§ Brought up, and read the First time.
New clause 21—Business start-up scheme—relief if share sold at less than full value:
'In Finance Act 1981, section 57(1)(a), delete the words after "arms length,". and substitute the following: "the amount of the relief to which he is entitled in respect of those shares shall be reduced by their market value at the date of disposal or, if greater, the amount or value of the consideration which he receives for them; and".'.
§ New clause 22—Business start-up scheme—relaxation of provisions relating to disclosure of information:
'(1) In the Finance Act 1981, leave out section 63(2) and substitute the following—
(2) Where an event occurs by reason of which any relief in respect of any shares in a company to be withdrawn by virtue of section 53(7), 55, 56, 58 or 59 above the company shall within sixty days of the event give notice in writing to the Inspector containing particulars of the event.
§ (2) In section 63(6) of that Act, delete the words "and any person controlling the company.".'.
§ New clause 23—Business start-up scheme—extension or relief to employees and directors investing in companies for which they work:
- '(1) After section 54(2)(a) of the Finance Act 1981 there shall be inserted "other than an employee owning 5 per cent. or less of the issued ordinary share capital of both companies",
- (2) After section 54(2)(c) of the Finance Act 1981 there shall be inserted "other than a director owning 5 per cent. or less of the issued ordinary share capital of both companies."
- (3) In section 54(3) of the Finance Act 1981 after first "director" in line 2 insert "Holding more than 5 per cent. of the issued ordinary share capital of a company."
§ Section 58(2) Finance Act 1981—insert after 'Section' the words 'and subject to subsection (10) below,'.
Insert new subsection:
(10) For the purposes of subsection (2) and section 59(7), any emoluments, expenses, benefit or facility provided by reason of an individual's employment with the remuneration for the performance of the duties involved.".'.
§ New clause 24—Business start-up scheme—extension of the definition of a qualifying individual:
- '(1) In section 53(3) of the Finance Act 1981, delete "50" and substitute "80".
- (2) In section 53(7) of the Finance Act 1981, delete "50" and substitute "80" (in two places).
- (3) In section 54(4) of the Finance Act 1981, delete "more than 30 per cent." and substitute "more than 40 per cent.".
- (4) In section 54(6) of the Finance Act 1981, delete "more than 30 per cent." and substitute "more than 40 per cent.".
§ New clause 27—Business start-up scheme—acceleration of receipt of relief:
'(1) For section 52(3) of the Finance Act 1981 there shall be substituted the following—
(3) the relief shall be given on a claim subject to the following conditions—
§ (2) In section 52(4) of the Finance Act 1981 the following words shall cease to have effect "(or, where the period mentioned in subsection 3(a) above ends later, after the end of that period) if the conditions for relief are satisfied."
(3) For section 61(1) of the Finance Act 1981 there shall be substituted the following—
(1) a claim for relief in respect of shares issued by a company in any year of assessment shall be made not earlier than the end of that year and not later than two years after the end of that year.
§ Mr. Loveridge
I acknowledge the improvements made by the Government earlier in the debate. They have extended the scheme so that the subsidiary companies of qualifying companies can obtain relief. That shows the recognition of the need to expand the small business sector and of the relationship between the growth of the economy and the strength of the small business sector. It is no coincidence that growth in Japan has been so much greater than in Britain, because Japan has twice as many small firms for each 1,000 people. It is especially worth remembering that two-thirds of manufacturing jobs in Japan are in small firms, while in Britain only 29 per cent. of such jobs are in small firms.
The purpose of the business start-up scheme is to give relief against income tax to those who invest in trading companies. The extension to their subsidiaries is a most welcome encouragement that will help to bring private investors to a less disadvantageous position compared with institutional investors, who now provide the majority of funds for investment. We often hear of the need for more investment in industry. It has been shrinking as a proportion of gross domestic product for many years and the small business start-up scheme and the extension announced today are welcome.
