Mr. Boateng: The clause introduces the community investment tax credit, which is a tax incentive to increase the flow of private investment in disadvantaged communities. The incentive is one of the Government's responses to recommendations by the social investment taskforce, which reported to the Chancellor in October 2000. We are enormously indebted to Ronnie Cohen and others on the taskforce for the work that they have done, which has enabled us to introduce measures in this way. The aim is to increase the supply to communities of development finance, which should act to stimulate enterprise, boost employment and reduce social exclusion. We want to target not only a wide range of businesses but the social enterprises that can play such an important part in providing premises and other facilities to under-invested communities.
Existing community development financial institutions are a vital connection between capital markets and enterprises in disadvantaged areas. They act as intermediaries channelling capital to enterprises that are too small or not sufficiently mainstream to be financed from the usual sources. CDFIs themselves can face difficulties in gaining access to capital: a failure that the community investment tax credit is designed to address. The hon. Gentleman's amendment is designed to probe why we have introduced the measure in the way that we propose, and would bring the legislation into force from 1 April.
For similar reasons to those that I gave the Committee to reject the hon. Gentleman's last amendment, I urge them to reject this one. We have drafted regulations dealing with CDFI accreditation, which have been published by the Small Business Service. Comments on those and supporting administrative processes have been invited, and the use of an appointed day order will give us the opportunity to consider fully any emerging points before the scheme is introduced. Because of the way that the taskforce went about its work, which was rooted in the experience of the venture capital industry that helped us develop the proposal, one of the great strengths of the scheme is that at every stage we have moved with the full support and involvement of the industry and those who are being supported and encouraged in making investment decisions that will benefit them and the wider community.
Mr. Mark Hoban (Fareham): There was an announcement in the Financial Times last week or the previous week that indicated that the Treasury had
Column Number: 229
invested £20 million alongside a further £20 million from the venture capital sector, including Apax which is chaired by Sir Ronald Cohen. Is that funding intended to go into a CDFI, or is it additional funding?
Mr. Boateng: I will come to the hon. Gentleman's specific point in a moment because there are several initiatives in that area, including the Phoenix fund, and I do not want inadvertently to mislead the Committee in terms of where the funds are going. This particular proposal stands on its own merits, irrespective of any identified funds that might be used in such a way. I will get back to the hon. Gentleman on that specific tranche of resource.
We are anxious to ensure that we take into account the representations made by business concerning the accreditation regulations. I do not want us to be inhibited in that by being requiredas we would beto bring the tax credit into immediate effect. We are in the course of discussions with the European Commission on state aid issues before the legislation comes into effect. I want to be confident that we have secured that before bringing the clause into effect, as I was on the previous occasion.
It is important that we have a dialogue with the Commission, not least because in relation to the rest of Europe we have an opportunity to lead the way in the development of disadvantaged areas through partnership with the private sector. I want to ensure that the Commission is on board and supportive, and that our proposals can be emulated elsewhere in the European Union. We are confident of a positive outcome, but the discussions must take place.
The hon. Member for Fareham (Mr. Hoban) raised a point about the specific fund and, although I have a different sum, I think he was referring to the Bridges community development venture fund, which was launched by my right hon. Friend the Chancellor and my right hon. Friend the Secretary of State for Trade and Industry on 14 May. That £40 million fund aims to address market failure in the provision of venture capital to deprived areas. It complements the measure by providing larger amounts of equity capital to businesses with high growth potential suitable for venture capital investment.
The Phoenix fund is a £96 million fund run by the Small Business Service, which invests in organisations working to provide better access to business support and finance in deprived areas. Some of that supports capacity building in the CDFI sector and, again, the CITC will help to capitalise that.
With that assurance, I hope that the Committee will give the clause a fair wind. It is an exciting development, linking the combating of social exclusion with the promotion of enterprise in some of our most disadvantaged areas.
Rob Marris (Wolverhampton, South-West): Can my right hon. Friend the Financial Secretary say whether the clause and schedule apply to co-operatives and credit unions, which I and many Labour Members are keen to encourage?
Column Number: 230
Mr. Boateng: We are taking a range of other measures specifically to support co-operatives and credit unions, in which my hon. Friend the Economic Secretary takes a particular interest. It would certainly be open to the Co-operative bank, other co-operative societies and credit unions that hold resources in this area to participate in this initiative when they have brought their specific proposals within the general accreditation rules. The provision is not aimed specifically at co-ops and credit unions, but, subject to the accreditation rules, they will be able to participate. My hon. Friend the Economic Secretary is working with the co-operative movement and credit unions on a number of specific initiatives that will assist them and other mutuals.
Mr. Flight: I thank the Minister for his explanation. When the provisions covering CDFIs are put into effect, I am sure that the Government will make it clear in any announcement that these are not new or additional provisions, but the final implementation of proposals in the Budget.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 56 ordered to stand part of the Bill.
Community investment tax rlief
Question proposed, That this schedule be the Sixteenth schedule to the Bill.
Mr. Flight: I want to refer to issues arising in schedules 16 and 17 and to point out to the Government some of the concerns raised, mainly by the Law Society. The relief is more of a subsidy than a tax relief and delivering such through the tax system will create complexity for both the Revenue and investors, particularly when the Revenue might not otherwise normally be involved in the provision of such direct grants.
Loan amounts can be repaid over a period and if they are repaid early or transferred relief will be withdrawn. In those circumstances the withdrawal of relief appears to take place from the year before the year in which the event giving rise to the withdrawal occurs and paragraph 42 of the explanatory notes to schedule 16 gives an example. That seems a little unjustified. The withdrawal of relief takes the form of an assessment under schedule D, case VI, for the tax year or accounting period for which the relief was obtained. If the withdrawal relates to the tax year or accounting period for which it was obtained, could not the tax liability for that year simply be reinstated because that might allow other reliefs to be used against that tax liability? An assessment under schedule D, case VI, is less flexible in that context.
