they were reading a prospectus. Thus all the traditional means of raising money may present serious difficulties, and management cannot be blamed if it does not take risks when raising money from the market. We need to revive the fixed interest end of the market—the area that used to be covered by the preference shares of various kinds before the war. With the unpredictable rates of inflation, the short-term cost of fixed-interest borrowing is unacceptable to the borrower, and the long-term risk to the investor is unpredictable. My device of the value added loan stock is designed to meet that problem.
We need a new class of capital that lies half-way between a debenture and an equity share, to correspond to the emergence of the institutions as the main source of investment funds. We must satisfy their concern for inflation protection over a long period and for steady growth, while considering the real nature of the commitment that the borrowers can honestly and confidently enter into in the circumstances of today.
The investment houses, institutions, pension funds, unit trusts and such bodies may be said to have a character half-way between that of a speculative investor and a 1096 bank. We need, therefore, to devise a new type of share that lies half-way between an equity share and a debenture. We must also give the encouragement of a tax concession to get investment moving. Since the value added loan stock would place on the business a commitment that would constitute a prior charge, it would be appropriate to make it allowable as a deduction for calculation of the company's liability to pay corporation tax.
We need, of course, to consider the possible cost to the taxpayer of making such a concession. It should increase the overall yield from the private corporate sector, because it would stimulate investment in projects that firms would otherwise not afford, and that would give rise to taxable flows of cash. I do not therefore see any risk to the taxpayer in making this concession, if it successfully stimulates investment.
The question arises of the relationship to equity shareholders if a new class of share is created which becomes an important element in corporate finance. Certain difficulties might be thought to arise, but I should like to meet them. If a company needs to expand and invest for the sake of its health, it is a good idea that it should be able to raise the necessary funds on terms that are not too extortionate. If that investment proves as successful as the management hopes, it will not only be able to serve the capital that gave rise to the investment but will generate a further element of profit in the business, which will be available to all the shareholders. The equity shareholders will have a better chance of an increase in their dividend through the firm's success.
If this type of share were not available and companies consequently decided to limit their activities or to rely on obsolescent equipment, the cult of the equity would ultimately prove an unsuccessful form of worship. The company would inevitably decline and lose its market share. That could not be good for the equity investor.
The new clause also represents a decisive step in the direction of the idea of corporate partnership. It would enable businesses to cover their need for capital while retaining discretion over the way in which they dispose of any measure of profit they make after paying a fair return to the investor. It is futile to talk about corporate partnership unless we can show how a firm can strengthen its reserves and add to the element of its cash flow that it rightly and properly can distribute to the workers after proper service of all its commitments to its investors.
It no doubt is obvious that the new clause is of my own drafting, but equally obvious no doubt that I have had the benefit of drawing on expert help. It may not cover all the points that the Government would wish to see covered in a new departure in the taxation of companies. It might be thought necessary to include a definition of the method of calculating the annual addition of value. Accountants have a clear idea of what they mean by "the value added''. However, it might be advisable to specify a permitted range of methods of calculating the value added so that the borrowers and lenders could decide the precise terms that suited them in any particular case.
It might also be necessary to ensure that the tax concession is not open to abuse. We would not want people to find ways of abusing the concession so as to take money out of a business without the proper payment of tax. I believe that the Taxes Act provides adequate reserves of powers to the authorities in such a case, but perhaps it is a matter that deserves further study. I hope, however, that my right hon. and learned Friend the Chief 1097 Secretary will welcome the principle behind the new clause. Perhaps he will prepare draft clauses for circulation to experts for discussion with a view to possible incorporation in next year's Finance Bill. Alternatively, it might be thought that the idea could be dealt with in the Green Paper on corporation tax which I understand the Government are considering publishing within the next few months.
I have made some suggestions about the way in which I hope that my hon. and learned Friend the Minister of State will respond. In particular, I hope that he will recognise that I am seeking to meet a real need and that this is a matter that cannot be left without Government action.

§ Mr. Peter Rees
My hon. Friend the Member for Kensington (Sir B. Rhys Williams) has long been recognised as a perceptive observer of this scene and has identified an interesting problem. However, perhaps we should examine its dimensions at greater leisure. He will know that if he is merely seeking to achieve a form of paper with indexed interest, that type of interest is already allowable for corporation tax, provided that it is of a reasonable amount.
I suspect that my hon. Friend wishes to go further than that. He has tried to devise—one sympathises with his aspirations—a sort of hybrid, something between equity capital and fixed interest capital to meet a need. We shall not find the solution to that problem tonight. His solution, as embodied in new clause 6, has certain difficulties. He has identified one detail that we could examine at greater length in conjunction with the Green Paper on corporation tax, which we hope to produce in due course. The consideration of distributions, interest and that sort of problem can be examined with greater thoroughness and at greater leisure than we can allow tonight.
12 Midnight
The House is indebted to my hon. Friend for having tabled the new clause and for having focused our attention on the problem that he has uncovered. I hope that he does not intend to press the new clause to a Division but that we may return to it in the context of the Green Paper. I cannot, I am afraid, undertake to produce any new clauses for consideration, but that depends on the outcome of consultations in the light of the Green Paper. We shall approach his suggestion with sympathy, with interest and, after his illuminating address, with understanding. I hope that he will feel that justice has been done and that he is able to withdraw the clause so that we may return to it on another occasion.

§ Sir Brandon Rhys Williams
I am grateful to my hon. and learned Friend for his forthcoming remarks. He has gone as far as it is reasonable to expect him to go tonight, but that does not mean that I should be satisfied if he went no further than that in the future. For the present, I am happy to accept his recommendation and I beg to ask leave to withdraw the new clause.