Miss Johnson: As the hon. Gentleman said, the amendment would remove the requirement that, in a company reorganisation, the maximum value of options in respect of the acquiring company does not exceed £3 million at the date of the grant. Removal of that requirement would allow one company or group to breach the generous £3 million limit as a result of the merging of several companies with EMI options. There is the potential to have an unlimited number of shares under the EMI option.
Mr. Oliver Letwin (West Dorset): I apologise for referring to the previous debate, but one of the Minister's comments has been reverberating around my mind and it is relevant. Is she claiming that, because capital markets in Britain are incapable of allocating risk to reward and vice versa, the Government intend, with EMI and other such schemes, to direct investment more heavily than the capital markets would otherwise do towards riskier ventures?
Miss Johnson: Our view is that there are enterprises involving greater risk that need investment and that we must encourage engagement with those companies, be it by staff investment support or through the markets and outside investment. As such, the schemes are focused on the riskier end. I am not saying anything new in thatthat was the thrust of our comments in last year's Finance Bill Committee. Opposition amendments, which would extend the scope to slightly less risky parts, would not target such enterprises in the intended way. They would also draw investors' interest to the less risky end of the spectrum. That is why we do not support the general drift of the amendments. I hope that that clarifies the point for the hon. Gentleman.
Mr. Letwin: As this threatens to be the only interesting point that we have managed to discuss this morning, I am tempted to pursue it one stage further. That is no reflection on either my hon. Friends or Ministers; this is just a boring part of the Bill[Interruption.]like most other parts of the Bill. Does the Economic Secretary seriously maintain that the current risk to reward ratio offered in the United Kingdom capital markets is, in the Government's view, systematically distorted? That would be the only rationale for her observations.
Miss Johnson: No, it would not. The rationale is the one that I have already set out. EMI offers generous targeted tax reliefs to help companies recruit and retain the staff that they need to help them to grow. As I told the hon. Gentleman, we must ensure that the scheme is focused on only smaller, higher-risk companies. Without targeting rules, the market would respond by devising schemes to extract tax reliefs without risk, because one attraction of the market is to try to find good returns with low risks. I am sure that I do not need to explain that to the hon. Gentleman.
The changes in this year's Finance Bill will make the EMI even more generous and not only remove the limit on the number of employees who can be granted the EMI option, but double the value of the shares that can be granted under EMI. Those changes were warmly welcomed during the consultation period. As I said, the amendment, which would remove any financial limit in the case of company reorganisations, would undermine the objective of the tax-relieved incentives. Although the hon. Gentleman was hopeful that we would accept the amendment, I urge the Committee to reject it.
Mr. Jack: The Economic Secretary mentioned the figure of £3 million. Why does the Treasury think that £3 million is the right figure? On what basis was that calculated?
Miss Johnson: We considered that. We believe that that is the right figure and targets the right range of companies. Indeed, we believe that that will lead to the right outcome in terms of risk. We welcome the support of the Institute of Directors on the matter, which said:
Mr. Jack: The Economic Secretary seems to be telling me that it is right because it is right. Any increase is bound to be welcomed. I return her to my question: how was the £3 million figure calculated? What was the basis of deciding that £3 million was right?
Miss Johnson: We looked to see what the take-ups were like and what value was likely to target the companies that we wanted to target. The figure is generous. The Institute of Directors, which does not lightly praise the Government or routinely welcome Government initiatives but is careful with its praise and judgmentsas I am sure that the right hon. Gentleman is awarehas welcomed the increase and considers the sum a reasonable one to pick. Of course, we consulted widely on the matter, and as a result of that we arrived at the figure of £3 million.
Mr. Andrew Tyrie (Chichester): If we consult firms and ask them whether they would like a relief, they are likely to say, ``Yes, please.'' The choice is between selective targeted relief and slightly lower rates across the board. Such choices must always be made with a tax system. In this case, the Government have gone for selective targeting, so the issue is whether they identified a need for it.