However, so far there has not been as much take-up of the scheme as we would wish. The suggestions put forward in the new clauses in the names of myself, my hon. Friends the Members for Luton, East (Mr. Bright), Bristol, North-West (Mr. Colvin), Devon, North (Mr. Speller) and Hertfordshire, South-West (Mr. Page) would help to make those schemes more effective. The business start-up scheme has had to be hedged in by restrictions to prevent its use as an avoidance device. This has resulted in the complex nature of the scheme. Only those with first-class professional advice can really understand it. Such advice is costly and the complexity must put off investors, many of whom would like to be able to understand for themselves what they may be letting themselves in for in making investments.
779 Our proposals are put forward to enable the business start-up scheme to work as intended. During the passage of last year's Finance Bill, the Government stated that the scheme would start modestly and might broaden in scope. This has happened to some degree. I hope that the Government will accept the new clauses designed to improve the scheme and to make it more effective. I propose to concentrate on areas where the scheme could be made more attractive without undermining the anti-avoidance provisions which the Government must ensure are effective.
I turn first to new clause 20. Since relief cannot at present be given until after the year of assessment for the taxpayer, the relief normally comes as a repayment of tax. If this repayment has to wait a year, it seems only just that interest should be paid on the money withheld. The new clause would enable this interest to be paid.
Next, I deal with new clause 21. If shares are bought under the scheme and they have to be sold at a loss or for less then full value, the restriction of relief should surely relate to the loss. At present, all relief is apparently lost, even though equity would suggest that only part of the relief should be restricted.
Last year, it was agreed to increase the time limit from 30 to 60 days for giving information to an inspector of any event that would cause relief to be withdrawn. New clause 22 merely ties the duty to inform the inspector to those to whom such an event relates. At present, any other person is deemed to have knowledge, even if he has not, and is required to give information not related to himself of which he may not be aware. This is bad law and should be corrected.
New clause 23 aims at encouraging employees and directors to commit their own funds to the enterprise in which they work. At present, they cannot do this and receive the relief under the scheme. But they are surely the people who should be encouraged to make a success of the firm by taking a stake in its equity. The new clause is itself restrictive. It limits relief to those with less than 5 per cent. of the issued share capital of the firm concerned. It is hoped that the Government will wish to encourage these employees to play a part.
To prevent any abuse of the suggested relief, the proposals before the House include an anti-avoidance measure that would allow the Inland Revenue to refuse relief where it is shown that anyone is drawing too much pay for the work he does. The relief could be restricted in such a case.
I refer next to new clause 24. As the scheme now works, no one person and his associates can invest in more than 30 per cent. of the issued share capital of the relevant company and still get the relief. The total invested under the scheme by any number of persons cannot cover more than 50 per cent. of the issued share capital. The effect of this is that if the company grows, those investors who have already invested in the company, and who understand it, will not be available to provide further capital to cover cash flow needs as the firm grows. It seems a great pity, since the choice of investors must necessarily be limited in any firm, that a firm cannot look for further money from the same source that originally invested. Therefore, our proposals would increase these figures from 30 per cent. to 40 per cent for individual investors and their associates, and from 50 per cent. to 80 per cent. for the total.
New clause 27 deals with delays in getting tax relief, which might amount to as much as three years. For a 780 company to qualify it must start trading in a period following the issue of the shares. It will often be the case that an investor has to wait 18 months or two years for the tax benefit to be repaid. It was always hoped that a number of professional people would become investors under the scheme. Such people, even if on high incomes, often have high immediate commitments to meet, such as school fees for children or mortgage repayments.
Unless ample cash savings have been made by them, they may have to borrow to make such investment, but the interest rates that might not be deductible for tax purposes would be so high that if they have to wait two years for the repayment of the tax under the scheme, it might discourage them from doing so because of the severe cash flow limitations on their families. These are just the sort of people that we want most to encourage to invest—professional people who can take an interest in the small firms in which they invest and help them through their knowledge and experience. New clause 27 would enable this to be done.