Follow-on loans do not in many circumstances achieve tax relief, presumably because there is a danger than if a loan is made to a CDFI a subsequent loan can be made and the sums subsequently lent used to repay the earlier loan. However, the CDFI might need a further loan and the second loan might be far greater
Column Number: 231
than the original loan. Could that not be dealt with differently by allowing a subsequent loan to gain relief if the former loan is repaid out of profits or available funds of the CDFI? There is a cap on the total loan relief available to a CDFI.
Finally, provisions are included that prevent a CDFI being reconstructed without a disposal of the shares, securities and loans held in that CDFI. Why has that provision been included?
Mr. Jack: I should like to ask the Financial Secretary a number of questions, but I want to say at the outset that I welcome anything that brings investment into what are defined in schedules 16 and 17 as ''disadvantaged areas''.
Paragraph 1 of schedule 16 refers to ''An individual or company'' and I am pleased that the schedule recognises the role of the individual investor. Forgive me if I have misunderstood, but it seems that an individual who wishes to take advantage of the relief can do so only by routing their investment through an approved institution. I should like to know why an individual who may want to make a personal investment into the sort of enterprise that is approved under schedules 16 and 17 might not do so in a straight line--that is, by putting the money into the activity rather than routing it through a financial intermediary. I may have misunderstood and perhaps the Financial Secretary can enlighten me.
I now turn to paragraph 4(2) of schedule 16, in which the phrase ''disadvantaged communities'' is first used. Again, I apologise if I have missed a point in this long and detailed schedule, but what is the definition of ''disadvantaged communities''? I ask that question because within potentially affluent areas there may be communities that are extremely disadvantaged which could benefit from the community-strengthening institutions that are to be invested in, which is one of the purposes of the measure.
The way in which the schedule is drafted gives it an urban feel, but what about rural disadvantaged areas? I am delighted that the body language of the Financial Secretary conveys that rural Britain may also benefit. When he replies, will he explain the definition because European Union schemes to help disadvantaged areas already have delineated zones. The Minister will be aware that there are often fearsome brushfire wars in the Government over where the boundaries of those zones are to be drawn. Changes have taken place since that was last done, and it is important that we have some indication of what disadvantaged areas are. Has the matter been settled, or can it be debated later?
Paragraph 5(3)(a) states that provision can be made by regulation
''for appeals to the Special Commissioners against refusals to grant accreditation''.
It is good that there is an appeals mechanism, but the idea that the provisions are so complex and so difficult that those involved in certain schemes will end up at a special commission hearing makes me question
Column Number: 232
whether the Treasury or the Government will give us a simple, easy-to-understand explanation that prevents people from taking advantage of sub-paragraph (3)(a). How will the intention be communicated to the investing community?
Paragraph 7 draws our attention to the fact that an
''accreditation has effect for a period of three years beginning on such day as may be specified''.
A project may last longer than three years, however, and my hon. Friend the Member for Arundel and South Downs referred to renewal. I should be grateful if the Financial Secretary would say a word or two about those who invest in, for example, a five-year regeneration project, but where the accreditation, in the initial sense, will last for only three years. If such projects are okay for the first three years and do the same thing in the last two years, would it not be sensible to have a little more flexibility and to proceed project by project, rather than having a fixed five-year period?
I am glad that the hon. Member for Wolverhampton, South-West (Rob Marris) mentioned credit unions and other micro-financial institutions at the community level, because my attention had been drawn to them by paragraph 8. I was delighted when the Financial Secretary said that the Economic Secretary was working on the issue, because those responsible may not want to fund community-based financial institutions through a loan security or a share.
Paragraph 13 is headed ''Pre-arranged protection against risks'' and makes it clear that projects will not be assisted if someone takes out cover against financial failure. The Financial Secretary made an interesting point, however, when he put the issue in a European context. Projects might attract finance from outside the United Kingdom, and it would not be unrealistic for those who provide the money to have a hedging arrangement to cover the financial risk involved in the currency transaction. Would such risk cover prevent a project from being agreed, given that it relates to a different kind of risk, involving a currency element? It would also be interesting to know how the European funds accessed by some projects might be treated under the proposals.
Paragraph 19(4) in part 5 contains words that need a little teasing out. It states:
That is an interesting formulation, because it implies that those on both sides of the equation could decide that the conditions were not satisfied. There will be uncertainty if an inspector comes along and says, ''I know that this was a flexible project, but you're not doing what you set out to do.'' Will the Financial Secretary sketch in how the test of whether the conditions are
''for the time being satisfied''
will operate? People would like to think that they will not be subject to all kinds of review once they have gone to the trouble of proving that the scheme is eligible for the three years, as set out in the Bill. I might
Column Number: 233
be exaggerating the import of those words, but some words of comfort from the Financial Secretary would be helpful.
I have a final, general, point. The measure restricts the amount of investment in residential accommodation that can be assistedin fact, it expressly excludes it. I could hear business expansion scheme bells ringing loudly in the Treasury when that was drafted. It goes on to restrict the proportion of money that can be invested in property development and commercial property. That is an important area for clarification. In run-down inner-city areas, it is often property-based activity that generates extra economic activity. I am worried that the understandable caution of the Treasury, which previously had its fingers burned by venture-based activity such as business expansion, might be unnecessarily restrictive when property matters are considered.
It is a little disappointing that residential accommodation has also been eliminated. In either an urban or a rural situation, the generation of low-cost social housing might be the route to developing an area and to encouraging the kind of institutional development that the measure seeks to encourage, but which is now expressly excluded. Would the Financial Secretary be kind enough to enlighten us on how this part of the measure is to operate?