§ Mr. Chris Smith (Islington, South and Finsbury)
I beg to move amendment No. 4, in page 32, line 14, leave out `14th March 1989' and insert '15th March 1988'.
It is important at the outset to sketch the background to the clause and the amendment that we are discussing. By means of clause 44 the Government are closing a loophole that gives enormous scope for abuse. We welcome the change but we wish to see the restriction biting harder and operating retrospectively to Budget day 1988 rather than Budget day this year.
We have long been highly sceptical of the merits of the business expansion scheme. It was established under the Finance Act 1983, supposedly to encourage risk investment by individuals in new equities. It was designed supposedly to close the equity gap that everyone agreed existed at that stage and that still exists. It provided for substantial tax incentives, with tax relief on income tax at the highest marginal rate. The highest rate is now 40 per cent. At that time it was 60 per cent. It is worth noting that the 60 per cent. provision persisted until 5 October last year, six months after the band itself had disappeared in the Budget changes.
In addition to income tax relief on business expansion scheme investment, there is full capital gains tax relief on disposal, provided that the investment was taken out after 1986. For investment before 1986, slightly different rules apply. In other words, the business expansion scheme gives scope for two lots of tax relief—tax relief on income in relation to the initial investment, and tax relief on capital gains in relation to the profit made by the investment over a five-year period. Not surprisingly, as a result of the generous double relief thereby available, the business expansion scheme has become a means of tax avoidance for higher rate taxpayers rather than of raising capital for risky but good quality new companies.
Last year, in debate on the Floor of the House and in Committee, we spelled out our concerns about the business expansion scheme and the way in which it was developing. We highlighted research which was published last year by the Small Business Research Trust. That research revealed a number of worrying factors in relation to BES investment. First, it noted that there was an increasing use of the business expansion scheme for 877 asset-backed and non-risky enterprises, predominantly in the wholesale, retail, real estate and leisure sectors of the economy, not in manufacturing.
Secondly, the report revealed that BES investment was increasingly the preserve of top rate taxpayers. It started out in the first year of operation as a relatively low percentage of top rate taxpayers; it is now almost exclusively the preserve of people in that economic bracket.
Thirdly, the Small Business Research Trust revealed that there were profound regional inequalities in BES investment. For example, 51 per cent. of all BES investments and 65 per cent. of invested BES capital went to the south-east and East Anglia between 1983 and 1986—way above the proportion of normal investment and capital in those regions" share of the overall national economy.
Fourthly, the Small Business Research Trust revealed that, as well as having the lion's share of BES investment, the south-east and East Anglia were attracting BES investment funds from the north. In other words, the BES was ensuring a north-south flow of capital, precisely the reverse of what we should be endeavouring to achieve in our economy with an underheated north and an overheated south. Most investors in the BES live in the south-east, but an even higher proportion of BES investment is placed in the south-east.
The authors of the Small Business Research Trust document published last year have since updated their work and, in a report in the Financial Times last Monday, they confirm that changes that were purportedly made by the Government last year to encourage greater investment outside the south-east have not had that effect.
The Financial Times on Monday reports:A limit of £500,000 per BES issue per year imposed by Mr. Nigel Lawson … in the 1988 Budgetthat was the principal change for the better introduced by the Government last year—will not have much effect, the researchers say. The limit was designed to encourage more investment outside the south-east but the region had 352 investments worth under £500,000 in its first five years out of a national total of 712.In other words, despite the Government's intention of using the £500,000 limit brought in last year to encourage investment under the BES outside the south-east, it is extremely unlikely, according to the research carried out by Southampton university and the university of Ulster, that it is having that effect.
The fifth point that that report last year drew out was that the cost per job created by BES investment was increasing as the scheme developed year by year. Even in 1983–84, the cost per job created was higher than that for other small firm schemes, and in subsequent years that disparity got worse.
All those criticisms of the BES—the regional inequality, the north-south flow of capital, the increasing use of asset-backed non-risky enterprise, the increasing preserve of the top rate taxpayers and the increase in the cost per job created—still apply. They apply the more so because of the principal change that the Chancellor made last year.
That change was to expand the BES, and the tax relief available under it, to the acquisition and letting of private rented property under the assured tenancy scheme introduced under the Housing Act 1988. The great 878 majority of BES investment now goes into precisely that form of investment—into the private rented property scheme.
That is not surprising. There is, for a start, a much higher limit on the overall BES investment for private rented property than there is for any other sector, with one exception. That higher limit for private rented property is £5 million per scheme, rather than the limit of £500,000 which exists for other sectors of the economy.
Secondly, investment in property is almost entirely asset-backed; it is far less risky than investment in other sectors. Thirdly, it is virtually entirely non-productive. Fourthly, it rests on the prospect of escalating property values.
The impact of interest rates currently means that property values may not be escalating as fast as they have in the last three years, but that position will not last for ever. Since 1978, the retail price index has risen by just under 100 per cent., whereas property values have risen by nearly 400 per cent. The return from investment in property, as opposed to investment in most other sectors of the economy, is considerably more lucrative.
Investment under the private rented property scheme of the BES is based on assured tenancies, which in fact are anything but assured. For example, schedule 2 of the Housing Act 1988, which applies specifically to assured tenancies, reveals that there are 16 different grounds on which a landlord letting property under assured tenancy rules can obtain possession of that property from the tenant.
Indeed, those facts were spelled out in many of the documents promoting BES investment put out by BES financiers during the last year, and I will give just one example. Chancery Securities plc, in its description of the investment that is available to the BES investor, sets out in clear detail the grounds for claiming possession, either on mandatory or discretionary grounds, as spelled out in the Housing Act.
It is clear from the way in which BES investment in private rented property has been marketed that investors are expected to use those grounds to obtain possession from tenants when they wish to do so. Those same prospectus spell out the ease with which a BES company can at the end of the five-year period, after which capital gains tax relief becomes available, transfer the property that it owns, thereby releasing the capital gains to the benefit of its investors.
The Johnson Fry plc "Bulletin" for July 1988 set out on page 6 the details of how it is effectively possible to buy out tenants at the end of a five-year period. The Assured Property Management plc prospectus sets out a number of exit routes, as it describes them, whereby a company can be sold to a third party for cash, exchanged for shares in another company, or its assets realised and the proceeds distributed to its shareholders in a liquidation. Alternatively, it is suggested that the company might seek a public quotation on the stock market and merge with other companies for that purpose. A variety of different devices are available whereby a BES company's profits can be realised at the end of the five-year period, thereby freeing the investment for profiteering by its individual investors.
The entire scheme is a recipe for bad landlordism, for tenant insecurity, and for pocketfuls of tax relief for top rate taxpayers. When that change to the scheme was 879 announced in last year's Budget and private rented property was included, even the Evening Standard noted that various commentators were saying that the schemecould become Britain's number one tax shelter.Referring to the provision for private rented property, the article concluded:Rachman, one suspects, would not have been slow to take advantage of the scheme if it had been around in the 1960s.The predictions made in the Evening Standard in March 1988 are coming true. The opportunities offered by the BES to invest in private rented property have totally distorted the BES market. The vast majority of such investment is now being made in assured tenancy properties. That is the background to the specific subject of the clause and the amendment.
§ Mr. Matthew Carrington (Fulham)
The hon. Gentleman makes a number of allegations about BES landlords. Can he produce evidence to show that BES landlords are behaving anything remotely like the way in which Rachman behaved?
§ Mr. Smith
The BES scheme offers an opportunity for bad landlordism in a way that no previous tax shelter opportunity did. The hon. Gentleman will be aware that, because of the five-year rule applying to BES investments, there is no point in a landlord seeking to regain possession of his property during the first year of the scheme's operation —and it is only in its first year of operation now. Only in the fifth year will such action have any point. I suspect that landlords who have established property under the BES will use all sorts of devices to get their tenants out. I also suspect that a good deal of that will be happening in the hon. Gentleman's constituency, and his constituents—who, we hope, will have voted in a different Member of Parliament by then—will doubtless reflect on his remarks.
It has become obvious over the past year that a massive abuse has been in operation—even by the standards of the already "abusive" device of the private rented property scheme. Through the use of a close company structure with a total of nine shareholders, tax relief was becoming available not only on BES investment itself, but on the interest on the borrowing. Triple tax relief was available, especially to an investor putting his money into private rented property: relief on income tax on the investment, on income tax on the borrowing and on the tax on the capital gain after five years.
An additional bonus available to the investor, indirectly rather than directly, was the small company rate of corporation tax, which, in the case of close companies, would be applicable rather than the large company rate. Some of the BES marketing plans attempted to link BES investment with pension fund investment to provide even more scope for relief. With such enormous scope for tax relief, it is not surprising that the BES, with the use of the close companies' device, was being marketed aggressively in the latter part of the last financial year, and in the run-up to the Budget in particular.
880 Let us consider exactly what this scheme would mean. It is worth dwelling in some detail on an example that reveals the exact nature of the abuse. Let us suppose tha someone invests £40,000 of his income, at a top marginal tax rate of 40 per cent., in a BES property venture. On that investment he receives tax relief at the highest marginal rate, amounting to a total relief on the investment of £.16,000.
To invest his £40,000 the investor borrows the entire amount, using the close company device, incurring interest payments of £6,000 a year and receiving tax relief on the interest as well as on the investment. He receives £2,400 a year in tax relief, amounting over five years to a total of £12,000. In the course of five years, he has thus obtained £28,000 in tax relief. The total cost of the interest that he has paid out is £30,000. The net cost to the investor, who has not put one penny of his own money into his BES investment of £40,000, is £2,000.
The investor requires a return of 5 per cent. over five years on that investment to recoup its entire cost. Of course, a growth of only 1 per cent. in that investment is extremely unlikely. Let us be moderate in our projection and assume that the investment grows by 10 per cent. a year. At the end of five years that £40,000 investment is worth £64,420. That represents a capital gain of £24,420. The cost to the investor who has not put in a penny of his own money has been £2,000 over five years and his tax-free capital gain after five years, on a conservative estimate, is £24,420. That profit will have been made almost entirely at the expense of the taxpayer, as it will have been made on the back of £30,000-worth of lax relief by using the device of the close companies system.
The people who were responsible for devising and marketing the operation have not been blind to its attractions for those who invest. Mr. Charles Fry, the chairman of Johnson Fry, which has been in the lead in marketing such operations in the past six months, in a press release on 10 January 1989 said:The opportunity to invest in our … Companies, with their tax advantages, guarantees and no requirement to invest a penny of the client's own cash, must broaden the market tremendously. Indeed, there would seem to be no way in which a high rate taxpayer can make a case for not investing; unless, of course, he believes that residential property will fall over the next five years.That is an extremely unlikely eventuality, the risk is extremely low and the use of the close company device has become money for old rope for an investor who takes advantage of it.
I wrote to the Chancellor on 3 March demanding that he took action to close the loophole in the Budget. The final paragraph of my letter stated:This cannot possibly have been your intention when introducing the scheme last year. Variations of this scheme are being marketed in a pre-Budget frenzy by—amongst others—Johnson Fry, Allied Dunbar and Centreway Development Capital. They are, not surprisingly, being snapped up. Frankly, this is a gravy-train for top-rate taxpayers and has nothing whatsoever to do with risk investment to close the equity gap which is what BES was supposed to be all about when it was launched. I very much hope that you will take action to end this abuse on 14 March.Therefore, we were very pleased that the Chancellor took action on 14 March to end that abuse. Clause 44 of the Finance Bill does away with close company relief where it is being sought in connection with a BES investment. However, we do not believe that clause 44 goes far enough. That is why we have tabled amendment No. 4, which seeks to backdate the closing of the loophole.
