§ 'Any reference to eligible shares for the purposes of Business Expansion Relief under Schedule 5 to the Finance Act 1983 shall include a reference to eligible Loan Capital which shall rank equally for income tax relief, subject to the qualifications that Business Expansion Scheme Loan Capital in a Company shall:
- (a) not be repayable within five years;
- (b) not carry any voting rights;
- (c) not be entitled to interest in excess of base rates (as published quarterly by Her Majesty's Government);
- (d) not participate in the profits other than by way of interest;
- (e) not carry any preferential right of repayment in any circumstances other than in preference to equity share capital;
- (f) not exceed the amount invested in Business Expansion Scheme equity shares; and
- (g) specify the events that would enable the Loan Capital to be converted into equity and so carry voting rights.'.—[Mr. Richard Page.]
§ Brought up and read the First time.
§ Mr. Richard Page (Hertfordshire, South-West)I beg to move, That the clause be read a Second time.
I propose this measure with no hope or expectation that the new clause will be added to the Bill in 1985. I like to think that I can let it gently float upon the surface of the Treasury waters, so that the Treasury can consider the idea and possibly bring it forward in the Finance Bill 1986.
1036 I am always reminded in matters such as this of one of the sayings of the late Lord Butler. When anyone saw him with a proposition, complaint or idea, he said, "How many are you?" I have been pleasantly heartened by the number of people who have expressed interest in and support for this idea.
One reason why this measure has been proposed is the relative failure of the loan guarantee scheme. I have been exceedingly disappointed at the calls placed upon the Government guarantee and at the high number of failures that have taken place.
We need to have a means of evaluating business propositions that do not require a high asset value. We should have a means of considering a business scheme and ascertaining whether it can be viable and stand on its own two feet without gearing it entirely to the assets that have been involved in the proposition. The work that has been done in the various local enterprise agencies within the Department of Trade and Industry in evaluating the business propositions put before them has shown how they can reduce new start-up failures to a rate between 1:8 and 1:12.
1.30 am
We must bear in mind the mentality of those who come forward to try to set up a business. They want to do it themselves, in effect. They want to become independent. They want to be their own boss. They turn to the business expansion scheme for start-up finance. We know that in Britain there is extreme difficulty in accumulating one's own finance. Perhaps the most finance that an individual can accumulate is through his own home, and there are some who would be reluctant to put that item or asset at risk. That is where the BES helps.
So much money is needed now to start up a business that the equity of the person who wants to do so is reduced sometimes to such an extent that he loses control and is not his own master. That means that he is back in the position from which he tried to escape. He wants to be his own master and does not want to be someone else's servant. That is why I have tabled the clause. By matching some form of loan to equity, with tax reliefs that give incentive to put money into the scheme and with the evaluation of the scheme that will take place, I hope that the clause will help many to start their own businesses.
I have introduced the clause because I have been approached by several people who have wanted to use the BES but have backed off it because they have been faced with the prospect of not having control of their company or that of not going ahead. As they want to be their own masters, they have withdrawn.
The conditions that are set out in the clause are infinitely flexible. I have set out principles but that is all. Whether any interest rates should be parallel with the base rates that are published quarterly by the Government is something that is open to debate. There are some who would say that the rate should be several points below the base rate. I have provided that the ratio of equity to loan should be 50–50 but others may consider that it should be a different proportion. I hope that my hon. Friend will give the principle due consideration over the next nine months or so before the next Finance Bill is introduced.
§ Dr. McDonaldI do not think that the clause would have the support of the Opposition. As Conservative 1037 Members know, we have many doubts about the business expansion scheme and the way in which it operates without adding the proposed relief to them.
A person who subscribes for loan stock takes less of a risk than someone who subscribes for shares. If the company goes bust, for example, the loan stockholders are paid out first. It is only if there is anything left that the shareholders are paid out.
The BES started as the business start-up scheme might have had some merit when it was introduced. However, the way in which the scheme has been used has moved away from the original concept. Investors want to find an easy method of tax relief without taking any risk and that is why the Government have had to eliminate agricultural holdings, and subsequently property based investments, from the scheme. The Financial Secretary to the Treasury knows that we have doubts about some of the other companies which attract investment under the scheme. Tax relief was designed to compensate investors for taking risks in new industries that would have difficulty in attracting investment, so we cannot support this addition to the tax relief that is already available.
§ Mr. Graham Bright (Luton, South)I support the new clause which was moved by my hon. Friend the Member for Hertfordshire, South-West (Mr. Page). The business expansion scheme has been an unqualified success. In its first year it attracted about £100 million for equity in companies. It assisted about 500 companies, over half of which were very new or were just starting up in business. Their capital requirements were very modest. A third of them raised less than £50,000. The scheme meets a long standing need. As my hon. Friend said, the loan guarantee scheme, for which I campaigned, needs to be replaced by an alternative. It filled a gap, but unfortunately it was misused in many instances by the banks. Companies which did not meet their criteria were passed as a risk by the banks to the Government.
