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Budget Resolutions and Economic Situation

I am grateful for that reminder. That is damaging, because small businesses are the source of much innovation, employment and growth in the economy. There are 4.3 million small businesses in the UK, and 97 per cent. of firms employ fewer than 20 people. More than half a million people start up a new business every year, and 12 million people work in small firms. One of my hon. Friends mentioned that the number of people who voted for the Labour party in the last two elections is similar to the number of people employed by small firms. Despite what the Chancellor said in the Budget, and despite the attitude of the Treasury and the Revenue, in many respects the Budget undermines some of the most creative and entrepreneurial sectors of the economy. I shall give a couple of examples to show what was happening in the weeks before the Budget. The Budget included specific measures on venture capital trusts, which are a form of tax-efficient investing that have been successful in raising equity and closing the equity gap for emerging businesses when it is difficult for them to secure capital from other investors, or purely from bank debt. Last year, £750 million was raised for VCTs and more than £500 million was raised in 2004-05. Each year, the Government have tinkered with the VCT regime and I welcome some of the minor measures introduced this year—some in response to points raised by me and other Conservative Members in the Finance Bill Committee, but rejected by the Government. However, they have now recognised that we were talking sense and introduced some of those proposals. I congratulate the Government on listening to the industry—as will the industry. Those provisions were completely overwhelmed, however, by the astonishing inclusion of two measures that limit investment in individual companies by VCTs to a mere £2 million, which will create a substantial equity gap between £2 million and £5 million to £10 million, at which level there are more sources available through the City. Even more damaging has been the limit on the number of employees in companies into which VCTs can invest: a mere 50 employees. I believe that is also the case for enterprise investment schemes. The Government’s excuse for that astonishing restriction on the flexibility of those investment vehicles is that it is all down to our friends in Brussels. The European Union, my hon. Friends may not be surprised to hear, has reinterpreted the rules for state aid and decided that any funds raised for the benefit of tax incentives now qualify as state aid, so European definitions of small and medium-sized enterprises need to apply. That move needs to be vigorously resisted by the Government, yet in the Budget they seem to have rolled over with no serious attempt to fight it off. I look forward to hearing their views—perhaps in the wind-ups—of how the position can be restored. One impact of the clamp-down on VCT flexibility has been significant in an industry close to the Chancellor’s heart—the film industry. The head of Ealing Studios, Mr. Barnaby Thompson, who was, as it happens, at university with me, said:"““It’s a massive kick in the nuts.””" I think that must be a film expression. A St. Trinian’s remake, starring leading British actors, is in production at Ealing Studios and after the Budget announcements, two weeks before filming was due to begin, the producer lost £2 million of pledged funding through the VCT route, which amounted to 30 per cent. of his budget. That is an example of the practical impact of the measures. Two days after the Budget, I received a letter from one of the leading commentators on VCT funding, Mr. Peter Hargreaves of Hargreaves Landsdown, who said:"““In our opinion this means that after 6 April it will be much harder for VCT managers to find companies worth investing in, and in all probability this will radically reduce the VCT capacity for investors.””" His colleague, Mr. Ben Yearsley, was rather more direct. He said that the Chancellor"““has effectively killed off the sector in two years. In 2006, he wounded them””—" the VCT industry—"““with the gross asset legislation, before going for the kill this year””." That is what the industry believes will happen as a result of the measures that the Chancellor has introduced in what was supposed to be an innovative Budget for entrepreneurial small businesses. The second specific issue arose shortly before the Budget. I have been trying to work out why, on 2 March, Her Majesty’s Revenue and Customs chose to publish some detailed notes under the guise of reducing abusive avoidance schemes. The notice has effectively brought to a halt the ability of investors to deduct losses generated through a partnership in one activity against their other income—it is known as sideways loss relief. My understanding is that the Revenue had identified various categories of activity where there may have been some genuine abuse. I am not seeking to criticise attempts to clamp down on genuine abuse or tax avoidance. Such attempts are appropriate. However, this announcement was slipped out on a Friday evening with no prior warning. Having scoured the Red Book, I now think that I understand why. The measure is estimated to raise £400 million for the Treasury, and £400 million is close to the amount of money that the Chancellor claims that the Budget will produce in the first year by way of a tax cut. If he had not already announced the measure, he would not have been able to say that this was a tax-cutting Budget. He introduced a tax-raising measure three weeks before. Is that smoke or a mirror? I think that it is smoke. A large cloud of smoke has been blown all over the Budget by that measure. What does this mean? It means that the Chancellor has introduced a measure that will stifle innovation and lead to a significant reduction in investment across a whole range of industries. The original intention, I believe, was to address abuses in the forestry and shipping sectors and latterly possibly also the property sector. Where it is actually going to bite is in the creative industries—the sectors so close to the Chancellor’s heart. Film, theatre, electronic games publishing and biotech investments—high-risk genuine venture investments—will find it difficult. The combination of the VCT and enterprise investment scheme rules that I have just referred to and the elimination of sideways loss relief means that investors who have other activities and are prepared to invest, typically in limited liability partnerships, in order to fund those high-risk ventures will no longer be able to relieve the loss. The Chancellor might say that we have a generous regime for film finance in this country as a result of the measures that he took in the