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Finance (No. 2) Bill

The first four amendments in this group deal with issues to do with the gross assets of investee companies. Those matters come into sharp focus as a consequence of the proposed reduction in the gross assets limit for venture capital trust investments. The final amendment in the group deals with changes announced in the Budget to the treatment of the VCT’s own assets. One of the most significant changes to the rules applicable to VCTs and enterprise investment schemes is the Bill’s proposed reduction in gross asset limits, and amendments Nos. 6, 7 and 8 would reinstate the limits that apply under the current legislation. The current rules state that gross assets should be equal to, or less than, £15 million prior to fundraising and £16 million after fundraising. That allows the very largest qualifying companies to raise £1 million. The proposed changes will reduce the gross assets limit so that a company will have no more than £7 million in gross assets prior to fundraising and no more than £8 million afterwards. The effect will be to reduce the amount that certain companies are able to raise. At present, a company with gross assets of £6 million is able to raise an additional £10 million through fundraising, but in future it will be able to raise only about £2 million. I am concerned about the effect on the operation of VCTs, and about the nature of the companies in which they can invest. If a VCT invests now in a company whose gross assets before investment comply with the new rules proposed in the Bill, its ability to make a follow-on investment will be restricted. Under the current rules, however, the VCT can make further investment in the company until the £15 million asset limit is reached. My experience before I came to the House was that early investors can find that their holdings and interest are diluted by people who come in later. It is often in their interest to make follow-on investments to maintain the size of their interest in the company. Reducing the gross assets limit from £15 million will restrict VCTs’ ability to do that if the company hits the proposed new £7 million limit. Secondly, the proposed reduction in the gross assets limit is that it could change the asset base that VCTs and the Enterprise Investment Scheme can invest in. The focus will be on smaller, and therefore arguably more risky, companies. The lower gross asset limit proposed by the Government will focus more finance on the companies in the funding gap identified in the Treasury publication entitled ““Bridging the Gap””, but there is a feeling that some slightly larger companies will still find it difficult to attract investment. The proposed reduction in the gross assets limit will exclude them from this source of investment, with the possible unintended consequence that the funding gap is moved further up—that is, that the needs of smaller companies will be met, but that slightly larger companies will lose out. The reduction in the gross assets limit could also change the type of businesses that VCTs invest in. Simon Rogerson of Octopus Asset Management has said:"““Managers will steer clear of asset rich UK manufacturing companies, focusing on asset poor service companies.””" When manufacturing is suffering from overseas competition and business investment is at a record low in real terms, is it right to exclude those businesses from the opportunities that VCTs present? It is not just manufacturing businesses that are asset rich. Last week, I visited a firm in my constituency that acts as a data centre for businesses, housing the servers that they need to power and maintain their websites. It is a relatively small business with about 30 employees but the cost of its data centre, including plant, cooling and some security measures, is extremely high relative to its turnover and its employee numbers. We must recognise that even a relatively small service business can be asset intensive and fall outside the limits set out in the Bill. Is it right that asset-intensive businesses are squeezed out of such funding? The Minister will argue that the problem would exist at whatever level the gross assets limit is set, and that is true. In a way, it is a crude proxy for company size, but the reduction in the gross assets limit from £15 million to £7 million makes the problem all the more evident. As asset levels fall, it is likely that more businesses will find funding through VCTs difficult to access. I should be grateful if the Minister would explain the basis on which the new lower gross assets figures were determined and say what steps he will take to monitor the flow of funds into VCTs and the EIS and the nature of the companies in which those funds are invested to ensure that the reduction does not adversely affect companies seeking funds. Will he also ensure that the measure does not simply lead to the funding gap moving up from companies with assets of less than £15 million to companies that previously would have benefited from funding through VCT schemes?