Finance Bill

This is a technical but important group of amendments relating to the detail of entrepreneurs' relief. The abolition of taper relief in the capital gains tax changes that were announced in the pre-Budget report sent a very negative signal to business and, as I said in the previous debate, provoked a ferocious response from business organisations. Indeed, it created what I think is a unique coalition of all the business organisations: the CBI, the EEF, the British Chambers of Commerce and the Federation of Small Businesses. I apologise to any others that I have missed, but they all coalesced in an unusual way—perhaps not surprisingly, given that they represent disparate types of business. Faced with that wall of opposition, the Government's tactics were, to put it bluntly, opportunistic. They decided to try to buy off the most numerous but least expensive group of opponents. I am thinking of very small businesses, which are largely represented by the Federation of Small Businesses. Let me be unambiguous: small businesses play a crucial role in our economy. Businesses that employ no one other than the principals or one or two people deliver a major part of the economic activity in our economy. Beyond that, small businesses play a crucial part in the social fabric of our society, and we support them entirely. However, the great majority of them are not going to—indeed, have no aspiration to—grow into large businesses. Many people establish small businesses as an alternative to other employment; running a small business gives them a different lifestyle and working style and the opportunity to succeed in a way that suits them. Some people, of course, want their businesses to become the next Microsoft, but many do not want that. For the economic future of the country, we do not need only small businesses, which provide the bedrock of our economy; we also need to foster small but scaleable businesses—those that have aspirations to grow, create substantial employment and raise ever larger amounts of capital. We need to be concerned about those businesses because of their importance in creating jobs and prosperity and because the entrepreneurs who establish them—such businesses are often in high-tech industries—tend to be more mobile, so the option of relocating overseas tends to be more realistic for them. When this debate first broke, I met a group of serial entrepreneurs. They had established successive businesses, built them up, sold them on and then started again. Some of them were quite young—in their 30s or early 40s—but already had a chain of business successes behind them. We have to encourage such people if we are to have a future in the globalising economy. I cannot remember the precise statistic, but a staggering proportion of our largest companies—40 per cent. of the top 100, I think, although one of my hon. Friends may correct me—were not among the top 100 companies 30-odd years ago. There is a high degree of churn and innovation in the economy and we need those new businesses, which aim to grow and are constantly nurtured, to come through. The entrepreneurs' relief—the Government's solution for buying off the protests of small businesses, the most numerous group—will offer nothing of any significance to the entrepreneurs whom I have mentioned. Clearly, a serial entrepreneur who founds and sells business after business will not find the opportunity of a tax refund on the first £1 million of gain to be a significant incentive. The relief will, however, provide a break for those selling small businesses worth up to £1 million, and that is a welcome concession and U-turn by the Government. I shall not focus any more on the loss of taper relief, although we could debate the implications of that. I shall restrict myself instead to the restrictions that the Government have imposed on the entrepreneurs' relief that they offered in order to buy off opposition among small businesses to the abolition of taper relief. In Committee, concern was expressed by professional bodies and by people who run small businesses and who are likely to be affected. They said that, under the restrictions as they were drafted, some people, who on any equitable analysis looked as if they should get the relief, would be denied it. We had visions of all sorts of apparently perverse outcomes that would bring the measure into disrepute and create significant confusion. I therefore welcome Government amendment No. 29. I am sorry that the Financial Secretary is not here, but I offer my compliments to the Economic Secretary, who is here in her stead. In Committee, the Financial Secretary pledged to look again at the restriction that would have meant that if rent had been received at any time in respect of any asset that was the subject of an associated disposal, that asset would be ineligible for entrepreneurs' relief. An associated disposal is the disposal of an asset that is used in conjunction with a business, but is not owned by the business. To take a common model as an example, if a business owner who personally owns the factory building from which his business operates had at any time received rent from his own business for the occupation of that factory, it would not have been eligible for entrepreneurs' relief when an associated disposal took place alongside the disposal of the underlying