I have set out the proposed changes related to each of the new clauses as briefly as possible to save the time of the House tonight. My colleagues and I hope that the Government will respond favourably to our suggestions, as they have done to other suggestions in the past. We are grateful for what they have done for small businesses, but we feel that to make this business start-up scheme effective, the provisions that we are advocating need to be implemented. We particularly need new businesses that will grow fast to provide new jobs in the kingdom today. If the Government will accept the new clauses it will help to provided such jobs.
§ Mr. Graham Bright (Luton, East)
The whole concept of the business start-up scheme puts the United Kingdom far ahead of any of the countries mentioned by my hon. Friend the Member for Upminster (Mr. Loveridge). However, the scheme as set out now is not working as it should. It is far too complicated and it is far too restrictive. The scheme is a classic case of the Inland Revenue over-reacting and using a sledgehammer to crack the walnut of anyone making a penny more than he should.
We are asking people to put down a great deal of money and to risk a great deal. It is all aimed at increasing the number of new companies, and creating new real jobs. That is a worthwhile risk if we can create more companies and jobs. The Revenue should enter into the spirit of the scheme, because the stakes are so important. For that reason, the Revenue should take risks. After all, if there are too many loopholes, there is no reason why the Government should not come back to the matter. What we do not want is what has happened so far in the scheme, and that is an overkill. The overkill to stop misuse of the scheme has almost killed the scheme itself.
We were told that the scheme would develop and broaden. The idea was to start cautiously. We were also told that it was important to get the scheme off the ground. We have tabled these new clauses because we want the scheme to get off the ground, which has not happened so far.
There needs to be greater certainty of entitlement to relief under the scheme. There should be less emphasis on the possibility of withdrawing relief, due to factors which 781 are often entirely outside the control of the investor. The emphasis should be changed, so that people know exactly where they stand.
As my hon. Friend said, the scheme is not easy to understand. Accountants are wary of it, because they do not understand it. One often needs to call in top professional advice. That is not cheap, and often it is not easy to find. So the potential investor often finds the whole idea offputting.
We, as a Parliament, should take account of the commercial realities of start-ups, and those commercial realities are not necessarily the same for people in the Inland Revenue, who are concerned about tax dodgers. They do not want a charter for tax dodgers; neither do I. I want a realistic scheme that will draw in new money with which to start new companies. There is a danger at present that an investor could go ahead without getting advice. In such cases, he could lose his entitlements. There need only be a few cases like that for people to be entirely put off the scheme.
In the new clauses we have tried to spell out three areas for urgent amendment. First, there is the extension of the definition of qualifying individuals. We recommend that the 50 per cent. limit that was originally imposed should be enlarged. New companies are always cash hungry, and people normally underestimate the money that they need to get a business under way. The outside investor who initially puts in money sometimes has to put in more money merely to protect his investment, because otherwise the whole project could go to the wall. I therefore hope that the 50 per cent. limit will be raised. In our view, 80 per cent. would be much more realistic. With an 80 per cent. stake, we could get away from the minority emphasis, which tends to put people off, because they do not want to be forced into a minority. So extra cash needs to be available. Entrepreneurs often have extremely good ideas but do not have the money to get them into practice. We are trying to introduce the cash so that good ideas can get off the ground.
Next, we need to extend the relief to employees and working directors who invest in companies. I am in favour of wider ownership of wealth for employees. That is a valuable source of cash for a company, and it encourages commitment, which is essential at the start of a new company. It has been said that there could be a loophole here and that people could get round corporation tax. The Inland Revenue has an opportunity to disregard remuneration which exceeds reasonable levels. It is right that it should have such power because limiting the amount of investment to £1,000 a year, or 5 per cent. of the share capital, provides protection. It is worth the risk to increase industrial democracy and to give opportunity to people working for a firm to have an investment in it.
Relief should have an immediate effect. My hon. Friend the Member for Upminster said that investors often have to wait up to three years before they receive their money. That is probably extreme and 18 months is more normal. That imposes enormous cash flow disadvantages because the whole amount has to be put down at once.
