Mr. Philip Dunne (Ludlow) (Con): I remind the Committee of my entry in the Register of Members' Interests. I am an investor in a venture capital trust: Baronsmead VCT 4. I am also honoured to chair its non-executive board.
I welcome the measures to improve access to capital, especially the increase in the EIS limits to which the hon. Member for Wolverhampton, South-West (Rob Marris) referred. Of course, investments in that category are not for the faint-hearted because they do not provide the portfolio risk diversification that is the attraction of a VCT. I also welcome the retention of tax relief for VCTs, albeit at a lower level, which we will discuss under a later group of amendments.
The reduction in the gross assets of a company in which VCTs may invest from £15 million to £7 million immediately before an investment and from £16 million to £8 million immediately after an investment will significantly reduce the scope of eligible companies. As my hon. Friend the Member for Braintree (Mr. Newmark), who is an expert on these matters, rightly said, that will raise the risk profile of investors in VCTs. The risk profile will be raised by definition because the portfolio effect of a mix of business sizes in a VCT helps both the underlying investors and the managers of the trust to have greater confidence because investment performance tends to be better when there is a greater spread of both risk and the size of investment in individual companies. The reason why the limits have been selected is unclear, so I urge the Minister to give an explanation to Opposition Members who are perplexed.
When VCTs were first introduced under the previous Government in 1995, the limit on the gross assets of eligible companies was £10 million. Over the following 10 years, that would, of course, have inflated to a much higher figure, but even £10 million is significantly more than the amount proposed. Many VCTs take advantage each year of the period prior to and immediately after the end of the tax year to undertake fundraising. Several VCTs pulled their fundraising following the Budget. I have read several of their websites and many have cited the halving of the maximum size of investee companies as the reason. I will name a couple of funds-not my own-because they are peer funds that perform well: Northern VCT 2 and First State AIM VCT, which was the best performing AIM VCT that was launched last year.
Those who are involved in marketing such funds have a good sense of investor appetite for VCTs. I refer especially to Henry Chaplin, the chief executive of Noble Fund Managers, the website of which points out that he anticipates that the VCT market, having raised £800 million in the last tax year, will decline to only £300 million by 2007-08. That gives some idea of the impact of the changes that the industry is expecting.
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That takes us to why are the Government so keen to introduce this change. As was said earlier, this may be purely a revenue limiting exercise. It may be to do with the gaping deficits in the public accounts. It appears that it has little to do with seeking to professionalise and encourage a stable VCT industry. One issue that it will give rise to for small companies has been touched on already. Those companies with gross assets of, for example, £6 million-just under the limit-can now raise only £2 million compared with a £10 million subscription that they could have raised under the previous regime. That will have a significant impact on small and medium-sized companies that have a requirement for significant amounts of capital, and this avenue of raising that capital is likely to be shut to them. That could have an effect on higher risk and potentially higher return or high risk and nil-return companies in the pharmaceutical sector and other areas that are great consumers of capital.
John Bercow (Buckingham) (Con): The prognosis that my hon. Friend cited of a prospective reduction from £800 million to £300 million is both gloomy and alarming. For the avoidance of doubt, can he confirm that the person whom he has quoted, Mr. Chaplin, is suggesting that the reduction will be exclusively the consequence of the Budget and not in any way attributable to other unrelated factors? If that is so, it is a source of alarm.
Mr. Dunne: I have been quoting from Mr. Chaplin's website. I have not had a direct conversation with him. The implication is that venture capital trusts that were in the process of fundraising and have cancelled are doing so as a result of the specific Budget amendment that we are considering.
Mr. Newmark: It might be helpful to explain a little more the cause behind the statement to which my hon. Friend referred. It has to do with the fact that smaller investments are far more risky. Therefore, people are far less likely to invest in such companies. At the same time-this is the point that the hon. Member for Wolverhampton, South-West (Rob Marris) was making-if there are not the tax incentives that follow these investments, that will be another reason why people will not invest in the industry. There is a double whammy, which is what I was talking about earlier.
Mr. Dunne: I am grateful to my hon. Friend for supporting my contention that that will be a direct consequence of the Budget. Access to follow-on capital will therefore be severely restricted as a result of the proposed measure. It will be interesting to know whether that is part of the Government's intent.
The second issue that I want to raise is perhaps a slightly more detailed point, but it is a direct consequence of the proposals that are subject to the amendments. A number of VCTs, including the one that I chair, have a dividend reinvestment scheme under which investors are given the option to receive their dividends not in cash tax-free, but by reinvesting in new shares issued by the VCT. That has attractions for investors as they can increase their investment in a VCT with the accordant tax advantages. It is also attractive to managers of VCTs because they can raise modest capital on regularly without having to go through the costly exercise of marketing and producing a prospectus, for example.
The problem is that as a result of the proposed changes from 6 April any new shares raised by a VCT will have to be invested in companies that meet the new criteria. That means that an existing VCT, which has an established portfolio of investments in companies that exceed the current criteria, will have to start managing an entirely separate portfolio. I believe that that is the case. I think that the Minister is nodding.
The Financial Secretary to the Treasury (John Healey) indicated dissent.
Mr. Dunne: That applies to every new investment that a VCT seeks to make using new capital raised by issuing shares in respect of dividends under a reinvestment scheme. This will increase the complexity to a point where this sort of dividend reinvestment is highly unlikely to be worth while for the manager, notwithstanding the tax benefits that it provides to investors. If the Minister can say whether that is something that he intends to catch by the proposed measures, I shall be most grateful.
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OTHER INTERVENTIONS IN THE DEBATE
Mr. Dunne rose-
John Healey: I was just winding up, but I will give way to the hon. Gentleman. He has assiduously attended the debates of the Committee of the whole House, and I welcome that.
Mr. Dunne: I am grateful to the Financial Secretary. The HMRC guidance on inadvertent breaches is welcome, as it may deal with the issue mentioned by my hon. Friend the Member for Fareham (Mr. Hoban) concerning a realisation generating a substantial amount of cash at an inopportune point in the year, when a test might be about to be met, for example. It would be helpful to the Committee if the Minister would confirm whether that would be addressed by the guidance from HMRC. If it would not, ought there not be provision in the Bill?
John Healey: To put the matter in perspective, the cases of inadvertent breaches of the rule that have come to our attention number fewer than a dozen. It is a small-scale problem in a minority of VCTs. HMRC will shortly issue guidance that will help cover important aspects of inadvertent breaches. I shall make sure that the hon. Gentleman receives a copy directly.