last Budget. I do not deny that the 20 per cent. production credit available to film producers is a useful assistance. However, if the other 80 per cent. is no longer going to be offsetable against other income, that is going to amount to a row of beans, because there will be no funding available for ventures such as film productions if investors are no longer going to be able to offset losses incurred from those very high risk, typically binary, investments. Those investments either work or they fail, and if they fail one loses all one’s money. If people cannot offset that loss against their other income, in effect productions will not get the 80 per cent. funding to which the 20 per cent. credit would apply. The instrument needs to be carefully considered by Ministers and their advisers in the Treasury. I hope that when the Finance Bill works its way through the Committee stage, Ministers will pay more attention to the matter than they are at the moment. [Hon. Members: ““Hear, hear.””] I am grateful to my hon. Friends for drawing attention to the fact that I am still speaking. It woke up the Members on the Labour Benches. I want to conclude with a few remarks about the Chancellor’s environmental measures. In 1997, the Treasury issued a ““Statement of Intent on Environmental Taxation”” setting out the Government’s aim:"““to reform the tax system to increase incentives to reduce environmental damage””—" very noble. They said that they intended to"““shift the burden of tax from goods to bads””—" I think that we have heard that elsewhere recently. They wanted to"““encourage innovation in meeting higher environmental standards; and deliver a more dynamic economy and a cleaner environment, to the benefit of everyone.””" For 10 years, the Chancellor failed to provide a green Budget. In the eight years before Labour came to power, green taxes rose as a percentage of overall taxes from 7.8 per cent. to 9.4 per cent. However, by 2005, which is the latest year for which information is available, the Chancellor had allowed that percentage to fall to 7.7 per cent., which was its lowest level since 1987, when the information was first recorded. The Government took just under 2.9 per cent. out of the economy, which was another 18-year low. Mr. Ed Matthews of Friends of the Earth said that he would give the Chancellor"““probably one out of ten. He’s got a terrible record””—" I agree with him. I will cite two specific measures in the Budget that were an attempt to demonstrate the Chancellor’s green credentials. Under the changes to the rates of vehicle excise duty, the most polluting car will pay £400. The hon. Member for Falmouth and Camborne (Julia Goldsworthy) referred to a measure that she and her party tried to introduce during consideration of last year’s Finance Bill, which would have made VED increases appropriate for various parts of the country. I represent a rural constituency, and I am chairman of the all-party group on rural services, of which many hon. Members in the Chamber are members. We are extremely concerned that imposing a blanket tax in the way in which the Government are doing completely and utterly ignores the needs of rural communities and, especially, people in employment who also happen to be motorists. For example, many farmers drive a 4x4 so that they can do their job. If you will allow me, Mr. Deputy Speaker, I will give a couple of specific examples. One of my constituents, Mr. Tony Machin, sent me an e-mail in which he wrote that he owned a 4x4 that was a 15-year-old, 3.2-litre, V6 petrol engine vehicle. He said that he realised that it was not the most economical mode of transport, so 18 months ago he converted it to run on liquefied petroleum gas at a cost of £1,900. The emissions of the vehicle are such that it is cleaner to drive than a small car, but it has not been re-rated and consequently it will attract the new higher rate of VED. Is that the intention behind the Government’s measures? If not, why did they not recognise that the instrument that they have introduced is blunt and try to think more carefully about it? Another of my constituents, Richard Hill of Intelligent Energy Systems, has asked whether we could"““have some common sense and increase the fee for ‘unnecessary’ 4x4s.””" He has a 4x4, and I am sure that the Minister will be interested to hear that his business is the installation of intelligent energy systems, such as wind turbines and solar panels. Those things are relatively heavy, so he needs a 4x4 to tow his trailer to transport the equipment around the country. He says that it is quite obvious which vehicles are genuine utility vehicles and which are not. He thinks that the measure should have created a distinction between sports utility vehicles, which, I suspect, are the vehicles that the Chancellor would wish to attract higher duty—I would have no problem with that—and genuine utility vehicles that are used in business. I urge Ministers to rethink the measure before it is considered in Committee. The president of the National Farmers Union, Mr. Peter Kendall, has said:"““We were extremely disappointed to see that no exemption was made for farmers who rely on 4x4 vehicles for their day-to-day livelihood.””" I could not agree more. Finally, I would like to raise the issue of the Chancellor’s stop-start scheme to promote the use of renewable energy in domestic households, a conversion scheme called the low carbon buildings programme, which many hon. Members, including me, have mentioned in recent weeks. The programme is now known in the trade as ““fund a fiasco”” after the managing director of the Renewable Energy Association described the operation of the scheme with the word ““fiasco””. The Chancellor has recognised that the scheme was woefully inadequately funded in the first place and was poorly administered. As a result, expectations have been raised among householders across the country—they thought that if they were interested in converting to a renewable energy source, there would be Government money to help them. That is a perfectly reasonable assessment to make, if one reads the Government’s promotion of the scheme. However, anyone who tries to use the scheme will find that fewer than 2 per cent. of applicants are lucky enough to get a grant. If the Chancellor were to run the country in the way that he ran the scheme, heaven help us. To conclude, the devil is in the detail of the Budget. It raises risk, the country is running on a public finance tightrope, and the Chancellor’s micro-managing risks damaging innovation, as I tried to explain. The risk for the Chancellor is that he may think that he has shot the Tory fox, when he has in fact shot himself in the foot. He has conceded the argument—Government spending will grow less than the economy, and he will have to share the proceeds of growth.