881 Some will doubtless argue that retrospective tax legislation is always wrong. We agree that in general terms it is to be avoided, but Governments of all political persuasions have used it in the past. Indeed, the Finance Bill contains one provision which might be deemed retrospective. The close company abuse of the business expansion scheme represents so much of an abuse that it is a special case because, first, it is not just one tranche but two of evasive relief. Secondly, quite clearly, when the Government introduced the private rented property scheme last year, they did not intend to enable close companies to be used in that way. Thirdly, the abuse has been especially focused on the assured tenancy operation; to my knowledge it has not been focused on any other sector of the economy using BES provisions. Finally, it has enabled top-rate taxpayers to profiteer at the expense of the generality of ordinary taxpayers.
There is no logical, moral, social or financial justification for that loophole; nor was there any last year. That is why we believe that the loophole should be closed not just now but from last year's Budget day, and I urge my hon. Friends and Conservative Members to support amendment No. 4.
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
The hon. Member for Islington, South and Finsbury (Mr. Smith) began by saying that the Opposition have long been sceptical of the business expansion scheme. I am not sure how long he meant. I well remember that the Leader of the Opposition welcomed the expansion of the business expansion scheme in 1986 and 1987. It was only in 1988, when we placed some restrictions on the business expansion scheme, that he began to criticise it. When we expanded the scheme he was in favour of it, but when we restricted it a little he became more critical. I do not think that that stands up to what the hon. Gentleman said.
It is a pity that the Opposition cannot take a more positive view of the business expansion scheme, which has altered the venture capital business in Britain. It has encouraged more people to invest in the stock market and in unquoted companies and small businesses. One of its main functions has been to educate the investing community and the City institutions. More than £1 billion has been raised since the scheme started, and that is a welcome development.
The hon. Gentleman quoted a number of points from the Small Business Research Trust reports of last year and this year, but he did not quote from the Peat Marwick study into the scheme that we commissioned and which produced its findings in 1985. It is significant that Peat Marwick discovered a high degree of additionality. It discovered that 70 per cent. of the money invested in small businesses and small companies would never have been raised if the BES had not existed. The figures for individuals were even higher, showing that 94 per cent. of the amount invested by individuals under the BES would not otherwise have been invested in those companies.
Not only has the venture capital business with tax relief developed, but a venture capital business that is not dependent on tax relief has developed in Britain. The venture capital business in Britain is more advanced and bigger than that in other European countries, and is probably the biggest outside the United States.
§ Mr. Chris Smith
The Financial Secretary cannot get away with continually quoting the Peat Marwick report, which considered only the BES's first year of operation. The Small Business Research Trust report, which was published last year, on the first five years of the scheme's operation revealed that profound changes had been made in its nature and scope since the Peat Marwick report.
§ Mr. Lamont
The hon. Gentleman has anticipated that I am about to deal with the report of the Small Business Research Trust.
§ Mr. Denzil Davies (Llanelli)
The Financial Secretary said that without tax relief those investments would not have been made. Given that this is a tax-cutting Government and given their dedication to the market and popular capital, why was it necessary to have additional tax relief? Why did not entrepreneurs invest anyway?
§ 5 pm
§ Mr. Lamont
For many years, institutions have been geared to stock market investment. Britain has been hampered by a lack of development institutions investing directly in unquoted companies. Although we have a highly developed capital market for large business, the fact that the capital market has not functioned quite so well for small and unquoted businesses has been recognised as a long-standing problem.
The hon. Member for Islington, South and Finsbury referred to a number of comments made by the Small Business Research Trust. It said that the BES had produced more investment in the south-east. That may be regrettable, but it is hardly surprising, because the report states that there are more entrepreneurs and industry in the south. A common feature of national tax allowances is that take-up is greatest in the south-east. The limit on the size of investment to £500,000 that we made last year may, in the long term, spread investment more widely. The assured tenancy is already spreading interest more widely. The hon. Gentleman is not in favour of the extension of the BES to assured tenancies, but—perhaps to a surprising degree—it is producing much interest in property investment not only in the south-east but in the north and Scotland. There have been many BES schemes for housing in the regions and Scotland.
The other point that the hon. Member for Islington, South and Finsbury made about the Small Business Research Trust report was the cost per job of the BES. The BES is not, and was never intended to be, a regional or employment aid. It is designed to encourage entrepreneurship and investment in small companies.
Last year, when we made changes to the assured tenancy and introduced the £500,000 cap, some people predicted that, taken together, the two measures would effectively mean the end of the BES as a source of equity finance for non-assured tenancy companies. It was thought that they would swamp the BES, but that has not happened. Preliminary figures show that over £50 million was raised by BES trading companies. Of course, a considerable amount of that has gone into assured tenancies—and we are pleased about that—but £50 million is a lot of money when one bears in mind that it has been invested in projects with an investment limit of £500,000.
Interestingly, the latest figures show that investment in projects of £500,000 and less has held up extraordinarily 883 well and is higher than two years ago, which is an encouraging development. As my hon. Friends will recall, we made that change because we thought that the purpose of this tax relief should be to concentrate help on the smallest companies. To a considerable extent, the signs are that that is beginning to happen.
§ Mr. David Shaw (Dover)
Will my hon. Friend accept, from a practitioner who has started new companies under the BES and been involved in companies that would not have started without it, that it has been a major success? It has helped many companies get going for the first time that would not otherwise have done so. It has helped many young people to get into business who would have been unable to do so because they did not have a track record.
Does my hon. Friend accept—he mentioned this during consideration of the Finance Bill in Committee last year —that the £500,000 limit needs to be kept under constant review so that it can be improved to enable more people to put more money into high-risk companies?
§ Mr. Lamont
We shall keep the £500,000 cap under review. We made many changes to the BES last year and therefore wanted it to settle down a bit. One of the criticisms that have been made of us, which is quite telling, is that we have made an awful lot of changes. There is something to be said for letting the scheme settle down. My hon. Friend rightly said that the £500,000 cap must be judged not only against the size of a business and inflation but against the costs of making a prospectus issue, which is the point that my hon. Friend had in mind.
We estimate that in 1988–89 about £400 million was raised for the scheme, a large part of which was invested in private renting, which has built up more rapidly than we forecast. It is too soon to know how much was raised privately for assured tenancies, but the signs are that many schemes were set up by small groups of individuals. The money will go to a wide variety of properties over a wide geographical spread. The precise number of dwellings provided depends on the price paid, but it could easily be in excess of 6,000. The first BES rented homes are available, so the benefits of the policy are already being felt.
The reason for such tax relief is similar to the answer to the question asked by the right hon. Member for Llanelli (Mr. Davies) about encouraging people to invest in small companies—to alter attitudes and investing habits. For decades, there has been a hostile climate to investment in privately rented property, which is why we introduced this relief. We are pleased that it has been dramatically successful.
One development that has not been so welcome, which leads me to the proposed change, is that a substantial proportion of the money raised this year was invested in public offers that made use of close controlled companies. Under existing law, an individual can obtain tax relief on the interest paid on loans taken out by shares in a close company. Interest relief is important to help close companies, which are often small family concerns, raise money for growth. Previously, the relief was available even if shares qualified for tax relief under the BES. The combination of tax relief on the investment and the interest is excessive. The schemes that were being marketed were not small family businesses for which interest relief was justified but artificial arrangements. A degree of ingenuity was used to create the schemes, but they were 884 artificial. I agree with the hon. Member for Islington, South and Finsbury that this relief is excessive, which is why we have decided to end it.
Amendment No. 4 goes further and removes interest relief for shares acquired on or after 15 March. The hon. Gentleman will not be surprised to hear that I do not think that that could be justified. I may object to the success of tax relief, but there is no doubt that the people who framed the schemes acted within the law. The development of and rush of money into this device occurred in the last couple of months of the financial year. It was good of the hon. Gentleman to write to us on 3 March, but it was only about a week later that we chose to act. The provision would have been retrospective if we had brought it in before the end of the financial year. I do not think that that could have been justified.
The hon. Gentleman has said that there are cases in which retrospection can be justified. Those cases are rare and in tax matters, the only circumstance in which retrospection can be justified is where it remedies a technical defect so that the law is altered retrospectively to what everyone thought it was. Occasionally, there have been such alterations in tax law. However, one cannot penalise individuals who have made investments and commercial decisions on the basis of existing law. It is up to Parliament to ensure that the law is right and that is why we propose to alter the relief, which is excessive—as the Opposition say.
§ Mr. Chris Smith
The Financial Secretary made an interesting point when he said that retrospection appeared to be sensible only when it was a matter of altering the law to be what everyone thought it was. He has already admitted that it was only through the ingenuity of certain individuals and financial houses that the close companies route was discovered last year. It was only in the last couple of months before the Budget that there was a sudden marketing of that route as an option. Are those not precisely the circumstances that the Financial Secretary has said would justify retrospective legislation?
§ Mr. Lamont
No. The people who used the scheme were quite clear about the law and felt that they were using the law in a legitimate way—as they were. But the tax relief available was excessive. That was a new phenomenon. The hon. Gentleman said that he had spotted it, although he did not write to us until 3 March. It was very much a rush of money in the last two or three months before the Budget. I should point out that the tax loss was about £5 million a year, but I do not think that the principle can be compromised by the amount of money, because the principle itself is important. That is why I cannot accept the Opposition amendment, although we favour the ending of this excessive relief.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
I share the Minister's view in one particular. I do not think that it would be right to accept a retrospective amendment. I agree with hon. Members of both parties who have spoken so far that—
§ Mr. Beith
It is typically Liberal. I do not know why it should be thought funny or undesirable that all members of the Committee should agree. Many people outside the House would find their lives easier if all hon. Members 885 could agree on more matters. On matters of tax law, people would find their lives simpler if we could reach a reasonable degree of agreement.
It is agreed generally that the ability to take advantage of close company tax relief and the business expansion scheme tax relief at the same time provides an unacceptable degree of tax relief. It is not odd that we all agree on that. However, the difference between us on retrospection is important. As a typical Liberal, I believe in the rule of law, that people should be able to know what the law is and that they should not be penalised if they abided by the law as it was at the time. I know that that is not the view of the Labour party and that if there were a Labour Government, they might wish to legislate retrospectively on a variety of matters. Clearly, the Labour party believes that retrospection is undesirable, but I take a stronger stand against it.
Let us consider the Secretary of State for the Environment. If we were to accept the proposition that we should all be happy that the law was changed if it turned out not to be what the Government thought it was, the Secretary of State for the Environment would be here day after day because he is always getting the law wrong—as he has this week. He would constantly wish to indemnify himself by retrospective legislation. The Financial Secretary went too far when he said that it seemed reasonable to have retrospective legislation when it was a question of what people thought the law was at the time. The law is what it says. It may be that no one noticed that the close company provisions could be tied up with the business expansion scheme, but that was within the law. If the Inland Revenue had looked it up in its books, it would have been found to be the law. The final judgment would be for the courts, but the Revenue would have had to accept that that was the law and that it simply had not noticed what it was. The proposition for retrospective legislation to bring the law back to what people thought it was is dangerous and I hope that the Financial Secretary will revise his form of words in future speeches. I cannot support the Labour amendment, although I share the objection to the abuse.
