§ Question proposed, That the clause stand part of the Bill.
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
Last year we extended the life of the business expansion scheme indefinitely and, in putting it on a longterm footing, we made a number of changes to focus the impact of the scheme more closely on its original objectives and to improve its operation. After such major changes we think that there is a good case this year for keeping further revisions to a minimum. I am glad that the changes we have proposed were welcomed by the Leader of the Opposition on Budget day.
Clause 45 is intended to reduce bunching of investment towards the last quarter of the tax year. As hon. Members will know, under the scheme relief is given for the tax year in which shares in a qualifying company are issued to an investor following subscription. Therefore, in order to obtain relief in any particular year, there is a deadline for investment of 5 April. Naturally, many people delay making their investment until near that deadline so that they have an idea of what their personal financial affairs are like towards the end of the financial year. For some it may be because they wish to minimise the length of time between paying for the shares and recovering the tax relief. Others may not have a clear idea until a late stage as to what their financial position for that tax year will be, so they have no idea how much money may be available or what tax relief they would get.
As experience of the scheme on the part of investors and promoters has grown, there has been an increase in the amount of investment earlier in the tax year, parti:ularly in the third quarter. However, there is no doubt that it remains more difficult for companies to raise equity under the scheme in the first half of the tax year.
There is no simple solution to the problem. Whatever deadline is set for the making of investments under the scheme, it is likely that there will be a concentration of investments shortly before it. Therefore, simply putting back the deadline would hardly help the companies concerned. However, we believe that the proposal now before the Committee will provide an incentive for more investment to be made under the scheme in the first half of the tax year.
We propose that an investor should be allowed to claim relief in the preceding tax year on up to half of any investments made under the scheme in that period, subject to a limit of £5,000 on the total amount of relief for all investments that can be carried back from any tax year to the previous one. To take advantage of that option, the investment would have to be made during the first half of the new tax year—between 6 April and 5 October. The normal limit of £40,000 on the amount of investment on which relief might be claimed for any one year would continue to apply. I do not suggest to the Committee that that change will eliminate completely the phenomenon of bunching. However, I believe that it will have a valuable impact and will make it easier for companies to raise business expansion scheme finance in the first half of the tax year.
§ Mr. John Maples (Lewisham, West)
I want to say a few words about the clause, but before I do I should declare 458 an interest. I do some work for a company that manages a business expansion scheme fund. I hope that what I lack in objectivity will be made up for by a little personal experience.
My hon. Friend the Economic Secretary described the problem fairly accurately but, in fact, there are two problems. One is in connection with BES funds and the other is in connection with individuals. The amendment to the law that he has proposed will go a long way towards solving the problem for individuals. There will be BES issues aimed at them in the first part of the tax year which will give them some relief in the previous part of the tax year, enable the sort of carry-over to which he referred and remove bunching. However, it does not solve the problem of BES funds.
I think that BES fund managers find that they cannot raise money for a BES fund until towards the end of a calendar year because people have no idea what their tax position will be and they want to leave it late. At the same time, the BES fund manager has to give himself room to invest the money. Most of us find that we cannot raise the money until about October in a calendar year and that effectively means that we reach Christmas by the time we have the money. Therefore, we have effectively three months to invest it. My practical experience of the company for which I do some work is that fund managers are running around looking for things in which to invest in March. That is a bad thing. It often means that money is thrown at deals that the scheme was not intended to help promote. The clause will not solve that problem. I shall explain why and ask my hon. Friend whether he will deal with it, if not on this occasion, at a later date.
The first problem is that if a fund is not fully invested by 5 April, the carry-over relief is of no use, first, because it applies only to half the uninvested amount and. secondly, because the maximum is £5,000. If an individual had put £40,000 into a fund and that fund was 75 per cent. invested by the end of the tax year, the carry-over relief would entitle him to a reduction of only £5,000, not the £10,000 remaining uninvested in the fund. The second problem is that, regardless of how much money one puts into the fund—even if one puts in only £10,000—one is still entitled to a reduction of only half the amount that is uninvested at the end of the year.