business. In the case of many small businesses, the majority of the value of the global activity may well be in the associated asset, rather than in the business itself. That can be for all sorts of reasons—from security to the need to use mechanisms to raise finance. It is quite common for an asset, particularly a building, to be held in separate ownership. The measure would have been especially harsh for old, established businesses, for which any period of rent payment for such an asset at any time in the past would have led to disqualification of the asset. The measure was likely to have been particularly unfair to businesses such as farming, in which a separation structure is widely used; the people who own the land are often different from those engaged in the business of farming it. I am glad to say that the Government have taken our suggestion on board and disregarded all periods of ownership before April 2008 during which rent was received. They have therefore removed a potential anomaly that would have given rise to considerable unfairness. I am grateful to the Financial Secretary and the Economic Secretary for listening to the arguments and reconsidering on this occasion. However, we now have to address other issues. I hope that the Ministers have considered the arguments on those as well; they have not responded in the same way. The Opposition amendments in this group are aimed specifically at achieving clarification from Ministers on these issues, and we hope that we will hear a concise argument on why they are not prepared to accept the amendments. There are no politics in this. It is fair to say that, by and large, this schedule is as dull as ditchwater, but technical clarification is essential. Amendments Nos. 89 to 91 involve a housekeeping exercise that is of wider importance and touches on the debate that we have just had about how we make our tax law. I shall go into more detail on that in a few moments. The exception to the ““dull as ditchwater”” label is amendment No. 88, which deals with the treatment of share options under the enterprise management initiative. That initiative was set up by the Government to encourage people working in a business to own shares in it. It was aimed at helping high-tech start-up businesses—as I say, that is exactly the kind of business that we need to foster—in order to attract the kind of people that they need if they are to grow. Those people might come from the academic sector or another business, but typically they could command high salaries and comfortable packages working in other sectors. The scheme was seen as a way of offering them a real financial incentive to take the risk of working in a far less certain and predictable environment. Under the taper relief regime, which has now been abolished, gains on disposal of enterprise management initiative shares were treated as if the acquisition of the shares had occurred on the date of grant of the underlying options. That favourable treatment was unique to EMI shares. It was designed to promote the EMI, because the Government had identified it as a beneficial measure to promote the growth of high-tech start-up businesses. Under the entrepreneurs' relief scheme, favourable treatment is no longer available, so a key benefit of the EMI scheme is removed. There is real concern that that treatment represents an abandonment of the Government's commitment to the EMI and, even worse, of their commitment to employee share ownership. The Economic Secretary will have the opportunity, when she stands at the Dispatch Box to reply, to be clear and unambiguous about the Government's commitment to the EMI and to employee share ownership more generally. If she asserts that the commitment will continue, she might explain why she has removed the key advantageous tax treatment that the taper relief delivered, and say why she thinks that potential employees would be tempted by EMI share options, given the lack of any favourable tax treatment. Amendment No. 88 was tabled more in hope than expectation. It would make EMI shares subject to the same treatment as pertained under taper relief. Its fiscal impact is likely to be very limited, because one of the criteria for receiving the entrepreneurs' relief is that a person must own 5 per cent. of the business in question. It would be very unusual for an individual to own 5 per cent. of the shares in an EMI company. It can and does happen, but we are by no means talking about hundreds of thousands of people. The Economic Secretary has the opportunity to send a strong signal about the value that the Government place on high-tech start-up businesses, and about the Government's commitment to the EMI scheme and employee share ownership in general. Concerns about that commitment are more salient than the concern about the treatment of EMI shares under the entrepreneurs' relief. Amendments Nos. 89 to 91 deal with associated disposals, as does Government amendment No. 29. The issue relates to the conditions that must be met if a disposal is to qualify as"““a disposal associated with a relevant material disposal””." As I said, the stuff that we are dealing with is complicated. A relevant material disposal is a disposal of an interest in a business. A disposal associated with a relevant material disposal is the disposal of an asset that is used in