§ Mr. Norman Lamont
I must make myself clear. The form of words I used was that the only examples I could think of where retrospection had been used in recent years in tax law were of the kind I described. I would, of course, in no way advocate retrospection that had an adverse effect on individuals.
§ Mr. Beith
There is an interesting example of retrospection going through the House at present, which is the Police Officers (Central Services) Bill, which contains retrospective provisions deeming the law some years ago to have been what it is now and which have been included because they are thought to be to the benefit of individuals. Retrospection is dangerous territory and we are right to keep out of it until there are overwhelming reasons for it, which are rare.
I do not share the Labour party's general hostility to the principles behind the business expansion scheme. There are many things wrong with it, but it is highly desirable that we should encourage more direct investment in industry and business, that we should widen the range 886 of shareholders and that we should widen the sources from which venture capital can come to help small businesses in particular. The scheme has had a number of serious shortcomings, although none of them seems to add up to a reason not to persist in trying to bring its advantages to those for whom it was originally intended.
I hope that the Government will accept that there are a number of loopholes apart from the one with which they have dealt. One has been mentioned already, which is the unsatisfactory aspect of the use of the business expansion scheme for assured tenancies. It would be open to a company whose main business activity was to acquire rented property and rent it out under the business expansion scheme to put up the rents after five years to such a grotesque extent that no tenant would wish to remain. By that means, the company could acquire properties quickly and dispose of them, thus defeating the Government's objective for the scheme to be a means of attracting venture capital into privately rented housing.
Again, I have a different approach from some Labour Members. It is desirable to attract more capital to rented housing because there is a great shortage of it. There are several ways in which we could deal with that shortage. More public housing could be provided—I object to the Government's great restriction on the provision of publicly rented housing—but the private sector has a part to play. The rules of the business expansion scheme provide insufficient protection and that is why I tabled amendment No. 6, whose purpose is to ensure that the business expansion scheme relief will not go to landlords whose assured tenancy provisions include an opportunity for a rent review at the end of five years, taking rents above the market level. I hope that the Financial Secretary will look more carefully at that aspect of the business expansion scheme.
It would also be desirable for the Financial Secretary and his colleagues to look at other ways of making the scheme attractive to non-property companies. Although there is merit in expanding the rented housing sector, it is so much more attractive an investment, because it combines the reliefs with the tangible assets of property, that the purpose of the scheme—to bring venture capital to risk areas of manufacturing industry—is likely to be wholly defeated. The capacity of the business expansion scheme to attract new capital will be largely used up in the area where the risks are least and the potential gains are greatest. The Minister should recognise that and do something about it.
We suggest that the rate of tax relief on schemes involving property should not be as high as that on the rest of the business expansion scheme. At the moment, the scheme is heavily tilted towards property investment.
As was spelt out clearly in an article in the Financial Times, the scheme is still not working to the benefit of the regions in which there is a serious need for venture capital for new businesses—particularly areas such as the north of England. It is noticeable that, even with a £500,000 limit, the south-east has almost 50 per cent. of the qualifying investments, and some of the capital for those investments comes from the very regions where it is most needed.
One of the failings of our economy is that we still do not seem to be able to relate capital generated in deprived regions to investment in an expansion of those regions. Some of the regions with the most serious economic problems—the north of England, Scotland and Wales—have a strong tradition of savings; a degree of capital is 887 maintained by the thrifty and careful. An obvious illustration of that is the power and strength of the Trustee Savings bank in Scotland, which testifies to the willingness of the Scottish people to save.
We have somehow failed to match savings and investment in business in the regions where it is most needed. The business expansion scheme should be the vehicle for that purpose, but it is not yet meeting the needs.
I hope that the Minister will consider ways of making the business expansion scheme more effective and less heavily tilted towards investment in property. If he does not do that, it will cease to fulfil its most important purpose. Having said that, I must advise my right hon. Friend and hon. Friends to oppose amendment No. 4 because it would yet again introduce retrospective legislation.
§ Mr. Battle
We are entitled to ask for a clear and detailed statement of the evidence of the impact of the business expansion scheme, and what contribution it is making to the economic restructuring that we all know is taking place. Is it contributing to geographically unequal and uneven economic development? The Financial Secretary said that the scheme was not an aid to tackle unemployment or an instrument of regional aid. That being so, where is the investment going and what sort of businesses are being invested in? To use a word that the Government regularly use, where is the targeting in this instrument of intervention?
The business expansion scheme is beginning to expose not only the Govenment's total lack of regional policy but the fact that the only instrument of intervention that they are prepared to use is tax relief that is indiscriminate except that it goes to those with the most means. It is ironic that the only form of intervention that the Government will make in their free market experiment is by means of tax relief to those who do not need it.
Where is the detailed evidence of the effects of the business expansion scheme? I seem to remember that the Government were very concerned about the spending of public money locally when it came to another instrument of intervention—urban policy and the urban programme. Let me give an example from my own city of Leeds, where the urban programme money accounted for 1 per cent. of the council's budget, or £4 million a year. Yet two years ago the city council, the voluntary bodies and the private sector bodies which took funds in partnership from the urban programme were required to fill in forms to spell out precisely how every penny of that money had been spent. I am inclined to ask the Financial Secretary to provide us with a similar annual monitoring report on the business expansion scheme. As tax relief, the money comes from the Treasury; it is public money and we ought to be able to ask that it be accounted for.
I agree with my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) that the research done at Southampton university and at the university of Ulster at Jordanstown shows not that the scheme has proved to be a neutral or indiscriminate form of intervention but that it has reinforced the existing social and economic divisions in our society. It has acted as a bulwark in building those divisions into our economic structure. In other words, the BES is worsening the north-south divide in Britain, which seems to be the opposite of the Government's declared intention.
888 There is a drift from north to south in equity investment raised under the business expansion scheme, and the researchers at Southampton are reported as having said:In terms of its geographical impact, the BES is reinforcing the economic advantages of southern England and discriminating against the economically-lagging regions of northern Britain.Apparently, the research showsa difference in the type and quality of investments, with more `sunrise' and service-based investments in the south-east compared with more of the older type of manufacturing investments in the north. The scheme is not therefore helping the north to restructure and widen its industrial base".At the turn of the century, Leeds was a city of 5,500 firms. It was not dominated by one industry or one company. It was built of medium-sized and small family firms spread across the manufacturing sector—in textiles, engineering and in printing in particular. With the restructuring of the economy that has occurred during the past 20 years, many of those manufacturing firms have been taken over or rescheduled—"rationalised", as the phrase went. Jobs have been lost and plants and factories closed.
With the decline of the manufacturing sector, there has been a clear shift to the service sector. Although there was an expansion of the public service sector in the 1970s, more recently it is the financial services sector that has expanded and developed. That has done nothing to tackle the unemployment that has resulted from the decline of the manufacturing base in cities such as Leeds. Jobs are supposed to have been "recreated" in the service sector. In the 1970s, 17,500 jobs in manufacturing were lost in Leeds and in the same decade, 17,500 new jobs became available in the service sector. The difficulty was, that many of the new jobs were temporary part-time jobs, and even lower-paid than the jobs in manufacturing had been.
Such developments have not helped to strengthen and regenerate the economy. Instead, they have built on the divisions and contributed to the continued existence of classic low-wage economies such as that of West Yorkshire. They have done nothing to take such regions up to the wealth of the M4 belt, for example. It is interesting to consider whether the business expansion scheme has had anything like the impact in Yorkshire that it has had on the M4 belt between Reading and London, which is now one of the wealthiest areas in Europe. That is the real question that the Government have to answer. Is the scheme being targeted? Is it merely reinforcing economic divisions? Is it contributing to growth throughout the economy and for all those in Britain, or is it only of benefit to a few in the south east who latch on to it?
A second aspect of the role of the BES should be monitored. We should consider carefully the measure in last year's Budget, under which the Chancellor applied the relief to the acquisition and management of private rented sector property under the assured tenancy scheme.
I served on the Committee on the Bill that became the Housing Act 1988. I see that the hon. Member for Fulham (Mr. Carrington) has left the Chamber. He seemed to suggest that there was no evidence that the scheme was being misused. We resisted the introduction of the scheme at that time because, while we were discussing the Housing Bill in Committee, at the very same time as the Budget was being presented, we were discussing the fact that a landlord in the City of London was being taken to court 889 by Chelsea and Kensington council because of the way in which he treated tenants in his properties. That landlord is Mr. Nicholas Hoogstraten.
There was a long trial because it was felt that the way in which he treated his tenants was totally unacceptable. The then Minister with responsibility for housing, who has moved on to the Foreign Office for his efforts, regularly used the phrase in Committee that there should be social, good landlords who do not give people the conditions that that man expected his tenants to live in. All were expecting the outcome of the trial to be that that man would be found guilty for keeping tenants in conditions that they should not be in.
What was the outcome? Because that man did not have his name on the rent book and used close company structures—he had so many companies set up that the authorities could not catch him under company law—he got away with offences under the housing law. We should pay attention to where the business expansion scheme is being applied. That same person declared on the television that he welcomed the business expansion scheme as a means of extending his property empire. I should be interested to receive a report from the Department spelling out whether parts of that empire have applied for and received money from the business expansion scheme. Clearly, it would be a demonstration that the money is not going to the kinds of people whom even Conservative Members believe should manage housing.
§ Mr. Chris Smith
My hon. Friend is making a powerful point. However, does he agree that the very nature of the business expansion scheme, involving a tax-free capital gain at the end of five years, will put a powerful momentum into the system to discourage landlords from being good, social landlords and encourage them instead to maximise their profit?
§ Mr. Battle
I am grateful to my hon. Friend for that intervention. During the debate on the Finance Bill last year, it became clear that the Government's intention was to give the kind of tax concession that my hon. Friend has outlined. It was only then that the real and genuine intentions of the Housing Act were revealed. Throughout the debate, we argued that the Housing Act 1988 was clearly a landlord and property charter. It had nothing to do with giving tenants rights and improving the stock of housing or tackling homelessness. It was about pushing the market place in terms of the provision of housing.
We must examine the concessions that are given under the Treasury's arrangements and the statements that were made in Committee about housing conditions and the need to enable landlords to have more power over their tenants. The Government were nervous simply to let the market rip in terms of being able to treat tenants as they wished. It is worth reminding hon. Members that tenants' rights were significantly eroded under the legislation. As my hon. Friend the Member for Islington, South and Finsbury mentioned, schedule 2 altered the grounds on which a landlord could winkle out tenants. The two grounds were redevelopment and the non-payment of rent.
Despite the fact that a person's rent may not have been paid on time because he was on housing benefit and the money had to be claimed through the local authority and 890 from the Department, as it stands now, the law says that the landlord can mandatorily evict the tenant and repossess the dwelling. The tenant has lost the right to go to court to appeal and state why he could not pay his rent. Similarly, if a landlord wants to redevelop the property, he must serve notice on the tenant and the tenant must leave, without a right of appeal to ask where they should go. As my hon. Friend suggested the conditions exist for landlords simply to take a tax handout and make a profit on property at the expense of tenants and under the guise of providing housing for the people.
It is incumbent on the Government now to tell us clearly how the close company structure will be used. Will it be, as the Minister said, that the business expansion scheme will be exploited by small groups of individuals? Where is the language of the previous Minister with responsibility for housing, that only those with a track record in tenant management should be allowed to be landlords? That language seems to have disappeared. People can use the business expansion scheme as a means of becoming a landlord.