The clause represents an attempt to come to grips with a real problem, but it does not do so in respect of BES funds. Although most of the money that has been raised for BES issues in the past couple of years has been in one-off public prospectus issues, my hon. Friend would do well to consider trying to encourage people to make such investments through funds. There is a considerable amount of evidence that many public prospectus issues are put together specifically for the purpose of raising money under the business expansion scheme. They are not preexisting companies that are looking for development capital. Business expansion scheme funds are in a position to find the sort of investments that my hon. Friend wants to see made under the scheme. BES funds are in a position to seek out relatively small companies that are looking for £100,000 to £200,000. However, if a City institution is to promote a BES issue, it has to consider raising £2 million to make it worth the effort.
Not enough of the companies that one wants to help with BES are trying to raise that amount of money. 459 Therefore, the sorts of issues that are put together in public prospectuses to raise money under the business expansion scheme are — not always, but often — artificially put together solely to take advantage of the BES. One can however, say with a good deal of honesty that money that is raised by BES is often development capital that is genuinely needed in an existing small business.
Although the clause will help to solve the bunching problem for an individual and allow him to wait until the end of the tax year to see how much money he will have to pay on and therefore how much he should invest in the BES because of the relief that he needs, something slightly different is needed for BES funds. I ask my hon. Friend to consider proposing that, as long as the money is invested in a BES fund, perhaps not even by 31 March, but some earlier date such as 31 January in a tax year, the fund managers should have an additional four, five or six months after the end of the tax year to invest the money. In that way, one will encourage people to invest in BES funds and give BES funds a little more time to look for the sort of businesses in which they should invest and not find themselves in the last couple of weeks of March, scrambling around for deals to throw money into. If 5 April arrives and they have not done so, all the tax relief is lost and everybody—the managers and investors—will be in an extremely difficult position. I shall be grateful if my hon. Friend will consider introducing an amendment to that effect at some stage during the passage of the Bill or, if the Bill is lost, in the Finance (No. 2) Bill.
§ Mr. Tim Smith
There is always a slight danger, on occasions such as this when the Government introduce an extension to an existing tax relief, to say that it is all very well as far as it goes. The business expansion scheme has been a tremendous success. It is an imaginative tax relief, and it has encouraged an enormous amount of investment in new and existing businesses. Treasury Ministers at the time introduced it against fierce resistance from the Inland Revenue. Indeed, the original proposal was that tax relief would be only at the standard rate of tax. If it had been, it would have been stillborn. It is because it is a generous relief that it is a successful scheme. Can my hon. Friend give the Committee some idea of the amount of investment that has been encouraged by the scheme?
On occasions such as this one knows that there will be some abuse. However, we must consider the net benefit. The Government, quite rightly, when it has been clear that the scheme has been abused, have introduced restrictions on qualifying investment. Overall, it has been a successful scheme. Last year, I was glad when the Government decided to make it a permanent scheme. This relatively modest extension recognises one of the difficulties that has occurred — the bunching of investment and the artificiality that that brings, which my hon. Friend the Member for Lewisham, West (Mr. Maples) described. To some extent, the clause gets to grips with that problem.
It might be helpful if my hon. Friend the Economic Secretary would explain why the figure of £5,000 was chosen. I think that I am right in saying that the maximum relief available to an individual in any one year is £40,000. Having decided in principle that it is sensible to allow carry-back on any investment made in the first six months, there must be a case for saying that, that being half the year, one should allow half the relief to be carried back.
§ Dr. McDonald
In his Budget statement the Chancellor said: 460Last year I put the business expansion scheme on to a permanent footing. However, the present rules still produce too much end-year bunching of BES investments, and hence may crowd out some projects and lead to bad decisions on others. I propose, therefore, to permit someone who invests in the first half of the year to claim part of the relief against his previous year's income. This will make it easier for companies to raise BES finance throughout the year"—[Official Report, 17 March 1987; Vol.112, c.820.]Of course, that has been expressed in the clause.