conjunction with the business, but is not owned by the business. Before the disposal of that asset can be treated as a disposal associated with a relevant material disposal, three conditions have to be satisfied. They are set out in proposed new section 169K of the Taxation of Chargeable Gains Act 1992, which is inserted by schedule 3 to the Bill. To paraphrase, condition A is that there is a material disposal. Condition B is that the disposal is made as part of the"““withdrawal of the individual from participation in the business””." Condition C is that the associated asset has been in use for the purposes of the business. There is no problem with conditions A or C; they are fine. The amendments would delete reference to condition B, so that any disposal of an asset—typically a building or land, but possibly also intellectual property—owned separately by an individual but used in connection with the business would be an associated disposal. The definition of"““withdrawal…from participation in the business””" gave us cause for concern in Committee. It is a bit of a woolly concept, and we foresaw that the provision would give rise to uncertainty, and ongoing problems as taxpayers struggled to understand whether they would be entitled to relief. However, the situation changed somewhat when draft guidance was published, and I am grateful to the Financial Secretary for circulating it. It helpfully defines what"““withdrawal…from participation in the business””" means. It says:"““A withdrawal from participation in the business concerned relates to the 'material disposal of business assets' which qualifies for Entrepreneurs' Relief…That is, it takes place when the individual reduces his or her interest in the assets of the partnership, or their holding in the company, as the case may be. It is not necessary for the individual to actually reduce the amount of work which they may do for the business.””" It goes on to give examples, which I will not read out. Withdrawal from the business is defined as occurring when an individual reduces his interest in the assets of a partnership, or his holding of shares in a trading company. In other words, if condition A is met—if there is a material disposal of business assets—condition B, which is that the individual makes such a disposal as part of a withdrawal from the business, will always be met. Condition B becomes tautologous as a result of the definition of the term"““withdrawal…from participation in the business””" in the guidance notes. Before we had the benefit of the guidance, we thought that condition B was offensive, but we now see that it is merely otiose. It adds nothing to the provisions of proposed new section 169K. We arrive at that understanding not through the mechanism of amending primary legislation, which is what the group of amendments would do, but by relying on non-statutory guidance. I suggest to the Economic Secretary and the House that that is not a satisfactory way to proceed. I offer her the opportunity to tidy up by using amendments Nos. 89 to 91 to put in the Bill what she is saying through guidance. If she is good enough to confirm that my interpretation, and the interpretation of others who have looked at the guidance, is correct, and that condition B will always be satisfied when condition A is satisfied, she must come to the conclusion that condition B is redundant and completely unnecessary. I suggest to her that the position should be made clear not through a non-statutory definition of"““withdrawal…from participation in the business””," but by deleting condition B. The Government addressed the substantive concern about condition B, but they did so in the wrong way. Making a condition self-fulfilling is not a satisfactory way to legislate. I am keen to hear the Economic Secretary's response on that point. Amendments Nos. 92 and 93 relate to restrictions on relief for associated disposals. The Government have dealt with the restriction where rent is payable in Government amendment No. 29. Other restrictions arise where the asset is in use for business for only part of the period of ownership, where only part of an asset is so used, or where the individual has owned the asset for only part of the period of business use. Again, guidance has been issued—CG64145—and that clarifies the point. It indicates that HMRC officials will be encouraged to take a common-sense approach to the application of those restrictions and that in terms of interpreting what is a just and reasonable apportionment—the test in the Bill—they are being encouraged to make the apportionment on the basis that any reasonable person would think appropriate. My remarks on amendments Nos. 89 to 91 apply to some extent to this group of amendments as well. It is better that we have clarification in the guidance than not at all, but it would have been better still if it were in the Bill. However, in this case, the guidance does not render what is in the Bill meaningless or unnecessary, so the Minister can make her case for doing it in guidance if that is what she prefers. Amendments Nos. 92 and 93 have been largely answered by the delivery of the draft guidance note. I wait to hear what the Minister has to say about amendments Nos. 89 to 91 and also wait for reassurances in respect of amendment No. 88 and the Government's commitment to EMI schemes.