Is the Minister checking who is receiving the money? Is he checking whether a monitoring report will be plainly published and available to all, so that the money that is spent from the tax system and given in handouts to people to provide money is clearly and publicly accounted for? If not, the Government have no excuse. They can say, "We must welcome the business expansion scheme as a means of intervening in the economy," but we want clear evidence that the intervention is appropriate and that it does something about the uneven and equal development of our economy. We need an assurance that, if it is the Government's intention to free the private sector to provide rented housing for people, it is not simply a cover for people to speculate with and make money from property that they prefer to be kept empty, rather than have people living in conditions that are suitable for the late 20th century in Britain and at a rent that they can afford. If the Minister cannot tell us that he can provide a publicly available monitoring report, there is unfair discrimination going on.
When it comes to local authorities spending public money and budgeting and implementing schemes such as the urban programme, they are expected publicly to account for every penny in a record that is sent to Marsham street. Every tree that is planted under the urban programme is accounted for, and every journey that is made by a mini bus to take elderly people to and from luncheon clubs is accounted for. I do not object to such amounts being accounted for, but I demand parity of treatment of public money as a whole. It will be incumbent upon the Treasury to publish the report and tell us where the business expansion scheme money is going. The Financial Secretary has suggested that, so far, the evidence is conflicting. It would not be too difficult for him to use his civil servants to find out where the money is going and make the details available to all.
§ Dr. Kim Howells (Pontypridd)
I have no objection to the business expansion scheme. It seems to be a good idea, especially when we often lack mechanisms for regional aid for areas such as mine. As the Financial Secretary stated, it has a proper, educative role to play in the business community. I have no quarrel with legislating for education of any sort, as long as it is progressive education. Constituencies such as mine have long needed 891 an expansion of small businesses. They have needed injections of what the Financial Secretary referred to as venture captial to help to diversify our manufacturing and service base. However, I am afraid that the tax relief which should have been focused on small companies as a result of the provision of the business expansion scheme, does not appear to my constituents to be applied precisely to those companies and businesses which could have helped diversification.
The amendment would rectify abuses of tax relief and shift the focus of relief back to those areas for which it was designed in the first place. If the educative role to which the Financial Secretary referred is to function properly, it must begin to show more equitable results in terms of the geographical spread of the investment. I do not fully understand why the regional disparities which have already been referred to should exist. I trust that the Financial Secretary is not employing any kind of genetic basis to his argument about why the take-up should be greater in the south-east than, for example, Scotland or the north of England?
§ The Chief Secretary to the Treasury (Mr. John Major)
One reason is that there are more people in the south-east.
§ Dr. Howells
Let me modify that and say that proportionately the take-up is not so great.
The object must be to close the loopholes which appear to be preventing the business expansion scheme from fulfilling the aims for which it was first designed. I fully appreciate that the business risk will continue to be greater in areas on the so-called periphery of the British economy—for example, in coalfields—where there continue to be declining staple industries. We hope that the scheme will work to rectify that situation.
The business expansion scheme should be, and could still be, a boon, although not a great boon, to constituencies such as mine. However, I am afraid that it is not viewed in that way in my constituency. I am afraid that it is seen as another way of massaging the profits of those concerns and businesses in the south-east that do not fall into the original categories for which the BES was designed.
My constituency would like the BES to help push it even further along the road of the remarkable transformation that it has already experienced during and since the decline of its basic industries.
I believe that the BES should help to revive that spirit of innovation—often a small but vigorous spirit of innovation—that makes a reality in terms of new products and jobs of the brave title, "venture capital". The amendment serves to remind us of the original purpose and would bring some discipline back into the business expansion scheme, which would be most welcome in constituencies such as mine.
§ Mr. Peter L. Pike (Burnley)
I intend to speak briefly on the amendment moved by my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith). I shall be echoing some of the comments made by my hon. Friend the Member for Pontypridd (Dr. Howells). My hon. Friend the Member for Leeds, West (Mr. Battle) spoke with considerable expertise, having served on the Committee that considered the Housing Bill, which created the assured tenancies, and which, in turn, was one of the reasons that the business expansion scheme has proved to be a boon. My hon. Friend was also involved in 892 housing matters in Leeds prior to becoming a Member of Parliament. I believe that my hon. Friend made important points that the Financial Secretary should consider. Even if he does not respond to them today, they are worth considering in depth. The Department of the Environment should also consider some of the implications of my hon. Friend's comments.
I, too, have some fears that some of the Government's assurances at the time that the Housing Bill was going through Parliament last year have not been fulfilled under the business expansion scheme, and that the scheme has been used in a way that was not anticipated.
I recognise that the amendment seeks to change the effective date of the blocking of a loophole. We all recognise that the Government have acted correctly, as it would have been completely wrong to allow people to get a tax concession on their investment and to receive additional tax relief if they were borrowing money to invest. The debate today is about whether the blocking of the loophole should be backdated for 12 months. One must remember that, when there is such an investment in property, a capital growth is almost assured. There has been continued capital growth in housing property over many years. In such a scheme, the investor would make a considerable amount of money.
I am not completely opposed to the principle of the business expansion scheme, because it has some welcome features. I have recognised for many years that one of our failings is that we make it extremely difficult for venture capital to be invested. At times our actions militate against venture capital. This scheme goes part of the way towards rectifying that. One of the problems of getting investment, for example, into industry is that we fail to take long-term investment views in the same way as our competitors in other countries, especially those in Germany. It is regrettable that to some extent our financial institutions militate against that.
We want to see investment in our areas, so it is important that we have a scheme such as the BES. However, we want investment in sectors that will create jobs and will help to rectify the balance of payments situation. We should get our manufacturing industries on to a better basis. It is appalling that we still import so much more than we export. After all, at the end of the day, this nation's bread and butter depends on its manufacturing industries.
Investing in assured tenancies by means of the business expansion scheme, which appears to be the main issue emerging in the debate, does not create jobs in the way in which we would wish. Of course, last year a £500,000 limit was introduced on the business expansion scheme, but there was an extension to £5 million for property. One could have argued that it was wrong to do that. One must of course ensure that the system is not abused and money wrongly made by receiving tax concessions. The least worthy cause was allowing people to invest in the private rented sector. Some of us fear that, perhaps, the Government, with their determination and obsession for creating a private rented sector, have had to consider means whereby people can put money into it.
I was surprised that in my constituency the business expansion scheme and the Housing Act 1988 have been used. We have surplus housing stock in Burnley of some 6 per cent., both in the private and public sectors. There are 893 semi-detached houses on council estates and private houses standing empty because of the declining population. I was surprised that a company was buying every property initially under £10,000, then £20,000 and now up to £30,000. To many hon. Members those figures will appear surprising, but in an area such as mine a house costing £30,000 is expensive. That company, Northern Renewals, is buying those houses and then improving them. I do not criticise it, because the agents involved, Ingham and Bulcock, are a reputable company. I shall be meeting them in a week's time to discuss their plans. I am criticising the Government for making that scheme available, because I do not believe it is needed.
I recognise that the company must make management judgments. I believe, however, that it may have made a wrong judgment, because it is difficult to believe that it will find the tenants for those houses. I recognise, however—the Government will say this—that it will stop some houses becoming derelict and it will ensure that work is carried out on those old stone-built terrace houses and stop them declining. If that happens, I shall welcome it.
However, instead of the tax concession being used in that way, I would prefer it to be used to give money for grants to enable people to buy such houses and to improve them. Many people do not buy such houses because of the non-availability of improvement or repair grants with which to do them up.
Because of the laws of supply and demand, another problem that is caused when companies buy houses is that they increase demand, and that is bound to increase the price of houses and to reduce the housing stock available to younger married couples.
As the debate has made clear, there has been a considerable growth in and use of the business expansion scheme, especially in the past few months, and I am not surprised by that, because the growth has been the result of the enactment of the Housing Act 1988 which tied in with last year's Finance Bill. That has led to the surge of investment in this scheme to which the Financial Secretary referred. However, when he replies to the debate, the right hon. Gentleman must say whether he believes that that is what the Government want.
I can see the difficulty about whether the provision should be applied retrospectively. One could argue that point for some considerable time. I recognise that on other occasions we could be arguing equally well against retrospective legislation and that is the danger in advocating an amendment such as this.
However, even more important than the principle of the date is whether the Government really believe that there are any fundamental errors in the business expansion scheme. I am sincere in saying that I am not totally opposed to the scheme and recognise that it has some good points. Nevertheless, I should like it to be used to encourage venture capital and the growth of small manufacturing industries, jobs and employment. I had hoped that it could play a small part in improving our balance of payments and thus the country's financial position. The way in which it is being used for assured tenancies in conjunction with the Housing Act 1988 is not the best way forward.
Although it could be argued that those points are not directly related to the amendment, I hope that the Minister 894 will recognise that they are important points which could have been argued in a stand part debate. I am glad that those important points have been put on the record and hope that the Financial Secretary will respond to them.
§ Dr. Lewis Moonie (Kirkcaldy)
As the outset it would be churlish not to say that I welcome clause 44 and the Government's attempt to put right a clear wrong in the working of the business expansion scheme, just as in the past they have put right other wrongs in other schemes, especially those relating to forestry and, in 1984, to agriculture.
On the surface, it seemed a perfectly good idea to raise capital for small businesses, to help to create employment and to reward enterprise through encouraging equity investment in what, by the Government's own definition, were higher risk organisations, and to help them, in turn, to acquire money for expansion without the severe loan charges that they would otherwise incur as a result of the Government's high interest rate policy. Therefore, in theory the business expansion scheme is consistent with a strong supply side macro-economic policy. However, problems arise and it is incumbent on us to point them out in the debate.
The cost has been high since tax relief on investment is given at the top rate. Obviously, since the top rate was reduced last year, that cost is less than formerly. However, the scheme has been costly, at over £100 million per year in recent years. It has been used as a tax shelter and for tax avoidance whereas the original intent was to reward and facilitate enterprise. The scheme has been widely abused in speculative building, a sector that is concentrated largely in London and the south-east. Therefore, the scheme has been concentrated on the sector of the economy that is most hurt at present by the supply side constraints and the capacity constraints that we have experienced and which are evident in our current account deficit of over £2 billion last year in materials related to construction. The construction sector is the worst hit sector, and the worst hit area of that worst hit sector is where the money and investment have principally been concentrated in the past year. Therefore, there is a wide distortion in the market and an accentuated drift of investment from Scotland and the north towards London and the south-east.
Because the money has been used largely for speculative building, it is incumbent on the Financial Secretary to try to tell us that this is the best way to invest in house construction and that it is the most cost-effective way of using public money—that is what it amounts to, because of the subsidy that is given. I do not believe that it is the best way. If a similar sum had been invested in the public sector, I believe that we should have seen a far greater return for our money, and housing far more appropriate to the needs of those who are without it at present. That in turn would have served to reduce the capacity constraints that are arising in the south-east.
All that underlines the fact that a poorly directed supply side policy is a danger not a benefit to our economy. The Government are reaping the harvest of their own somewhat narrow definition of supply side policies.