We should like senior executives to invest in the start-up scheme. They can afford the money, after relief, but with all their commitments they cannot afford the total. They could consider bridging loans, but that might make the scheme not worth while. Many small businesses fail 782 because of lack of experience. The executive can give his advice and skill to get a company off the ground. We must speed up the scheme so that the executive can put his money in without cash flow problems. The executive is needed to give a company a better start.
I have rushed my argument because of the time. The business start-up scheme is without doubt excellent, but it must be unshackled and given a genuine chance to work. The new clause aims to give the scheme the "get up and go" that it needs.
§ Mr. Richard Page (Hertfordshire, South-West)
The selection of new clauses enables us to discuss the suggestions for the start-up scheme in a group instead of dealing with each in turn.
My hon. Friend the Member for Upminster (Mr. Loveridge) described the details involved kindly. I wish that I could support strongly the way in which the scheme operates, but it is failing. One of the reasons for my disappointment is the contrast between what is happening and the statement by my right hon. and learned Friend the Chancellor of the Exchequer in March last year. When talking about helping the small business community and the start-up scheme he said:One of the biggest problems faced by people thinking of starting their own business is the difficulty of attracting sufficient risk capital to finance it during its critical early years … The individual private investor has for many years had little encouragement to help fill that gap in the capital market. I propose to change that.My right hon. and learned Friend's final words on the start-up scheme were:This business start-up scheme will be unique in not only this country but among our main trading competitors. It will be a striking new incentive to channel investment into small businesses."—[Official Report, 10 March 1981; Vol. 1000, c. 781.]I only wish that that had been the case. I can remember how disappointed I felt when the details emerged out of the machinery of the Treasury. It would not be unfair to say that the scheme was an accountant's nightmare. I know that in Committee my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) accepted many of our amendments and produced many of his own to try to improve the scheme. However, despite all his help—the scheme was much improved—it is unattractive to the accountancy profession. We have a double task, not only to try to improve the scheme, but also to encourage the accountancy profession to put it forward to the investors.
I am sure that my hon. Friend the Member for Upminster will accept that anybody dealing with such sums of money usually has professional advice. If that advice is not to go ahead, it will be an extremely foolish investor who does so. Unless my hon. Friend has information to the contrary, I must say, regretfully, that I know of few people who have taken up this start-up scheme. It has been a proverbial damp squib. It has only three years to run from its commencement. One year has already gone and I see nothing, even in the amendments that have come forward in the Finance Bill and on the Floor of the House today, that will make that scheme more encouraging to the investor.
I shall not go through all the new clauses in detail, but I should like to make a few comments, some of which follow on those of my hon. Friend the Member for Luton, East (Mr. Bright). It seems nonsense that an employee 783 cannot participate in the start-up scheme. He can put his money into a firm operating down the road, but he cannot put his money into his own company.
One of the strengths of small businesses is the fact that they have better industrial relations and feeling of participation. What better way to cement relations than by having a stake in the business in which one is employed? Surely 5 per cent. will not bring the whole Treasury structure crashing about our ears. I quite understand why one does not want an individual investor to have more than 30 per cent. relief, but I see no reason why the present 50 per cent. limit cannot be raised to 80 per cent., as we have suggested.
One sees certain periods in the formative stages of a small business when it needs extra finance. Who better to put it in than the initial backers? I see no problem at all in allowing it to go to 80 per cent., again without endangering the scheme and bringing about any form of tax avoidance.
I should be further grateful if my hon. Friend would tell me whether new clause 43 covers the question of management buy-outs. As I understood it, there is a requirement in the start-up scheme that in the two years prior to the issue of shares on which relief is claimed a company must not buy a subsidiary of another company and make up subsidiaries itself unless the subsidiaries commence trading after the company itself. In these times of management buy-outs, this must surely be a source of new companies and should be encouraged. I should be grateful if I could be told whether new clause 43 covers that point.
We do not want to encourage any form of tax evasion or avoidance by undermining the anti-avoidance restrictions. However, as the scheme is virtually dead, we must attempt to revitalise it. Surely the way in which the sales of shares are treated must be a valuable step in that direction.