If the Chancellor had been a little more frank, he would have said, "We tried to get people to invest in small new companies by offering them tax relief. Of course, because people wanted the tax relief, but not to take any entrepreneurial risk, they were only willing to invest in asset-backed enterprises such as private nursing homes. We did try to sort out the worst abuses last year, so give me some credit for that. However, because BES is seen as just a tax dodge"—hence its popularity, which the hon. Member for Beaconsfield (Mr. Smith) did not explain—"people have been thinking about investments only in the last three months of the tax year—January, February and March. This has meant that any half-baked scheme can raise cash in that period, but for the other nine months of the year virtually no project, however well thought out or beneficial to the nation, can raise a bean. Therefore. we shall patch up the BES a bit more by allowing people who invest in the period April to September to claim relief against their previous year's income."
The real question. if the Chancellor had been frank, is whether it is sensible to direct a state subsidy to investment according to the tax planning needs of wealthy BES investors — bearing in mind that the Peat Marwick report showed that 85 per cent. of recipients of BES relief were higher rate taxpayers — rather than some wide-ranging criterion such as the need to create jobs or to improve the nation's industrial performance. They are certainly the criteria that we would apply to any money that is given to support industry, whether directly by grant or through tax relief.
The Inland Revenue statistics for the latest year available, 1984–85 — this is from "Inland Revenue Statistics 1986" — show that 61 per cent. of all BES investment went into companies in the service sector, compared with just under 2.4 per cent. in manufacturing. I mention that, not out of any disrespect for the service sector, but to emphasise that manufacturing needs the greatest Government support. It is the area in which the Government have dismally' failed over the past eight years, as we see if we look at the huge losses in the manufacturing sector and note the Government's own forecast of a deficit. Britain has lost one fifth of its manufacturing sector and the Government expect a vast deficit of £8,000 million this year in manufactured goods. Therefore, it is manufacturing industry that needs the greatest support and encouragement if we are to avoid the expected balance of payments deficit this year.
The regional analysis of business expansion scheme money shows that the destination of just over one quarter of it was described as unknown. That cannot he satisfactory for any Government. Perhaps the Economic Secretary has done a little investigative work on this matter since the financial year 1984–85. If he has. perhaps he will tell us the destination of that quarter of BES money. Of the 74 per cent. that was traced, over 62 per cent. went to the prosperous south-east, 5.5 per cent. went to the north and north-west combined and only 1.6 per 461 cent. went to Northern Ireland. Those are extremely worrying statistics. The BES scheme weights the relief that is given at the expense of taxpayers in favour of schemes that have been brought into existence in the south-east of England. The BES does nothing to help the serious unemployment in the north and north-west and in Northern Ireland.
The total BES investment was about £140 million. Assuming that all investors pay tax at a rate of 60 per cent., this represents a Government subsidy of £84 million. That expenditure is large. It is important that £84 million of Government money is properly directed, but there is no indication that it has been. The Department of Trade and Industry figures for regional and general industrial support show a steady fall from £791 million in 1980–81 to £277 million in this financial year. Since 1984 a mere £370 million has been given by way of regional developments grants for eligible capital projects.
The Government have provided relief through a scheme that is heavily concentrated in the south-east. It benefits the better-off taxpayers and, as the hon. Member for Lewisham, West (Mr. Maples) said, means that tax relief will go to ill-thought-out schemes and will not be of great benefit to anybody except the taxpayers who receive that tax relief.
There must be better ways of spending £84 million. There must certainly be better ways of keeping track of Government money that has apparently disappeared to an unknown destination. I am sure that the Economic Secretary is extremely worried about that — or is he? Perhaps it does not matter if better-off taxpayers, the higher rate taxpayers, benefit from it. It matters only when we are looking at those who receive unemployment benefit or social security benefits.