I have referred to the labour and housing shortages in London and the south-east that are a direct result of such policies and to the capacity constraints that are leading to excess imports. At a time when there is a surplus of labour and skills in the north-east and Scotland, surely a proper effective supply side policy would concentrate on the 895 whole economy; as my hon. Friend the Member for Leeds, West (Mr. Battle) has said, that requires a strong regional policy. However, it also requires investment in other aspects of the supply side, especially in training. We must redress the skills shortages that our economy is now facing and encourage more young people to stay on at school and to go on into higher and further education. We must not forget that we have the lowest levels of participation in higher and further education in western Europe—and that, again, is hurting our economy.
§ Dr. Moonie
Yes, we must always remember that labour is as important as capital in supply side economics. The Government are finding that out only too clearly as industrial unrest rises in the economy and as the former surplus of labour is eroded by demographic change.
Much of the United Kingdom is still suffering from under-investment, for example, in our infrastructure. That can be seen most clearly in my own area of Scotland where we have a great need for roads and for a motorway from Leeds to Edinburgh and from Carlisle to Glasgow. We need better intercontinental air links for Scotland and the north-east of England, and electrification of the north-east line, not only to Edinburgh as intended, but further north to Aberdeen and Inverness.
An effective supply side policy requires proper regional development otherwise the shortage of capacity and the overheating in the south-east, which is slowing down the movement of people and goods, which London is now experiencing, and which has been mentioned by many manufacturers as a key element in their rising costs, will rapidly worsen until London will start to choke to death under the burden of its own population and enterprise. That is the real challenge to the Government on the supply side which, to date, the business expansion scheme has failed to address.
The Financial Secretary said that in the past the Opposition have been inconsistent and that we now appear to criticise a scheme that we formerly supported. There is no inconsistency. It was right to support what was, after all, the only limited measure of help that was being given to help industry to expand. If it is a question of take it or leave it, thanks very much, we will take it. However, surely it is also right for us to conduct a proper critical analysis of what has happened as a result of the implementation of the policy. We must point to deficiencies in their policy and ask the Government to come forward with some means of redressing them.
The principle was not unsound. It was supported by people such as myself when I was in local government before I came to this place. When I was one of the trustees of our pension fund in Fife regional council, I supported its investment in venture capital schemes. The only money going into venture capital schemes in Scotland at that time came from local authorities. It certainly did not come from the private sector. We welcomed this as a principle and a means of perhaps enticing more money into valuable areas. Unfortunately, it has turned out to be a shyster's charter and a home for fast buck merchants that bedevils our economy.
896 6 pm
Yesterday, in another debate, I criticised the principle of widening tax rates on income. I still believe that this scheme has produced more problems than it has solved, as has the scheme about which I talked yesterday. It needs to be modified, if not abolished. It is a warning to us to be careful when we try to influence market decisions in this manner.
I have welcomed clause 44 and I also support the amendment of my right hon. and learned Friend the Member for Monklands, East (Mr. Smith). I do so for one simple reason. I believe that a genuine mistake was made and that the Government's intention was to ensure that the scheme had its present and not its past form. It is wrong that people should be allowed to profit doubly from a mistake such as this. Although I would not normally support retrospective legislation, there are reasonable grounds for us to do so tonight.
§ Mr. Morgan
The Opposition are trying to put over the fact that we have sought to give the business expansion scheme a fair trial. We are expressing on behalf of the communities that we represent Leeds, Kirkcaldy, Pontypridd and Cardiff—
§ Mr. Morgan
I am talking only about my hon. Friends who have spoken. We have given the business expansion scheme a fair trial, but have had to draw a sorry conclusion about it.
There are Conservative Members present, although not many seem to want to speak. That could be for two possible reasons: first, that there is a news blackout on "Today in Parliament" and secondly, that they are deeply ashamed of the performance of the business expansion scheme because they know that it has not achieved what it was cracked up to do.
The Financial Secretary was good enough to agree that when the business expansion scheme was first introduced, the Leader of the Opposition welcomed it. Certainly, when I came to the House I said that I had been a fan of the scheme. Many others, including my hon. Friend the Member for Kirkcaldy (Dr. Moonie) also said that they wanted the business expansion scheme to be given a fair trial. The scheme was supposed to encourage people to take risks with their money in a way that would contribute to the expansion of enterprise in this country and, therefore, to the expansion of jobs and the correction of our chronic balance of payments deficit.
The Financial Secretary also said that he thought that the business expansion scheme had been part of the amazing resurgence of venture capital industry in this country. He boasted that we had a venture capital industry that was bigger than that of any other European country and second only to the United States of America. He completely misunderstands what the business expansion scheme was originally cracked up to do and the difference between venture capital and seed capital.
The business expansion scheme is not about venture capital. The companies involved in it are far too small and young. By and large, the gap that the business expansion scheme was supposed to fill was the seed capital gap and not the venture capital gap. The scheme was supposed to say to people, "Would you like to put your money at risk? You could lose the lot or make a lot of money. This is not 897 a safe investment, and if you want a safe investment you should put your money in the Post Office. This is a high risk investment." High-risk investment is for companies that either do not yet have products to market, or that have just got a product to the market place that still needs an enormous amount of working capital spent on it to market it properly so that it is capable of being sold overseas, not merely within the company's home town or region.
These are not the sort of industries that have been funded by the business expansion scheme. The scheme should be a million miles away from putting money into old people's homes, private cleaning and contracting companies and other enterprises that are largely asset based. It should be a million miles, if not light years, away from putting money into the provision of private residential accommodation under the assured tenancy scheme.
This is one of the failures of the scheme and I hope that the Minister will address that problem when he returns to the Dispatch Box. If the scheme was supposed to involve venture capital, surely, there has been a complete misunderstanding. We should have been talking about high-risk, high-growth companies, which could be funded and from which the investor's money could either be returned 10 times over at the end of five or seven years, or he could lose the large bulk of it, if not the lot. Such companies have not benefited from the scheme.
We have to educate the Financial Secretary about the regions. He has failed to understand our point about venture and seed capital. He has also failed to understand our point about regional drift. He does not have the facts straight in his head about this country's geography. When asked why more than 50 per cent. of the schemes and more than 65 per cent. of the money had been invested in enterprises based in the south-east and East Anglia, which we considered to be one of the scheme's failings, he said that there was more business in those regions. In response to my hon. Friend the Member for Pontypridd (Dr. Howells), he said that there were more people in those regions.
The Financial Secretary should listen to the facts about this country's geography. The number of people who live in the south-east and East Anglia totals about 19.5 million, which is almost one third—33 per cent. —of the country's population. The fact that 65 per cent. of the money is invested in the south-east and East Anglia, which is where 33 per cent. of the population live, creates a massive disparity of almost 100 per cent. between the regional share of this country's population in the south-east and East Anglia and the money invested there under the business expansion scheme. That is a massive failure of the scheme and it is no good his saying that there is more business in the south-east. That is palpably not true. There is no evidence to suggest that there are fewer new business formations or enterprises in the outer regions of the country than in the south-east and East Anglia. However, there is more capital in the south-east.
The fundamental problem with the business expansion scheme is that it is not attuned to where there is enterprise, to the needs of the risk taker, inventor or person willing to invest in a new business, but to the needs of capital. It is attuned to the needs of people with money in their pockets.
898 They are told that they can double their money through the scheme, that they will not have to take any more risks than they want, and that the taxpayer will give them a bonus on top of that.
The regional disparity in this country is not simply that the south-east of England is a large region, although clearly it is. In fact, it is the biggest region. If East Anglia is thrown in, the south-east region contains one third of the population. Another disparity is the fact that it contains about 50 per cent. of the middle classes and 90 per cent. of the wealthy people. It is where, by and large, the millionaires live, apart from a few wealthy landowners who live in Scotland and the south-west. If a scheme is attuned to the needs of millionaires, and people interested in the tax breaks for higher rate tax payers, clearly those areas with more wealth will be where it operates most strongly. The scheme is not targeted on areas where there is more enterprise.
There is no evidence of less enterprise in Pontypridd, Kirkcaldy or Cardiff or in the outlying regions. The problem is that those places cannot get together with the owners of capital, because the owners do not live there. In the south-east, capital, is easily available because, historically, it has accumulated there for various reasons —it has agricultural wealth, the capital city is there, Parliament is there, and so on.
If the Government persist in misunderstanding the deeply risk-averse nature of British capitalism—the failure of the business expansion scheme to remedy it over the past five years is further evidence of that misunderstanding—they will never devise a set of policies that will close the trade gap and bring it back to parity and beyond; for we shall need surpluses in the 10 or 15 years after the deficits to pay off the colossal debt that we are now running up.
All Opposition Members were keen to see the BES have a fair trial. We are deeply disappointed by the way in which it has been pushed further in the direction of risk aversion rather than risk taking by the inclusion of residential property under the assured tenancy scheme. Now, even more than before, the BES has become a political gimmick. Last year it meant the Secretary of State for the Environment suddenly reflecting, when considering the Housing Act 1988, that he should not approach the next election without a single scheme having been put in place and with no private capital having flowed into assured tenancies. That would have made him look even more foolish than he usually looks when the courts declare his leaflets illegal. He wanted belts and braces to ensure that a couple of schemes—assured tenancy and private capital funded schemes—were brought forward, thinking that he would not pay for them himself but would get the British taxpayer to do so. Rather than depend on the willingness of British capital to put risk money into private rented property, he decided that, if it were given the extra bonus of a tax break on the top rate, British capital might get some schemes going.
Well, there may be some schemes, so the right hon. Gentleman will be able to claim that there are some at the next election. They cannot be compared on a fair and equal basis with schemes for developing new laser beams or new silicon chip factories that might produce products to sell to Japan or the United States. The BES projects are a straight tax break to ensure that the Secretary of State's few remaining shreds of political reputation can be held together respectably when it comes to writing the next 899 Tory election manifesto. The scheme always carried the risk of being a political gimmick and this has proved that more true than before.
We are now retrospectively trying to put close companies in order. The Government feared that financial manipulation was going on, and so it was. I welcomed the Financial Secretary's expression of horror at the way in which certain financial middlemen were abusing the scheme, but that is in the nature of the scheme—that is what it is all about. It is not filling the gap that it was meant to fill. It is not putting people into manufacturing industry. In America, a person starting a new silicon chip company can go to his local rotary club or masonic lodge and get people to give him a couple of thousand dollars each to help him get started, knowing that they can lose all the money. That does not happen here, and the BES does not fill that gap.
Instead, curiously, the scheme presents a free gift to a certain breed of financial middlemen who can sell safe little earners—this is supposed to be high-risk new venture capital, but it is proving the reverse. The middlemen promise to fix people up with nice little earners; all they have to do is answer the advertisement, tear off the coupon and a salesman in the latest sharkskin suit will call round to see them. I advise people to watch out for these salesmen.
I said in an earlier intervention that the scheme was providing packed lunches for sharks, but I forgot that I am deeply interested in marine wildlife. I should have said packed lunches for vultures—vulture capital, not venture capital.
The Minister must give serious consideration to the failure of British small businesses to take risks. He must understand that if the money from the tax break goes into residential property, DIY warehouses, old people's homes, and private caterers and contractors, which take over on a sweetheart basis from local authorities and hospitals, that will do nothing to solve our balance of payments. It will redouble all the economic difficulties from which the country has suffered and continues to suffer. We have a£15 billion balance of payments deficit, and this scheme in no way contributes to solving our severe economic problems.
§ Ms. Diane Abbott (Hackney, North and Stoke Newington)
I support the amendment. The extension of the business expansion scheme to private rented accommodation under the assured tenancy arrangements is cruel and irrelevant. It is irrelevant because, as my hon. Friends have already said, the purpose of the scheme was to encourage risk investment and create jobs. It will create very few jobs. It is also irrelevant and cruel because of the effects it will have on the housing market and on people in housing need, especially in London and the south-east.