The purpose of the new clause is to extend the relief afforded to the business expansion scheme to loan capital. As both the Bolton and Wilson committees of inquiry found, many small companies are reluctant to lose control of their equity or to risk future loss of control, should they need additional capital. The loan guarantee scheme and the practices of the major banks do not necessarily meet the precise needs of these companies.
For this reason, the new clause provides that the provision of loan capital as well as equity capital should be eligible for income tax relief under the business expansion scheme. It envisages a loans commitment for a period of at least five years without any prospect of loss of control by the recipient company by the conversion of the loan capital into equity capital. Furthermore, an investor would not expect to receive extra payments of interest, as provided for in the loan guarantee scheme. In its new guise, the loan guarantee scheme is very much weaker than it was.
New clause 29 contains a scheme that is designed specifically to complement the provisions of the business expansion scheme and to extend them in a way that will be acceptable to new small companies. I recommend it to the House. There ought to be a rolling programme for small business initiatives. We need to introduce new ideas and improve what we already have. This would greatly help those small companies which hope one day to become large companies. At present, many of those who start or 1038 own companies are reluctant to the point of not taking advantage of what is available to them in the market place because of fear of losing control of the company. The new clause would present an answer which would be acceptable to them, and I hope that the Financial Secretary will give the idea due consideration, if not tonight then at some time in the future.
§ Mr. MooreIf anything could endear me to the new clause, it was the charming way in which my hon. Friends the Members for Hertfordshire, South-West (Mr. Page) and for Luton, South (Mr. Bright) did not seem to have much anticipation of its being accepted. If anything also could commend me to support their attitude, it was the unstinting effort that they have made, along with other of my hon. Friends, in arguing for the cause of the small business and the extension of the business expansion scheme, which they see as a major help.
The business expansion scheme is designed to promote new and expanded activity in the small firms sector by mobilising a new source of equity investment in unquoted United Kingdom trading companies—equity investment by individuals who are not otherwise connected with the company. By contrast, this new clause seeks to extend the relief to investment in such companies by way of loan capital. We see real difficulties with this, given the underlying aims and objectives of the BES.
The fundamental purpose of the BES, like the start-up scheme before it, is and always has been specifically that of helping to meet a shortage of equity finance that is thought to face small companies. It always has been very difficult to pin down the precise nature and extent of any financing gap facing small companies, but for many years there has been — and I believe still is — widespread agreement that the main problem facing small start-up and newly expanding companies is one concerning equity rather than other kinds of longer-term finance.
To extend the relief to investment by way of loan capital would, therefore, defeat the fundamental purpose of the scheme. Indeed, one of the uses to which companies may put the proceeds from a BES issue is precisely that of repaying loan capital and other borrowing, other than from the BES investors themselves.
There is a second major difficulty with my hon. Friend's proposal. As I said in Committee, BES provides a uniquely generous level of relief. The object of, and justification for, this is that of providing a big enough incentive to encourage outside investors to undertake the kind of very high risk investment for which the scheme is intended—that is, a minority holding of new, full risk ordinary equity with no prior or preferential rights, with no guaranteed return, and, even assuming the business succeeds, with no certain or obvious exit route.
I appreciate that some of the qualifying conditions in my hon. Friend's proposal would be similar to those that apply at present in the case of BES equity investment. The fact remains, however, that under this proposal qualifying loan capital would not be at risk in the various senses I have described to the same extent as BES equity capital. For example, loan investors would have an immediate return by way of interest, whereas equity investors would not, and the loan investors would have priority over the equity investors as regards repayment of capital. In addition to my concern that this proposal would defeat the 1039 fundamental purpose of BES. Therefore, I do not believe we could justify what is an extremely generous relief for this kind of investment.
We shall be reviewing the scheme later this year, once the results of the study are available. Clearly, it is too early to say what the outcome of this review will be, but I feel bound to say that, for the reasons I have explained, I see little prospect of our concluding that the scheme should be developed on the lines proposed by my hon. Friends.
While, therefore, I hear the words that they are uttering, I do not seek to give them too much encouragement, even at this late hour, and I hope that they will agree to withdraw the new clause.
§ Mr. Richard PageI thank the Financial Secretary for the gentle way in which he led me down the path of rejection. I had hoped that as he had accepted an earlier clause, he would accept this one, but obviously his generosity lasts for only a short time and then he reverts to the normal Treasury line.
The House will appreciate that because of the lateness of the hour, I did not spend long expanding the thoughts on and principles behind the new clause. For anybody wishing to start a new business, a range of financial tools should be available, and the new clause would have provided an extra implement to help companies get started. I emphasise the need to have the equity and the loan in a set ratio so that the two go together and are linked, but designed to allow somebody starting a business to retain managerial control. I am conscious of the remarks of my hon. Friend. I know that in the past ideas have been summarily rejected and later surfaced suitably garnished and embellished with more expertise in draftsmanship than I am able to bring before the House. On that hope for the future in my breast, if nowhere else, I beg to ask leave to withdraw the motion.
§ Motion, and clause, by leave, withdrawn.