It would be more equitable to restrict relief to the loss suffered, with suitable safeguards against avoidance, than to withdraw relief completely. Alternatively, the five-year period in which investment is made could be reduced to three years. In addition, it might be possible to ensure that relief is progressively retained depending on the length of time that the investor holds his shares. If he retains his shares until the fourth year, his relief is almost completely retained. If he cashes in the shares after three years he will lose a little more, but he will still receive a major chunk of the tax relief that originally encouraged him into the scheme. We must accept that five years is a long time and that circumstances change.
Finally, there is a strong case for some advanced clearances to be built in for potential investors, with a form of conditional guarantee. I shall cite an extreme case. If an investor puts in the top figure of £30,000 and the money and relief is turned down, he will need—because he is on the 60 per cent. rate—an income of £75,000. It must be a tremendous disincentive to have to find that £45,000 over and above the £30,000 and must cause the investor to stop and think before encouraging a would-be entrepreneur to start. Let us consider the smaller amount of £2,000, with the investor paying 40 per cent. If his claim for relief is turned down, he must find another £1,333.
784 I am conscious of the time and of the pressure of business, but I am also conscious of the failure, to date, of the start-up scheme. I do not say that everything in the scheme will be rectified by accepting the new clause or that everything will bloom tomorrow. I am sure that the new clauses will not be pressed to a Division, but those of us interested in small businesses are very concerned about the scheme. It is a marvellous idea that is not succeeding. It was originally started for only three years. There are two years to go, and even if the new clauses are accepted, it is difficult to see how they will be seen to have worked in that time. Therefore, I hope that the scheme will be extended by at least another two years and that investors will be encouraged to put their money in and to give this marvellous idea the genuine start that it deserves.
§ Mr. Ridley
I am grateful to my hon. Friends, because they have returned our attention to the business start-up scheme. As they said, the intention to develop and broaden the scheme and new clause 43, which we discussed earlier, seeks to do just that. I say to my hon. Friend the Member for Hertfordshire, South-West (Mr. Page) that provided that the subsidiary purchase would qualify under the business start-up scheme rules—in other words, that it is a new qualifying trade and so on—the company in which the shares are put may claim relief for investment under the business start-up scheme. To that extent, it could, depending on the details, assist in some management buy-outs.
The main thrust of the argument has been that the scheme is shackled. I agree that it is a marvellous scheme, and that it is unique in the industrialised world. It is suggested that the restrictions have shackled it. If anyone wants to put £10,000 or more into a small business and claim the tax relief of up to 75 per cent., none of the conditions and anti-avoidance devices which are mentioned in the new clauses will inhibit him. At the margin it is highly complex, but if somebody is a straight investor of the type for which we are looking there is nothing in the legislation to deter or frighten him. Too much is made of the suggestion that necessary defences against avoidance put off people who want to make a genuine investment. I do not believe that the idea can be sustained. We have tried to remove the difficulties and restrictions.
New clause 20 and new clause 27 run close together. The relief is available in the year of assessment in which the shares are issued. It depends upon the point in the financial year, but there should be no delay. The only delay is built in for when the company has not started to trade. It would be wrong to allow relief when the shares are issued but the company has not traded, because the idea is to encourage investment in a trading company. There was a rule that the company had to trade for 12 months before relief would be available. The Bill has reduced that period to four months. I do not believe that that will inhibit anybody who wishes to invest in that way.
New clause 21 is more difficult, because to allow any non-arm's length sales to have some form of taper or alternative treatment for the recovery of relief if the shares are held for less than five years would provide a loophole. It would be possible for someone who is paying a higher rate of tax to subscribe for shares and after a short period—one or two years—to transfer those shares to a relative paying a lower rate of tax and thus to make use of an avoidance de vice between 75 per cent. and 30 per 785 cent. of personal income tax and to offload a tax liability in that way. There is nothing wrong in giving shares to a relative or employee, but the point of the scheme is not to subsidise that process at the taxpayer's expense but to provide funds for business.