In London and the south-east, the private housing market has for many years been the prey of sharks, vultures and people such as Rachman. There is already a terrible problem in London; private landlords try to winkle out sitting tenants so that they can sell off flats and transform accommodation into assured tenancies. Now that private landlords receive a tax break to do up such accommodation, the financial pressure on them to get rid of private tenants will be even greater.
900 I know that the Minister takes no interest in these matters, but he has only to go half a mile down the road to Westminster, Bayswater, Pimlico or Maida Vale to see elderly sitting tenants who have lived all their lives in mansion blocks—many of them in marginal Conservative constituencies—living in fear and leading unhappy lives—
§ Ms. Abbott
Indeed. The Minister would not have to go far to find such people, or to find families being harassed by landlords who want to remove them so that they can transform the accommodation to assured tenancies. This tax break will provide an additional financial incentive for such harassment.
The growth of the assured tenancy sector to which this extension of the scheme will lead will make no practical contribution to the housing problems of London. These assured tenancies will be offered at prices way beyond the reach of the average person who works and lives in London. They will be offered to businesses, tourists and rich people who want a pied-a-terre in London. The tenancies do nothing to help the average family who want somewhere to live or the homeless. The scheme will only put money into the pockets of speculators and the heirs of Rachman. To bring it forward under the guise of encouraging enterprise and creating jobs is hypoCritica I, bogus, cruel and irrelevant, and I hope that even at this late stage the Government will see their way clear to withdrawing the idea.
§ Mr. D. N. Campbell-Savours (Workington)
I try each year to take an objective position in Budget debates. Over the years I have invariably supported the Government when I thought that they were right, and I have been open in my support; I have been critical when I have thought that they were wrong. Last year we had a debate on these matters. If I recall correctly, we were debating the possibility of abuse of assured tenancies where people might enter into arrangements with those who took out the tenancies over a period of five years and where the investor might have a direct pecuniary and, indeed, occupational interest later.
I persisted in raising the matter last year. If I recall correctly, my hon. Friends may have raised it in Committee upstairs. I persisted in the hope that this year the Minister might be able to report on how things had developed. I should like to know whether abuse has taken place or been reported to him. If it has not been reported, will he consider my original predictions about how the scheme might be abused and make a statement to the House during the debate that may take place on Report? There may not be much chance to discuss the matter in Committee upstairs, and I will not be on that Committee this year.
I want to speak more specifically to the whole question of the intellectual base on which the BES scheme was submitted originally to the House and argued by Ministers publicly. As I understand the Government's position, it is generally that Government need not intervene directly to create jobs, that they can reduce their commitment to regional policy and that, by a system of tax aids, individuals will be given the opportunity to take decisions and invest where, in other conditions and under other Governments, those decisions might be taken by Ministers or by civil servants in conjunction with industrialists.
901 The premise is that as a substitute for a regional policy of state intervention we should rely on individuals to take decisions which will have the same effect in creating employment in the regions. Ministers will recall that I have supported aspects of the BES scheme over the years. I put it to the Minister today that the scheme is not working in the way that the Government originally hoped it would. They may feel that it has had some success, but a report on the Peat Marwick report of 1986 said:With the benefit of a longer time-period this report has also been able to reveal the high loss rates amongst fund investments made under the BES (over 50 per cent.) and in the early years of the BES (over one-quarter of investments made in 1983–84 and 22 per cent. of the capital invested in that year had been lost by late 1987). Overall, of the £175 million invested by funds and managed schemes in the seven years to April 1987, 17 per cent. had been lost by late 1987.As I understand it, that report was fairly favourable to the scheme.
I cannot believe that the Government ever intended such losses on the scheme. That must indicate a deficiency in it. I cannot believe that the Government, if they were being reasonable on these matters, would have been so willing to support some of the schemes. Earlier, there were references to wine merchants and art dealers. I cannot believe that it was ever the intention of Ministers that such people should be involved. The scheme should have been geared far more to manufacturing industry.
The 1986 Peat Marwick report made a point about the regional base for investment. The document from which I am quoting said:Finally, the report highlights the significant regional inequalities in the impact of the scheme. The South East and East Anglia contain considerably more than their 'fair share' of BES investments relative to their shares of the total stock of UK businesses (51 per cent. of investments and 65 per cent. of the invested capital in the period 1983–84 to 1985–86 inclusive).The scheme has failed because of its emphasis on the south-east, although I accept that there are pockets of high unemployment in Kent, in some of the Medway towns. I recognise, as I am sure my hon. Friends do, that those problems need resolving. Indeed, Labour's case is that we would single out many of those areas and target them for special treatment. We would ensure that they are given the support that they need to develop.
In wealthy Kent and wealthy south-east England generally, those areas stand out as blots on the employment landscape. In some of them unemployment is as high as it is in Yorkshire and Lancashire. I am sure that the people in Kent, Surrey, Sussex and all those areas would accept that in the main they are affluent counties. Yet they are getting the lion's share of the BES investment. If Ministers want to substitute for a regional policy, by way of state intervention, schemes that are tax-based they must find a regional basis on which to give tax concessions.
I have had correspondence with Ministers who say that it is not possible to build into the tax system a regional basis for tax concessions.I do not subscribe to that. The Prime Minister may have done things that I do not like, but she has proved in many ways that things can be done when the will is there. If Ministers set out to find a way, I am sure that they could establish in finance law principles that would benefit areas of high unemployment through the tax system. In that climate and under that regime, Labour, without any sense of equivocation or adding any 902 condition, would wholeheartedly support the scheme in the same way as I did when it was much narrower in its early days after its introduction in 1983–84.
There is work that can be done. It would be nice if the Minister, in reply to the debate, could say, "I have never conceded the case before but I will ask my officials to see whether it is possible somehow to incentivise regional investment through the tax system on the basis of a scheme akin to the principles laid down in the business expansion scheme." It might be geared to the manufacturing sector. The Government would not be compromising any principle. They would not be conceding the case for Government intervention in a way that might lead to an ideological backlash from Government supporters or that might offend the views set out in the Conservative campaign guide for the last election when they were preaching vigorously about the need for as little state intervention as possible. I am asking them to use what they accept are the weapons—no, the tools—that the state has at its disposal: that is, a tax system, in trying to drive a greater regional incentive into small business investment.
Another matter irritates me. I want to read to the House an advertisement. This is what discredits Government tax policy. The advertisement was put in by a firm called Johnson Fry Corporate Finance Limited. It is taken from The Times of the—the Economic Secretary smiles. Perhaps he will tell me why he does so or, after I have read this, whether he still feels like smiling.
§ The Economic Secretary to the Treasury (Mr. Peter Lilley)
A sedentary smile.
§ Mr. Campbell-Savours
That is an original term.
The advertisement appeared in "The Times" of 25 February 1989. Its headline is:High earner pays no tax".It goes on to say:Peter Fletcher is a successful entrepreneur who will earn £200,000 in this tax year. Last year, his tax bill was a frightening £105,000 +. This year Peter will pay nothing at all. He is taking advantage of special tax concessions offered through Business Expansion Schemes (BES) and Enterprise Zone property investment"—I am not condemning that; I am just drawing attention to the way in which such investment schemes can be abused and how that can anger people such as myself who see the mistreatment of millions of people in our society within tax law and the benefit system—which together will completely eliminate his tax liability.6.30 pm
I supported the original enterprise zone proposal, as the Financial Secretary will recall. My efforts were rewarded with one in my constituency which has been a glowing success. I do not dissent from my original view, but, unfortunately, the whole scheme has gone over the top.
The advertisement goes on:What's more, he won't have to dig deep into his pockets to do this as all his investments are totally self-funding, through specially arranged bank loans.I understand that, with the support of my hon. Friends, the Government are now closing that gap.
Peter has invested £140,000 in Enterprise Zone property, £40,000 in BES and his remaining tax liability is mopped up by personal allowances and mortgage and pension tax relief.No doubt my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith) will be dealing with those 903 matters in Committee. I shall not be there to play my part on this occasion, but I am sure that my hon. Friend will make a good job and an effective case.
The advertisement continues:But good news for the Fletcher family doesn't stop here. Peter's brother Michael, who is 28"—I presume, a yuppie Porsche man—works in the City and takes home"—maybe not—£35,000 a year, has found that he too can eliminate his entire higher rate tax liability by investing in a Smaller Companies Assured Tenancy (SCAT) BES Scheme, with a 100 per cent. loan.I understand that that is elegible for tax relief if it is done through a close company.
Michael will receive tax relief on the interest"—yes, he is doing it; it is coming out now—on his loan and, in five years' time, he will be able to sell his BES investment, which is not subject to Capital Gains Tax. Charles Fry, Chairman of Johnson Fry,"—the corporate finance company whose advertisement I am now quoting—a company that specialises in BES and Enterprise Zone investment, comments 'All higher rate tax payers should be examining BES and Enterprise Zones very closely. The Assured Tenancy Scheme effectively enables investors to invest, at a 40 per cent. discount, in companies that buy and rent out residential property. This is the first year that this type of investment has been available. BES has a £40,000 limit per person, so the wealthier individual should also be looking at Enterprise Zone investment which enjoys full tax relief on approximately 95 per cent. of the investment.'I am slightly out of order, Sir Michael, but I shall go on.
'One important point to stress, however, is that people should invest now before possible Budget changes. Why pay money to the taxman when you can utilise the same money (without any further capital outlay) to make good quality property investments instead?'I am sure that my hon. Friend the Member for Hackney, North and Stoke Newington (Ms. Abbott) will find those remarks offensive. She knows what will happen when such tenancies get off the ground. My hon. Friend the Member for Leeds, West (Mr. Battle) turns in his seat to grab my copy of the advertisement. I can tell him that I located it with great difficulty. However, having spent several hours doing so, it now features in every speech that I make wherever I go in the United Kingdom as an example of how tax law has got a little out of hand. It cannot be right for someone to offset a liability to tax on £200,000, taking allowances into account, by using such schemes.
All that I say to Ministers in my modest contribution today is that they should target this scheme more effectively. It should be geared more to genuine service trade and manufacturing industry and it should be limited, perhaps to a lower level than it is today, unless it applies to manufacturing industry in the regions. I am talking about regions or localities of high-level unemployment, depending on how one draws the line. One could almost support an amendment for a considerable extension of the scheme if it had a firm manufacturing regional base. I should be willing to support further and greater tax concessions if that were the case.
§ Mr. Win Griffiths (Bridgend)
I had not intended to intervene and I apologise for not having been here at the start of the debate but I was attending the Select Committee on Education, Science and Arts. I want to ask one or two questions which I hope the Financial Secretary will answer. I apologise if he dealt with them when he opened the debate.
904 The Government have always been concerned to target help on those who need it most and where it can be most effective, whether it be in housing, industry or social security benefits. Therefore, can the Financial Secretary say how much money has gone to those areas where unemployment is higher than average through the business expansion scheme by way of tax relief, and so on? The Government should be able to do that by reference to travel-to-work areas in the United Kingdom. I should be interested to know whether the Government have any figures about the effectiveness of the business expansion scheme in areas of high unemployment and how that compares with the business expansion scheme in areas where the unemployment rate is below average.