The Economic Secretary said a moment agoI hope that I am almost quoting herthat some areas were not receiving the investment that they needed. That means that the Government must have their own assessment of need or the right level of investment; that assessment must differ from that of the capital markets; and some distortion in those markets must be creating the inadequate level of investment and therefore the need.
Has the Economic Secretary estimated that need and market distortion? Has such an estimate been published and I have missed it? If not, will she put it in the public domain? Is the situation getting worse or better? I think that she is really saying that the Government should, to some degree, be in the business of picking winners in one part of the capital markets. That is a risky road to go down. Before I conclude that that is what she is saying, will she answer my questions?
Mr. Letwin: I do not want to extend the debate unduly, but I want to expose the fallacy of what the Economic Secretary has said, and I hope that she will revise her remarks as a result. From the inception of the schemes, their purpose has not been to try to overcome a misalignment of risk and reward in the capital markets or the economy as a whole, although my hon. Friend the Member for Chichester (Mr. Tyrie) is right that it would have been rational to do so had there been a problem. Nor has the Chancellor ever suggested that there was such a problem. The schemes' purpose is to change the position on the graph of the indifference curve of investors.
Investors make judgments about risk and reward at any given combination of those two phenomena. The aim of the schemes is to make investors as a whole less risk averse by improving return, which moves the whole indifference curve up the graph. That applies as much to highly risky and hence highly rewarding enterprises as to highly unrisky and therefore unrewarding ones. It has no relationship to the point on the curve on which any given enterprise may fall. I do not know whether, on the assumption that investors in the UK are collectively too risk averse, it is sensible to induce investors to move upwards on the indifference curve. I plead agnosticism, but that is the purpose of the schemes.
The Economic Secretary's justification for rejecting my hon. Friend's points is therefore against the spirit of the schemes. I hope that she will see fit to revise her remarks, because I think that they mislead the Committee about the Government's purposes, let alone a rational purpose.
Miss Johnson: I will in no way gainsay what I have said. I strongly believe that the hon. Gentleman's remarks on changing the risk-averse nature of some investors support my points. That is one issue that we address in the schemes. I am curious about why the Conservatives are so interested in the topic, because they had the EIS scheme and introduced the VCT scheme.
I was originally dealing with the argument advanced by the hon. Member for Arundel and South Downs, who suggested that a moral element was involved. I shall not go back over the previous set of amendments, Mr. O'Hara, because you will rule me out of order, but we are not talking about a moral stamp of approvalquite the reverse. I gave the relevant reasons earlier.
All that needs to be said about enterprise management incentives is that the scheme was based on consultation and developed in detail by an advisory group including representatives from the companies most likely to benefit and from practitioners. The outcome was devised keeping in mind those whom we wanted to benefit from the scheme, the detail of which is entirely appropriate.
Mr. Tyrie: Does the Economic Secretary agree that a scheme created and devised by the interest group most likely to benefit may not result in a scheme that is most likely to benefit the economy?
Miss Johnson: The point is that it is a targeted measure, as are the other schemes we have been discussing this morning. The economy benefits if proposals are targeted; performance is improved and so is access to investment in the relevant part of the economy. The Opposition seem to be suggesting a scattergun approach, in which they distribute tax largessewhich they do not have anywaywithout targeting. That is not within the spirit of the measure, which I hope that the hon. Gentleman now realises.
Mr. Flight: We welcome the increase to £3 million and the other reforms in schedule 14, most of which we suggested in the debate on the EMI schemes last year. If a company in which a person has EMI options is taken over, and he cannot continue them, he will lose unless amendment No. 20 is accepted. One solution is that the maximum value of options in respect of the relevant company's shares should be recorded at the time of the original grant and not at the time of the release of rights under the old options. However, if nothing is done about it, a person will be unfairly treated if his little business is taken over and it is not of his doing. The amendment applies to takeovers, not to applications further to increase the £3 million limit.
Schedule 14 agreed to.
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