Income Tax Relief in VCTs

Brooks Newmark argues to retain the 40 per cent tax relief that applies to VCTs

3.15 pm

Mr. Newmark: The Government's desire to refocus VCT investment is a simple excuse for dealing with the unforeseen cost to the Exchequer of the tax relief currently offered to investors. The cost to the Exchequer of 40 per cent. income tax relief has risen from £220 million to £315 million, nothwithstanding the caveat that those figures are

"particularly tentative and subject to a wide margin for error."

Treasury Ministers have perhaps got into the habit of not expecting their market interventions to be successful, and when they are, they are caught short. That is the real justification for part 2 of schedule 14.

The Treasury Committee had the benefit of a simple warning in March 2004 when it heard:

"I think that the Chancellor has to be careful that the history of an awful lot of tax reliefs is that they are set up with very tight restrictions, they have little effect, progressively Chancellors relax the effect, increase the benefits, and then the thing takes off in a completely unexpected direction and has to be stopped."

The Chancellor lectures that there should be no return to boom and bust-it is his favourite stick with which to beat the Opposition-but what is the result of all these changes if not boom and bust for the venture capital trusts and their investors?

The Chief Secretary has committed the Government to maintaining the 30 per cent. income tax relief for the life of this Parliament.

Stephen Hesford: Which part of "temporary" does the hon. Gentleman think that the industry did not understand in 2004?

Mr. Newmark: The hon. Gentleman is absolutely right; the point was made that the relief was temporary. But, as we saw, the industry was flat on its back, at a size of £50 million or £70 million, and it is now successful and has grown. But that has been primarily because of the stimulus that the Government gave by increasing the tax relief from 20 per cent. to 40 per cent., and that is my argument here.

The fact remains that repetitive changes in the tax relief scheme and, concurrently, the risk profile of VCTs, will undermine investor confidence and prevent legitimate tax planning. Is that really the solid foundation to investment that the Chief Secretary would have us all believe it to be? The justification for the 40 per cent. income tax relief was always couched, as the hon. Gentleman said, in terms of a temporary stimulus that would be the subject of continued review. But it is questionable whether that approach is helpful to investors who are looking to plan their long-term financial affairs. It has denied them the reasonable level of certainty that should be their right.

My concern as a past practitioner is that there is a high probability that the market will begin to shrink back-the point made by my hon. Friend the Member for Ludlow (Mr. Dunne)-notwithstanding the preservation now of a proposed 30 per cent. income tax relief.

I also question the assumptions that underpin the figure of 30 per cent. Was it chosen simply because it is a midway point between the old 20 per cent. relief and the two-year period of uprating to 40 per cent., or is there a more substantial justification for the compromise? Venture capital trusts are working, and working well, because there is sufficient incentive to stimulate uptake by investors operating in an inherently risky market. We should not arbitrarily change incentives, even for the lifetime of the Parliament, without subjecting them to regular review.

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OTHER INTERVENTIONS IN THE DEBATE

Mr. Newmark: I am sure that the Financial Secretary will go on to deal with some of the points that I made earlier, but I am concerned about his perverse logic. The Government should rightly be congratulated on providing a stimulus for the venture capital trust industry by increasing the tax relief from 20 to 40 per cent. That resulted in clear success, with growth in the sector increasing from £500 million to £700 million. I do not understand why changing the rules will mean the continuance of success, particularly when it was the tax stimulus that helped the industry become a success in the first place.

John Healey: It was just that. It was set at 40 per cent. for two years; it was due to revert at the beginning of April to 20 per cent.; and our judgment now, backed up with a proposal, is that a 30 per cent. rate of income tax relief for VCT investments is appropriate. It represents an increase of 10 percentage points on the original relief rate. As the hon. Member for South-East Cornwall (Mr. Breed) said, that is our judgment in the circumstances. We believe that it will help to ensure a sufficient and stable level of fundraising in the years to come and that it will therefore help to support a sustainable VCT sector in the years to come. It is designed, in response to the issues raised by the hon. Member for Fareham, to be a settled rate. As we discussed in the last group of amendments, it is also important carefully to monitor the application of the VCT schemes and the impact of the package of changes that we are introducing. It is right to keep under review, as we do with all taxes, the operation and impact of the scheme.