The Government have allowed money to be spent—tax relief is a form of spending-without proper checks. This is an ill—directed scheme and it is high time that it was examined once again to see whether there are better ways of giving support to industry, especially in the deprived regions. Instead of accepting the assumption made by either the hon. Member for Lewisham, West or the Economic Secretary that this scheme is permanent, I hope that the Minister will think again. He is prejudging the outcome of the general election. This scheme requires careful examination and we need a redirection of that £84 million.
§ Mr. Ian Stewart
A number of points have been raised during the debate. The hon. Member for Thurrock (Dr. McDonald) concentrated on her dissatisfaction with the way in which the business expansion scheme works in practice. It is inherent in any scheme of this kind that full information becomes available only gradually. It is important that as more information about past years becomes available to the Inland Revenue the Inland Revenue and Ministers should consider the implications of that. From time to time we should, if need be, make adjustments to the scheme to take account of the information that becomes available. That is what we have done.
In earlier Budgets we tightened up the focus of the scheme to deal with the problem of asset backing. In this Budget we made the change by way of the clause that we 462 are discussing about the timing of the investment. I do not think that it is an ill-directed scheme. Funds should be available, and are available, through such a scheme to small and growing companies that need the funds for investment. I disagree fundamentally with the hon. Lady that it would be sensible to try to direct the tax relief to a specific sector such as manufacturing. I hope that more manufacturing and other sorts of companies will be able to take advantage of the scheme, expecially in view of the change that we are now making.
The whole of manufacturing industry is becoming increasingly profitable, and that is the best way to encourage the growth of that industry. When that happens, no doubt more companies within it will look for extra finance. The hon. Lady spoke about 62 per cent. of the money being spent on the south-east. The location is determined by the registered office of the company, not necessarily by the operating area of its activities. Therefore, the fruits of the investment may occur anywhere in Britain, and no doubt frequently do.
§ Mr. Tim Smith
I was not aware of that important piece of information. Many new or very small companies are extremely unlikely to have their registered offices at the same location as their place of operation. Many of these funds raise their capital in London and are London-based and, of course, their registered offices will often be in the London area. However, the investment might well be elsewhere. Can we get a better survey to find out where these businesses actually are?
§ Mr. Stewart
The more information that we can obtain on the operation of the scheme the better. I have already said that. As the tax relief relates to the investment in the company itself rather than to the activities that are carried out by the company, it is inevitable, as my hon. Friend said, that the figures will come forward on the basis of the registered office of the company.
§ Dr. McDonald
The Minister speaks about registered offices, but presumably tax relief is given for a specific scheme. Therefore, one surely knows, not just the location of the head office, but the purpose for which the scheme is designed. I spoke about private nursing home schemes. Presumably one knows the location of the various nursing homes for which relief might be given through a scheme of this sort. Is the Minister saying that he has information only about head offices, and has no information about the purposes of the scheme for which tax relief is given? Surely a geographical element must come into the matter, at least for some schemes, if not for every scheme.
§ Mr. Stewart
The Inland Revenue does not have information on where the activities of a company as a taxpayer take place and whether it operates through the benefit of business expansion scheme finance or through any other scheme. Such information is not available in the form that the hon. Lady seeks.
I have said, and I repeat, that it is important for us to continue to obtain as much information as possible about the scheme as it goes along. The Peat Marwick report referred only to the operation of the scheme in its infancy. I have no doubt that we shall want more information as the scheme develops, especially in the light of the changes that we have made during the past two years, because we shall wish to see the way in which those changes are reflected in the behaviour of investors and, indeed, in the 463 behaviour of the companies in which the investment is made. I do not think that there is any difference between us about the desirability of such information, but the matter is not nearly so straightforward, or the information so readily available, as the hon. Lady implies.
