Finance Bill

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The Chairman: With this we may take the following amendments:

No. 21, in schedule 15, page 152, line 28, at end insert—

    `Qualifying trades

.—(1) In subsection (2) of section 297 (qualifying trades), following ``a substantial part of the trade'' substitute:

    jf13``(a) advertising and publicising the policies of Her Majesty's Government;

    (b) the conduct of surveys or polls as to the opinions of members of the public (or any section of them) on any subject (whether by interview in person or by telephone or through the medium of a group discussion focused upon any particular subject);

    (c) estate agency;

    (d) consultancy as to the arrangement of objects or artefacts within any living space (where based upon the principles of any non-European philosophy);

    (e) fashion modelling (the provision of individuals engaged wholly or mainly for the purpose of displaying, whether or not to the public, items of clothing); and

    (f) the publication of newspapers (including magazines or other periodicals, but not journals of a technical or scientific nature).''.

    (2) Leave out subsections (3) to (9) inclusive of section 297 and subsections (5) to (5C) inclusive of section 298.'.

No. 27, in schedule 16, page 170, line 11, at end insert—

    `Excluded activities

(1) In sub-paragraph (1) of paragraph 26 (excluded activities), following ``excluded activities'' substitute:

    jf13``(a) advertising and publicising the policies of Her Majesty's Government;

    (b) the conduct of surveys or polls as to the opinions of members of the public (or any section of them) on any subject (whether by interview in person or by telephone or through the medium of a group discussion focused upon any particular subject);

    (c) estate agency;

    (d) consultancy as to the arrangement of objects or artefacts within any living space (where based upon the principles of any non-European philosophy);

    (e) fashion modelling (the provision of individuals engaged wholly or mainly for the purpose of displaying, whether or not to the public, items of clothing); and

    (f) the publication of newspapers (including magazines or other periodicals, but not journals of a technical or scientific nature).''.

    (2) Leave out sub-paragraph (2) of paragraph 26 and paragraphs 27 to 33 inclusive.'.

Mr. Flight: The amendments relate to three different sectors and cover territory debated in last year's Finance Bill. The list of qualifying activities is a hangover from the old days of business expansion schemes. Even at that time, it was a mistaken reaction to a belief that the BES was being abused in the property arena; in reality, the property sector was about to collapse and many people failed to make money through property BESs.

There is a list of qualifying or excluded activities, which has a strange historic moral purpose behind it. The amendments would substitute a new list of excluded activities. In today's age, some might view it as equally not worth having morally or in terms of economic interests. I present the argument in this fashion intentionally to make the point that specifying excluded territory on moral grounds is subject to fashion and revised judgment and also fails to make commercial sense. These are probing amendments whose objective is to get rid of the list of excluded activities.

The Economic Secretary to the Treasury (Miss Melanie Johnson): The reason for excluding certain trade activities is to target the schemes on companies in the greatest need and to ensure value for money. I am sure that the hon. Gentleman realises that. They are not excluded, as the Opposition used to suggest, on moral grounds, but because they are generally less risky and because the investor's stake is effectively underwritten by property owned by the company. I was sad to discover that the millennium dome was left off the Opposition list, but we can discern a new bandwagon on their list this year.

A relevant factor for the Government is the extent to which the essentially artificial trades involved in these activities could be set up for the purposes of obtaining relief without exposure to an appropriate level of risk. The reliefs in the schemes are very generous and it is right to target them at companies carrying out riskier forms of enterprise. That applies to all these provisions.

Mr. Flight: Does the Minister accept that one of the excluded activities, agriculture, now faces the highest risk and is more in need of capital economic activity than any sector in the country?

Miss Johnson: I will deal with that immediately, if the hon. Gentleman would like. Farming is one of the excluded activities from the list that is kept under review. The list was most recently extended in the Finance Act 1998 to exclude some additional activities, including farming. It was partly a response to the concern of the farming industry itself—referred to in the hon. Gentleman's opening remarks—that the tax-driven acquisition of farm land was making it more difficult for existing farmers to expand.