The same applies to new clause 23. I must be tiresome and resist new clause 23 because there would be nothing to stop a director or employee, if the clause were accepted, whether he owns 5 per cent. of the company or not, from easily and properly paying another £20,000 a year out of the company's funds. He could then reinvest that £20,000 in the company. If he could get tax relief on that investment he would save himself tax and save the company from paying tax on that part of its profit. It would be such an obvious and easy way not only to pay no tax but conceivably to milk the Revenue that it simply could not be allowed.
As to the suggestion that there should be Government or Revenue control of what is reasonable payment, I do not think that we should set up machinery to vet what everyone in small business is paid in order to ensure that it is reasonable. How would we know that it was reasonable?
§ Mr. Ridley
I am most grateful to the hon. Gentleman. His contribution to the debate has been outstanding. Those are just the words that I wanted. My hon. Friends can now see the dangers that they face. The hon. Member for Blackburn (Mr. Straw) was unable to restrain himself from mentioning wage control at just the right moment. Much as I would like to help, I do not believe that we can go down that route.
On allowances, my hon. Friend the Member for Hertfordshire, South-West did not wish to press the increase for one shareholder from 30 per cent. to 40 per cent., although my hon. Friend the Member for Upminster (Mr. Loveridge) certainly did. The question is really whether a person who owns 40 per cent. of a private company puts himself into a position in which he can influence the dividend and salary policy of the company. I suggest that he does, but it is a matter of judgment.
If we reached the stage when outsiders with business start-up scheme assistance could own 80 per cent. of the company it would be possible for 60 per cent. of the equity capital of the company—that is, 75 per cent. of 80 per cent.—to be provided by the taxpayer. I think that that would be going too far. It is already possible for the taxpayer to contribute 37½ per cent. of the equity capital of a small business through tax relief, which I believe is extremely generous. If we pushed it to 60 per cent., there would be too little commitment of their own money by the people concerned.
§ Mr. Richard Page
My hon. Friend pointed out logical defects in the new clauses and I appreciate what he says, but the start-up scheme is not being taken up. It will not be successful unless there is some change to re-sell it to investors and to the accountancy profession. My hon. Friend gives perfectly logical reasons for not accepting our suggested improvements, but unless he produces some further boost and encouragement the scheme will remain dead. That is the reason for our clutch of new clauses, defective though they may be.
§ Mr. Ridley
If my hon. Friends constantly talk of complications, restrictions and difficulties causing trouble, they will persuade investors that problems exist when in fact they do not. The claim that the scheme is not working is another way of sowing doubts and pouring cold water on an excellent scheme.
Information as to whether the scheme is working and how many people are taking it up is not yet available because investors have not yet put in their claims. We know that the funds approved as collective investment vehicles raised a total of about £11 million by 5 April this year, although not all of that has so far been invested in new companies. Therefore, there is no evidence that the scheme is not working and the claim that restrictions are putting people off is not proven. If instead of looking for difficulties we tell people how marvellous the scheme is, that the restrictions will not be a nuisance to investors, that the scheme will be widely taken up and how valuable it will be, that attitude is likely to sell the scheme. That is what is needed. Nevertheless, I am always happy to consider ways to remove unnecessary restrictions, as I hope that I have shown today, although I cannot quite recommend any of the proposals put forward by my hon. Friends.
§ Mr. Loveridge
The Financial Secretary said that the point is to bring in funds. We want more investment. The nation needs the investment. It would have been more impressive had the Financial Secretary been able to give us figures for the total take-up at this stage.
We accept that the Government are trying to make the scheme work. One thing that the Financial Secretary said surely cannot be correct. My hon. Friend the Member for Luton, East (Mr. Bright) and I said that the limit of relief for investment by an employee should be put at £1,000 a year. In those circumstances, it is impossible to see how tax avoidance on the scale mentioned by the Financial Secretary could conceivably arise. It could not. The Government are anxious to make this excellent scheme work. They have made concessions to the proposals put forward by my hon. Friends and myself in the past. We believe that in the end they will have to make more concessions, on the lines that have been suggested today, to make the take-up of the scheme adequate and to make it the success that the Government desire it to be.
In the light of what has been said, I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.