My hon. Friends the Members for Beaconsfield (Mr. Smith) and for Lewisham, West (Mr. Maples) raised several points about the proposal in clause 45. My hon. Friend the Member for Beaconsfield asked why the figure of £5,000 was chosen for the amount that could be carried back. My hon. Friend the Member for Lewisham, West complained that only £5,000 could be carried back, and also that it applied to only half the figure. I should like to comment on those points, but before I do so I should like to mention the actual figures. For 1984–85, which is the latest year for which full data are available, a total of 807 companies benefited from the scheme and the amount raised was approximately £150 million. Information on the following year, 1985–86, is not yet complete. However, the indications are that the figures are likely to be considerably higher than they were for 1984–85.
The Peat Marwick report on those figures concluded that the great majority of those funds would probably not have been raised by other means if the business expansion scheme had not been available. Clearly, the scheme has had an important impact in that respect, and has helped smaller businesses and companies to get going in a way that otherwise would not have been open to them. That fully justifies the initiative that the Government took in introducing the scheme.
Let me now deal with the figures. The evidence for the years completed so far, which is all that we have to go on at this stage, is that 80 per cent. of all investors put in sums of up to £10,000 a year. Therefore, £5,000 will be half the figure that covers 80 per cent. of all investors. Although one might argue for another or a higher figure, it is clear that, in the great majority of cases, the figure of £5,000 will be significant and will cover the amounts involved.
My hon. Friend the Member for Lewisham, West made a particular plea on behalf of the funds and said that he thought it would be helpful to have a different regime for the funds because, by their nature, they could spread risk and find investments more readily than could individuals who were looking for direct investments. I beg to differ on that point. I do not in any way wish to denigrate the funds, which have played an important and useful role, but they should not be given special advantages over individual direct investments. In fact, we are in favour of investment of both types. The arrangements that we are now introducing will make such investments easier because, as I have said, it will not be necessary for an individual to wait until the end of the tax year before making an investment that he knows can be set against the taxable income that has already been earned because it fell in the previous year.
Wherever one puts the cut-off date, there is bound to be bunching before the date concerned. However having said that, we shall obviously keep that under review—as, indeed, we have done the entire operation of the scheme 464 so far. As I said in my introductory comments, the provisions will not necessarily remove all bunching, but they will have a significant effect. If, during the first half of a new tax year, someone knows his taxable income for the previous year, he will now, up to a figure of half of £10,000 — be able to make an investment that will be usable, retrospectively, for tax credit against the previous year, the earnings for which he should know by that time. That should benefit individuals and fund managers. I do not think that it is beyond the ingenuity of fund managers for the BES to work out the best ways of taking advantage of the new proposal.
§ Mr. Maples
The point that I was trying to make was that this amendment is of no relevance to the BES funds, for the reason that I gave. I understand that My hon. Friend wants the same tax regime to apply to individuals and to BES funds, but the amendment to the law that he is proposing will not be of any benefit to the BES funds, because in no circumstances will they be able to carry over uninvested funds from the end of one tax year to the first half of the next.
§ Mr. Stewart
The value of the funds is not only to the companies in which they invest, but to the people who invest in them. To the extent that it is easier for those who invest to make such investments at different times of the year, which they cannot readily do at the moment, the provisions are bound to make it easier for the funds to raise money at times other than later in the tax year. The earlier in the tax year that the funds can raise the money, the longer they have to make the underlying investments themselves. Therefore, although the benefit is not directly available to the funds as a result of what we are doing, the advantages to the investors will, by definition, make it easier for the funds to raise money throughout the year.
I do not want to deny that my hon. Friend has a point in emphasising that there are different considerations between funds and individuals. However, I am not persuaded that we should make a separate regime for individuals and funds, because I am in favour of encouraging individuals also to make direct investments through the business expansion scheme. It should be possible for the funds to gain some of the benefit of the willingness of individuals to make investments in the first half of the year, which are encouraged by the clause, and which otherwise they might he reluctant to make. On that basis, I hope that we shall have my hon. Friend's support, and that of others, for the clause.
§ Question put and agreed to.
§ Clause 45, order to stand part of the Bill.
§ Bill (Clauses Nos. 11, 18, 20 to 23, 33, 45, 147 and 160 and Schedule No. 4), reported, with amendments; to lie upon the Table.