We have recently been asked whether now is an appropriate time to readmit farming as a qualifying trade. Of course, we have every sympathy with businesses affected by the foot and mouth epidemic, but all the schemes that are the subject of the amendments apply only to companies, and our figures suggest that fewer than 5 per cent. of livestock farms—I emphasise that that is livestock, not arable—are incorporated, so only 5 per cent. could potentially qualify. Even then it is unlikely that such farms would attract the interest of unconnected outside investors. The measures would not address the immediate liquidity problems of most of the farms suffering from foot and mouth disease.

Moreover, allowing farming to qualify for EIS deferral relief would principally benefit so-called hobby farmers rather than those whose livelihood depends on farming. I am sure that the hon. Gentleman would not want us to do that, because it would divert investment away from genuine higher-risk trading activities. Those who wish to invest in rural industries, rather than farming and market gardening, can do so under the existing rules. The rules would not prevent such companies from being based on existing farms.

It is not clear from the drafting, but it seems that the intended effect of the amendments is to substitute the existing list of excluded activities, which was largely drawn up by the previous Conservative Government, with an entirely new list. The similar amendments tabled by the Opposition last year included the corporate venturing scheme and the enterprise management initiatives. The wider point that the Opposition may want to make is that there is no case for excluding any activities from the scheme. I do not agree, if that is the force of their two rather different-ranging sets of lists from the past two years. For example, it is clear that those who advise potential EIS investors consider that property-backed activities carry a lower level of risk. That is not surprising. Publications that provide an assessment of investor risk for EIS share issues give significant weight to that factor. If the more common property-backed activities were not excluded, experience gained from the EIS predecessor shows that most EIS investment would be channelled into such companies, denying to other forms of company the opportunity to raise the funding.

If the list were abandoned, that would also encourage those who want the benefits on offer but do not want to act in accordance with the aims and spirit of the schemes. There is no reason why those who abuse the business expansion scheme by, for example, setting up essentially artificial retail trades, in antiques or paintings, or by interposing artificial distribution companies between genuine wholesale and retail companies, would not act the same way in relation to EIS if they were free to do so. We would end up with the same range of abuses that existed under the business expansion scheme.

I hope that I have given Committee members ample reason not to pursue the amendments.

Mr. Flight: First, may I make a distinction between abuse and measures that may be needed to prevent avoidance, and the concept of economic activities that are either more deserving than others or are deemed to be of higher or lower risk? I made the point that the list was born of the BES days and indeed of the previous Conservative Administration. Economic history shows that it was ill conceived at the time. There were comments that BES was being used too much for property investment, and the property market collapsed shortly after. Many people lost a lot of money and learned from their experience. The probing amendment was first tabled to deal specifically with agriculture. While 95 per cent. of farms are not owned individually, there is no great difficulty in people using a corporate vehicle if they wish, and being able to use one of the schemes as a source of badly needed capital. I ask the Government to think further about agriculture.

Secondly, the list is out of date. It reflects moral judgments on the economy made 15 years ago and is well overdue for revision in terms of what areas need capital. As I have said, the amendment is probing. The Minister replied to the effect that agriculture has been examined, but I still believe that that is unsatisfactory.

Miss Johnson: This list is not about morally excluded activities, but levels of risk and whom we want to incentivise. There is no point trying to incentivise low risk activities because, by their nature, they are already incentivised. We keep risk under review and I thank the hon. Gentleman for drawing the Committee's attention to the losses sustained by investors under the previous Conservative Government.

Mr. Flight: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 20, in page 150, line 4, leave out from `option),' to end of line 6 and insert—

    `for paragraph (b) substitute—

    ``(b) at the time of the release of rights under the old option, the requirements of paragraph 9 (purpose of granting the option) are met in relation to the new option;''.'.

I trust that the Government will accept the amendment, because the Bill is defective. As it stands, it will be possible to exchange a new EMI option for an old one only if the total value of the new options does not exceed £3 million. That will mean that, if a company uses up its full EMI capacity and is then taken over at a premium, it will not be able to roll over the options into the acquiring company. The remaining provisions of paragraph 63 of the EMI rules are inadequate to protect the position of the new option. Paragraph (b)(ii) is irrelevant once the limit of 15 participants is removed. The Government might know that that defect has been noted by the Chartered Institute of Accountants, and we want the Government to address it.

 
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