Secondly, how effective has the business expansion scheme been in providing jobs in those sectors which contribute to British exports? It is obvious that, if the Government have two target areas in terms of trying to encourage enterprise and create jobs, they should be those areas where unemployment is highest and those sectors where a contribution can be made to taking on the immense balance of payments problem which the Chancellor's other policies have created.
I hope that the Financial Secretary will be able to give some information on those points and that he will consider a more radical reform of the business expansion scheme to take account of my questions.
§ Mr. Chris Smith
We have had a wide-ranging and lengthy debate about some of the major issues that lie behind the abuse with which the amendment seeks to deal. The debate has been characterised by the fact that, apart from the Financial Secretary, no Conservative Members have taken part. Clearly, they are not interested in the problems of the BES, in the tax abuse which the clause addresses, in the equity gap which exists or in the desperate need for more investment, especially in the manufacturing sector.
The only Conservative Back Bencher to intervene at all for most of the debate was the hon. Member for Dover (Mr. Shaw), who absented himself for much of the discussion, perhaps to conduct more research with his researcher into the net book agreement. He seemed to imply that he wished the Government to keep under review the £500,000 cap on non-property or shipping-based BES schemes. The Minister said that he would do so. I hope that he will not be tempted too far down that road, because the restriction to £500,000 was welcomed by the Opposition last year and we hope that it will he kept in place.
It is worth noting that the hon. Member for Dover., as he himself said, is an expert on the BES. Last year, when I checked on these matters, I discovered that he was a director of four BES-financed companies—City Gate Estates, Hoskins Brewery, Private Investor Publications and Palladian Estates—all four of them, I am sure, making a major contribution to the manufacturing needs of the nation. He was, in addition, a director of three further companies, all of which were involved in the raising of BES finance. Those were Sabrelance Ltd., Sabrelance Business Service Limited and South Cumbria and North Lancashire Management Limited. He is indeed an expert on the BES, and as a result he appears to be benefiting substantially.
I was disappointed that the Financial Secretary—as he did last year—trotted out the Peat Marwick report, which 905 dealt only with the first year of operation of the BES. The favourable nature of that report must be modified in the light of further research, especially that done by the Small Business Research Trust, which saw major changes in the nature of BES investment from 1984 to 1988. The trust said in its report:the economic impact of the scheme is less favourable than suggested by Peat Marwick.The Financial Secretary must not attempt to convince us that Peat Marwick is the whole picture: it is not. It shows the picture in the initial stages of the BES and not the subsequent development of the scheme.
Many of my hon. Friends have said that we are not opposed in principle to the idea of the BES. However, we object to the way in which the scheme is being used, and the close companies mechanism is the most obvious of the deficiencies in the way in which the BES has turned out since 1984.
My hon. Friend the Member for Workington (Mr. Campbell-Savours) said, for example, that the BES was not working in the way that had originally been hoped. My hon. Friend the Member for Burnley (Mr. Pike) said that he was not totally opposed to the scheme in its conception and recognised the need to raise capital to close the equity gap. I agree with my hon. Friend in that approach. My hon. Friend the Member for Pontypridd (Dr. Howells) also said that the BES was a good idea.
The problem is that the reality does not match the principles with which the scheme was introduced, the reason being that it has become a device for sheltering high rate taxpayers' incomes. It has become distorted from the original intention of the BES, which was focused on the raising of capital for small-scale risk enterprise.
It has changed in nature. The primary purpose of the scheme now is tax avoidance rather than the raising of equity finance, and the problems that have flowed in train include the north-south flow of funds, the increasing emphasis on property and the increasing emphasis on asset-backed enterprise. The use of the close company device is a clear sign of the problems that come when a good idea turns sour and becomes used entirely for the purposes of tax avoidance.
The debate is primarily about an amendment which seeks to make the closing of the loophole retrospective for a year. Towards the end of his earlier remarks, the Minister—I fear that I must disagree with the hon. Member for Berwick-upon-Tweed (Mr Beith) on this—said that there had been occasions during the last 20 years when retrospective tax legislation had been regarded as worth introducing because the original situation that everyone had assumed to be the case had become distorted.
The use of the close companies device is such an instance. The Minister said that the private rented application of the BES had grown much more quickly than he had forecast this time last year. Indeed, the use of the close company device in the three months leading up to the Budget, specifically linked to the rented accommodation scheme, was not forecast at the time.
Nobody expected that that would happen and nobody realized—certainly not the Financial Secretary—that it could be used in that way. The ingenuity which some 906 bright financial operators put into developing a device which gave not just the BES tax relief but, in addition, extra slices of tax relief to top rate taxpayers, should not be rewarded; it should be penalised retrospectively.
Let us remind ourselves of the exact nature of the abuse that we are debating. We are talking about a top rate taxpayer who can make a payment of interest over five years of £30,000, can get tax relief in return for that payment of interest of £28,000, making a total payment of only £2,000 in return for an investment worth £40,000. We are therefore referring to somebody who, by that means, makes a profit at the end of the day—tax-free, with no capital gains tax to be paid—of £24,000.
That is only a modest estimate of the increased value of the company's assets. A situation in which an individual can literally make money out of this country's taxpayers must be considered intolerable and be dealt with as severely as possible. That is why, in those special circumstances, we ask the Committee to close that tax loophole retrospectively. Unless the Financial Secretary is prepared to accept our amendment, I shall urge my right hon. and hon. Friends to vote in favour of it.
§ Mr. Norman Lamont
As the hon. Member for Islington, South and Finsbury (Mr. Smith) observed, the Committee's debate has been very wide-ranging. In fact, the hon. Gentleman's comment is something of an understatement. It emerged from the debate that a number of Opposition Members have some kind things to say about the business expansion scheme. They include the hon. Members for Pontypridd (Dr. Howells), for Burnley (Mr. Pike) and for Workington (Mr. Campbell-Savours) and, to some extent, the hon. Member for Cardiff, West (Mr. Morgan). They all had words of praise for certain aspects of the scheme.
A number of Opposition Members wanted more detail about the scheme's effects, though at the beginning of the debate I outlined the information at my disposal about the direction of the scheme, about the proportion of it devoted to small businesses having a turnover of less than £500,000, and about assured tenancies—and I gave a general report on the scheme's progress.
The hon. Member for Cardiff, West made an interesting speech in which he compared some people with sharks but then withdrew that remark because he rather likes sharks. I was then dismayed that he made a comparison with vultures because I rather like vultures. [HON. MEMBERS: "Oh!"] I spent most of my summer in Crete watching them, and I hope to return to see more of them. I would have preferred the hon. Gentleman to stick to his original metaphor.
The hon. Member for Cardiff, West drew a useful and valid distinction between seed capital and venture capital. He will recall that the business expansion scheme began as a start-up incentive, but the development of the venture capital market since 1983, when we extended the scheme to larger companies, enables us again to place the emphasis on smaller companies having a turnover of less than £500,000, which is more in line with the hon. Gentleman's thoughts in respect of seed capital.
The hon. Gentleman gave several reasons why he feels that the scheme is concentrated in south-east England, and disagreed with my views on that aspect. I was impressed by some of the hon. Gentleman's arguments, but I emphasise that it was never intended or marketed as an instrument of 907 regional or employment policy. It was always specifically designed as a national economic tool to encourage enterprise.
§ Mr. Lamont
There is always a tendency for any tax allowance scheme to be taken up in areas where economic activity is at its highest. As the hon. Gentleman said, sometimes take-up occurs where there is more capital available. I agree that it would he better to have a spread of financial services throughout the country, but I feel certain that the scheme has brought benefits to many regions.
The hon. Member for Workington referred to a matter that he raised last year concerning connected persons. I have seen no evidence to support the claim that he makes, but I shall look further into the matter and may write to him.
The hon. Gentleman said that he cites the Johnson Fry advertisement in every speech that he makes, and I hope that he is receiving a commission from that company for doing so, because he seems to be an active salesman for its services. He referred to the tax loopholes that Johnson Fry advertises. When he makes speeches quoting that advertisement, I am sure that he mentions also that it was perfectly possible for higher rate taxpayers to avoid paying any tax under a Labour Government. By using universally available 100 per cent. capital allowances, a higher rate taxpayer could easily avoid paying any tax under Labour, because similar schemes were being marketed at that time.
§ Mr. Lamont
The right hon. and learned Gentleman makes the point that the schemes related to capital allowances. One hundred per cent. capital allowances were used in conjunction with leasing agreements by higher rate taxpayers to avoid paying tax. That happened frequently under a Labour Government and was a direct response to the very high marginal rates that they imposed.
The debate touched also on assured tenancies and on the Housing Act 1988. The hon. Member for Leeds, West (Mr. Battle) gave several examples of bad landlords, but seemed to argue against any privately rented accommodation, which is where I part company with him. Assured tenancies are subject to general law, which the Housing Act 1988 strengthens both in respect of harassment and illegal eviction, which has led to some recent convictions.
The hon. Member for Berwick-upon-Tweed (Mr. Beith) mentioned the possibility of a rent review provision being used to drive out a tenant. Even at this early stage, I think that the problem mentioned by the hon. Gentleman is unlikely to arise, for there is no evidence to suggest otherwise. However, we shall keep an eye on that aspect.
The Opposition amendment would simply build on clause 44, which will end a tax loophole that has been exploited to excess. The only difference between us is that the Opposition contend that that loophole should be closed retrospectively, but no argument has been advanced to justify that contention. The Government are blocking the loophole because it is now thought to be excessive, but there is no doubt that those who have already exploited it did so perfectly legally, and it would be wholly wrong for Parliament to legislate on it retrospectively. Nothing said 908 by the Opposition justifies such a draconian measure, and I urge my right hon. and hon. Friends to reject the amendment.
