AMENDMENTS OF PART I OF SCHEDULE 5 TO THE FINANCE ACT 1983 (Hansard, 12 July 1983)

§ Mr. Robert Sheldon
I beg to move amendment No. 14, in page 12, line 11, leave out sub-paragraph (a).
This is a probing amendment. It sets out to establish what the words in paragraph 3(a) mean. There is a considerable problem about some of the paragraphs, as I have mentioned before. There is a problem with nine provisions in the schedule as well as the two provisions mentioned in amendment Nos. 14 and 15, which I have tabled for the purpose of obtaining from the Financial Secretary information about what they involve and how they are determined in the cases that he has in mind.

§ Mr. Ridley
The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) asked what paragraph 3(a) did. Companies that qualify for business expansion scheme relief are allowed to have subsidiaries, but they must carry on qualifying trades under the Act. Those trades must be carried on wholly or mainly in the United Kingdom. Schedule 5 to the Finance Act 1983, quoted in schedule 1, states that a company must be a company whose business consists wholly of … both the holding of such shares or securities, or the making of such loans and the carrying on of one or more qualifying trades. After "carrying on" we suggest the insertion of the words: wholly or mainly in the United Kingdom". The parent company must carry on its trade wholly or mainly in the United Kingdom, but the legislation was 831 drafted defectively, so that it was not necessary for its subsidiary to be carrying on its trade wholly or mainly in the United Kingdom. We do not want to grant relief to investors in companies that operate abroad. Neither the holding company nor the subsidiary will be able to obtain relief unless it operates wholly or mainly in the United Kingdom. That raises an issue of principle to which we must return later.
It is possible that the company that started up in the United Kingdom might do well and expand its production and then find that it has to have a subsidiary overseas to market its products, and repair and service the goods that it makes. It might find that the overseas subsidiary becomes more important than the home manufacturing base in terms of the numbers employed and the capital used. Nevertheless, it is a British company and we must ask ourselves whether we should continue to give relief in those circumstances, particularly if the company turns its overseas company into a subsidiary. The Committee will be familiar with the fact that many foreign countries almost make it a condition of doing business that one has to establish a manufacturing unit to make one's product there. If that pistol were to be pointed at the head of a company that was successful under the business expansion scheme, it would lose its relief if it complied with the requirements of the overseas customers. That raises a point of some difficulty, which I do not propose to answer now. The paragraph to which the right hon. Gentleman referred will restrict for the moment the business expansion scheme to companies that carry out their trade wholly or mainly in the United Kingdom. That in no way prevents exports. If a company is located in the United Kingdom and operates under the business expansion scheme it can export 100 per cent. of its production. That is not what we are getting at. If slightly more than half of a company's assets are located here or if slightly more than half of its employment is in Britain, it would qualify and meet the definition of being wholly or mainly in the United Kingdom".

§ Mr. Peter Bottomley (Eltham)
Are we getting to competitive bidding between countries or does this have more to do with the implications of taxation? Should we be more worried about the effectiveness of the business start-up scheme, or is this part of the double taxation arrangements, which confuse me a great deal and, I suspect, the Committee? It might be helpful to know the category with which we are dealing and the circumstances surrounding it.

§ Mr. Ridley
By accident, we have created a dilemma. We all agree on the principle that assisting investment in small and unquoted companies in the United Kingdom is excellent. The more we refine, expand, extend and develop the scheme, the more we find problems at the periphery. The pressure will come from companies that are successful under the scheme, establish overseas subsidiaries and discover that they are debarred by this paragraph from continuing to qualify for relief if the overseas subsidiaries do not meet the special conditions. However, they will argue that it must be good business to meet the market and set up subsidiaries or trading organisations overseas to meet the needs of customers.
832 Why, then, should they be penalised for doing that? That is a dilemma that the Committee must return to another time.

§ Mr. Kenneth Carlisle (Lincoln)
I apologise to my right hon. Friend for not being here to listen to him earlier. He touched on small businesses and the relevance of taxation of them. The Treasury should have due regard to development land tax and the rates levied on small businesses. I suggest that it is not possible to divide one tax from another. One must examine the effect of the burden of taxation as a whole on the expansion of small businesses. I hope that the Government will examine that, perhaps in another Finance Bill. If we are to relieve small businesses of the burden on them and provide the conditions for employment in them, we must examine the problems that prevent them from taking on young and skilled people.

§ Mr. Ridley
I am constantly amazed at the ingenuity and compassion of my hon. Friend the Member for Lincoln (Mr. Carlisle). He has succeeded in mentioning development land tax where some of my right hon. Friends have failed. I assure him that the Government are conscious of its effects and will continue to watch its effect on small businesses. Companies that might benefit from the business start-up scheme are not necessarily those that will be caught up in development land tax. Having said that, there is one small business that will be caught up in the tax. My hon. Friend will be glad to see that there is a special clause in the Bill that deals with that. We shall consider it later. That shows how sensitive the Government are to the important point that he raised. I hope that the right hon. Gentleman is happy with that explanation and will allow the paragraph to remain as drafted.

§ Mr. Robert Sheldon
I beg to ask leave to withdraw the amendment.

§ Mr. Robert Sheldon
I beg to move amendment No. 15, in page 12, line 39, leave out sub-paragraph (5).
Again, we are dealing with the amendments to the Finance Act 1983 that the Opposition were generous enough to allow through. We are right to ask for a more detailed explanation than has been given about the import of sub-paragraph (5).

§ Mr. Ridley
The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) seeks to probe the meaning of subparagraph (5), and I am happy to explain its provisions. He will not consider me over-critical when I describe his amendment as a wrecking amendment. It seeks to delete the necessary definition of shares of the same class and, therefore, would make unclear the new rules about the identification of shares on a disposal.
If a person owns shares in a company and has obtained business expansion scheme relief on some, but not all, of them, it is necessary to identify the shares involved in a disposal. The existing legislation treats all ordinary shares in the same way. It identifies shares on a disposal, first with those on which business start-up scheme relief has been given, if there are any; secondly, with those on which business expansion relief has been given, if there are any; and, thirdly, with shares on which there has been no tax 833 relief. I shall call those categories A, B and C. Within them, the identification rules laid down in the schedule are on a first in, first out basis.
Many hon. Members will remember the trouble we had with capital gains tax indexation and the pooling rules. I am sorry to introduce such an unwelcome note in my answer to the right hon. Gentleman, but that pattern of identification can produce anomalies. Where a company has more than one class of ordinary share and the classes have different values, there could be differences in the nominal value. Some of the shares could be lop shares and others £1 shares, and some could carry voting rights while others did not. Therefore, we are trying to make the rules fairer by considering each class of share separately. If there were a disposal of the 10p shares, the Committee will agree that it is right that the identification is only with the other lop shares and not with the £1 shares—that is, that identification is within one class.
To decide whether shares are of the;.same class, we must again follow the capital gains tax rules and find out whether the stock exchange would put them in the same class. That is the definition that we shall adopt for the class of the share. The method is complicated, but I hope that I have demonstrated the point of it to the right hon. Gentleman and that he will not press his amendment because, if he succeeds in carrying it, he will make what seems complicated less complicated, but, equally, he will make an attempt at complete fairness less fair.

§ Mr. Sheldon
The purpose of the amendment was to secure the clarification that the right hon. Gentleman has provided. If I understand it correctly, he has said that the identification will be the same as before but within the same class, and that it uses the capital gains tax rules. If that is the position, I am content, and I beg to ask leave to withdraw the amendment.