§ Question put, That the amendment be made:
§ The Committee divided: Ayes 161, Noes 237.910
|Division No. 193]||[6.58 pm|
|Abbott, Ms Diane||Hood, Jimmy|
|Adams, Allen (Paisley N)||Howarth, George (Knowsley N)|
|Allen, Graham||Howells, Dr. Kim (Pontypridd)|
|Anderson, Donald||Hughes, John (Coventry NE)|
|Archer, Rt Hon Peter||Hughes, Robert (Aberdeen N)|
|Armstrong, Hilary||Hughes, Roy (Newport E)|
|Ashley, Rt Hon Jack||Hughes, Sean (Knowsley S)|
|Ashton, Joe||Illsley, Eric|
|Banks, Tony (Newham NW)||Ingram, Adam|
|Barnes, Harry (Derbyshire NE)||Janner, Greville|
|Barnes, Mrs Rosie (Greenwich)||Jones, Barry (Alyn & Deeside)|
|Barron, Kevin||Jones, Ieuan (Ynys Môn)|
|Battle, John||Jones, Martyn (Clwyd S W)|
|Beckett, Margaret||Kaufman, Rt Hon Gerald|
|Bell, Stuart||Kinnock, Rt Hon Neil|
|Benn, Rt Hon Tony||Lamond, James|
|Blair, Tony||Leadbitter, Ted|
|Blunkett, David||Leighton, Ron|
|Boyes, Roland||Lestor, Joan (Eccles)|
|Brown, Gordon (D'mline E)||Lewis, Terry|
|Brown, Nicholas (Newcastle E)||Lloyd, Tony (Stretford)|
|Buchan, Norman||Lofthouse, Geoffrey|
|Buckley, George J.||Loyden, Eddie|
|Campbell, Ron (Blyth Valley)||McAllion, John|
|Campbell-Savours, D. N.||McAvoy, Thomas|
|Cartwright, John||McFall, John|
|Clark, Dr David (S Shields)||McKelvey, William|
|Clarke, Tom (Monklands W)||Madden, Max|
|Clay, Bob||Mahon, Mrs Alice|
|Clelland, David||Marek, Dr John|
|Clwyd, Mrs Ann||Marshall, Jim (Leicester S)|
|Cohen, Harry||Meacher, Michael|
|Cook, Robin (Livingston)||Meale, Alan|
|Corbett, Robin||Michael, Alun|
|Corbyn, Jeremy||Michie, Bill (Sheffield Heeley)|
|Cousins, Jim||Mitchell, Austin (G't Grimsby)|
|Cryer, Bob||Moonie, Dr Lewis|
|Cunliffe, Lawrence||Morgan, Rhodri|
|Darling, Alistair||Morris, Rt Hon A. (W'shawe)|
|Davies, Rt Hon Denzil (Llanelli)||Morris, Rt Hon J. (Aberavon)|
|Davies, Ron (Caerphilly)||Mowlam, Marjorie|
|Davis, Terry (B'ham Hodge H'I)||Mullin, Chris|
|Dixon, Don||Murphy, Paul|
|Douglas, Dick||Nellist, Dave|
|Duffy, A. E. P.||Oakes, Rt Hon Gordon|
|Eastham, Ken||O'Neill, Martin|
|Evans, John (St Helens N)||Orme, Rt Hon Stanley|
|Ewing, Mrs Margaret (Moray)||Pike, Peter L.|
|Fatchett, Derek||Powell, Ray (Ogmore)|
|Field, Frank (Birkenhead)||Quin, Ms Joyce|
|Fisher, Mark||Radice, Giles|
|Flannery, Martin||Randall, Stuart|
|Flynn, Paul||Redmond, Martin|
|Foot, Rt Hon Michael||Rees, Rt Hon Merlyn|
|Foster, Derek||Reid, Dr John|
|Foulkes, George||Richardson, Jo|
|Fraser, John||Roberts, Allan (Bootle)|
|Fyfe, Maria||Robertson, George|
|Garrett, John (Norwich South)||Rogers, Allan|
|Godman, Dr Norman A.||Rooker, Jeff|
|Gordon, Mildred||Ross, Ernie (Dundee W)|
|Graham, Thomas||Rowlands, Ted|
|Grant, Bernie (Tottenham)||Sedgemore, Brian|
|Griffiths, Win (Bridgend)||Shore, Rt Hon Peter|
|Grocott, Bruce||Short, Clare|
|Haynes, Frank||Skinner, Dennis|
|Healey, Rt Hon Denis||Smith, Andrew (Oxford E)|
|Henderson, Doug||Smith, C. (Isl'ton & F'bury)|
|Hinchliffe, David||Smith, Rt Hon J. (Monk'ds E)|
|Holland, Stuart||Smith, John P.|
|Home Robertson, John||Snape, Peter|
|Soley, Clive||Welsh, Michael (Doncaster N)|
|Spearing, Nigel||Williams, Rt Hon Alan|
|Steinberg, Gerry||Williams, Alan W. (Carm'then)|
|Strang, Gavin||Wilson, Brian|
|Straw, Jack||Winnick, David|
|Turner, Dennis||Worthington, Tony|
|Vaz, Keith||Wray, Jimmy|
|Walley, Joan||Tellers for the Ayes:|
|Wardell, Gareth (Gower)||Mrs. Llin Golding and|
|Wareing, Robert N.||Mr. Jimmy Dunnachie.|
|Welsh, Andrew (Angus E)|
|Adley, Robert||Fishburn, John Dudley|
|Aitken, Jonathan||Fookes, Dame Janet|
|Alexander, Richard||Forman, Nigel|
|Alison, Rt Hon Michael||Forth, Eric|
|Amess, David||Fox, Sir Marcus|
|Amos, Alan||Franks, Cecil|
|Arbuthnot, James||Freeman, Roger|
|Ashby, David||French, Douglas|
|Ashdown, Rt Hon Paddy||Gardiner, George|
|Atkins, Robert||Garel-Jones, Tristan|
|Baker, Nicholas (Dorset N)||Gill, Christopher|
|Banks, Robert (Harrogate)||Glyn, Dr Alan|
|Batiste, Spencer||Goodhart, Sir Philip|
|Beaumont-Dark, Anthony||Goodson-Wickes, Dr Charles|
|Beith, A. J.||Gow, Ian|
|Bellingham, Henry||Grant, Sir Anthony (CambsSW)|
|Bendall, Vivian||Greenway, Harry (Ealing N)|
|Biffen, Rt Hon John||Greenway, John (Ryedale)|
|Blackburn, Dr John G.||Griffiths, Peter (Portsmouth N)|
|Blaker, Rt Hon Sir Peter||Grist, Ian|
|Body, Sir Richard||Ground, Patrick|
|Bonsor, Sir Nicholas||Grylls, Michael|
|Boscawen, Hon Robert||Gummer, Rt Hon John Selwyn|
|Boswell, Tim||Hague, William|
|Bottomley, Peter||Hanley, Jeremy|
|Bottomley, Mrs Virginia||Hannam, John|
|Bowis, John||Hargreaves, A. (B'ham H'll Gr')|
|Boyson, Rt Hon Dr Sir Rhodes||Harris, David|
|Braine, Rt Hon Sir Bernard||Haselhurst, Alan|
|Brandon-Bravo, Martin||Hayes, Jerry|
|Brazier, Julian||Hayward, Robert|
|Bright, Graham||Heathcoat-Amory, David|
|Brown, Michael (Brigg & Cl't's)||Heddle, John|
|Bruce, Ian (Dorset South)||Heseltine, Rt Hon Michael|
|Buck, Sir Antony||Hicks, Robert (Cornwall SE)|
|Budgen, Nicholas||Higgins, Rt Hon Terence L.|
|Burns, Simon||Hind, Kenneth|
|Butler, Chris||Hogg, Hon Douglas (Gr'th'm)|
|Butterfill, John||Howard, Michael|
|Campbell, Menzies (Fife NE)||Howarth, G. (Cannock & B'wd)|
|Carlile, Alex (Mont'g)||Howe, Rt Hon Sir Geoffrey|
|Carlisle, Kenneth (Lincoln)||Howell, Rt Hon David (G'dford)|
|Carrington, Matthew||Hughes, Robert G. (Harrow W)|
|Carttiss, Michael||Hughes, Simon (Southwark)|
|Chapman, Sydney||Hunt, David (Wirral W)|
|Clark, Dr Michael (Rochford)||Hunter, Andrew|
|Clark, Sir W. (Croydon S)||Irvine, Michael|
|Clarke, Rt Hon K. (Rushcliffe)||Irving, Charles|
|Colvin, Michael||Jack, Michael|
|Coombs, Anthony (Wyre F'rest)||Jackson, Robert|
|Coombs, Simon (Swindon)||Janman, Tim|
|Cope, Rt Hon John||Jones, Gwilym (Cardiff N)|
|Couchman, James||Jones, Robert B (Herts W)|
|Cran, James||Kellett-Bowman, Dame Elaine|
|Currie, Mrs Edwina||Kennedy, Charles|
|Curry, David||Key, Robert|
|Davis, David (Boothferry)||Kilfedder, James|
|Dover, Den||King, Roger (B'ham N'thfield)|
|Durant, Tony||Kirkhope, Timothy|
|Dykes, Hugh||Kirkwood, Archy|
|Evans, David (Welwyn Hatf'd)||Knapman, Roger|
|Evennett, David||Knight, Greg (Derby North)|
|Fallon, Michael||Knox, David|
|Favell, Tony||Lamont, Rt Hon Norman|
|Fearn, Ronald||Latham, Michael|
|Field, Barry (Isle of Wight)||Lawson, Rt Hon Nigel|
|Leigh, Edward (Gainsbor'gh)||Redwood, John|
|Lester, Jim (Broxtowe)||Rhodes James, Robert|
|Lightbown, David||Riddick, Graham|
|Lilley, Peter||Ridsdale, Sir Julian|
|Livsey, Richard||Roberts, Wyn (Conwy)|
|Lloyd, Peter (Fareham)||Rost, Peter|
|Lyell, Sir Nicholas||Rowe, Andrew|
|McCrindle, Robert||Rumbold, Mrs Angela|
|Macfarlane, Sir Neil||Ryder, Richard|
|MacGregor, Rt Hon John||Sackville, Hon Tom|
|MacKay, Andrew (E Berkshire)||Sayeed, Jonathan|
|Maclean, David||Shaw, David (Dover)|
|McLoughlin, Patrick||Shaw, Sir Giles (Pudsey)|
|McNair-Wilson, Sir Michael||Shephard, Mrs G. (Norfolk SW)|
|McNair-Wilson, P. (New Forest)||Shepherd, Colin (Hereford)|
|Madel, David||Skeet, Sir Trevor|
|Major, Rt Hon John||Smith, Tim (Beaconsfield)|
|Malins, Humfrey||Speller, Tony|
|Mans, Keith||Spicer, Sir Jim (Dorset W)|
|Maples, John||Spicer, Michael (S Worcs)|
|Marlow, Tony||Squire, Robin|
|Marshall, John (Hendon S)||Steen, Anthony|
|Marshall, Michael (Arundel)||Stevens, Lewis|
|Martin, David (Portsmouth S)||Stewart, Andy (Sherwood)|
|Mates, Michael||Stradling Thomas, Sir John|
|Maude, Hon Francis||Summerson, Hugo|
|Mellor, David||Tapsell, Sir Peter|
|Michie, Mrs Ray (Arg'l & Bute)||Taylor, Ian (Esher)|
|Miller, Sir Hal||Taylor, John M (Solihull)|
|Mills, Iain||Taylor, Matthew (Truro)|
|Mitchell, Andrew (Gedling)||Thurnham, Peter|
|Mitchell, Sir David||Townend, John (Bridlington)|
|Moate, Roger||Townsend, Cyril D. (B'heath)|
|Montgomery, Sir Fergus||Trippier, David|
|Moore, Rt Hon John||Trotter, Neville|
|Morrison, Sir Charles||Vaughan, Sir Gerard|
|Moss, Malcolm||Waddington, Rt Hon David|
|Moynihan, Hon Colin||Walker, Rt Hon P. (W'cester)|
|Neale, Gerrard||Wallace, James|
|Nelson, Anthony||Waller, Gary|
|Neubert, Michael||Wardle, Charles (Bexhill)|
|Nicholson, David (Taunton)||Wheeler, John|
|Onslow, Rt Hon Cranley||Whitney, Ray|
|Oppenheim, Phillip||Widdecombe, Ann|
|Page, Richard||Wolfson, Mark|
|Paice, James||Wood, Timothy|
|Patnick, Irvine||Woodcock, Mike|
|Patten, Chris (Bath)||Yeo, Tim|
|Patten, John (Oxford W)||Young, Sir George (Acton)|
|Pattie, Rt Hon Sir Geoffrey||Younger, Rt Hon George|
|Porter, David (Waveney)||Tellers for the Noes:|
|Powell, William (Corby)||Mr. Alan Howarth and|
|Price, Sir David||Mr. Stephen Dorrell.|
|Raison, Rt Hon Timothy|
§ Question accordingly negatived.
§ Clause 44 ordered to stand part of the Bill.