Share Capital (Businesses)

Andrew Selous Excerpts

Thursday 24th October 2013 Commons Chamber

[Andrew Selous (South West Bedfordshire) (Con)]

I am grateful to Mr Speaker for giving me the chance to raise the important issue of how we can raise share capital for our nation’s businesses. All hon. Members will be well aware that we do not have to spend long in either Treasury questions or business questions before Members from all parts of the House get up to talk about the difficulties that businesses have in gaining access to finance. Every time that has happened over the past couple of years when I have been in this Chamber the complaint raised by Members has been that the banks are not lending. Indeed, we still have a partially broken banking system, which is why the banks are not able to lend in the way that British business, large and small, would ideally like them to do.

Of course, loan finance is only one way in which businesses of all sizes—although I am thinking particularly about small and start-up, fast-growing businesses— can raise the capital they need. The other way is through equity or share capital. I find it odd that that type of capital—that way of helping businesses to start up, grow and expand—is a subject so rarely raised in this House, and I wish to remedy that this afternoon. So I stand here on behalf of the nation’s 4.5 million smaller businesses—the small and medium-sized enterprises that do so much to power our economy and grow the larger businesses of tomorrow—and on behalf of the men and women who work in the “small- cap” market sector of the City of London, who try to raise that much-needed and incredibly important share capital, or equity finance, for our nation’s businesses.

I wish to pay tribute to some of the people who work in that sector in the City and who took time out, at no remuneration to themselves, to write the Drury report. They are: Tony Drury, Roger Hardman, David Scott, Michael MacDougall, Simon Webber, Robin Stevens, Brian Hibbert CBE, Charity Walmsley, Laura Keeling, Teresa Quinlan and Paul Quade. I had the pleasure of working with them and helping them. Indeed, I took them all to meet the previous Financial Secretary to the Treasury, so that they could outline what was in their report.

This is not a new issue. The Macmillan committee report of 1931 identified what became known as the “funding gap” as far as British businesses were concerned. Our Government, in March 2012, commissioned the Breedon taskforce to write a report, “Boosting Finance Options for Business”, examining these very issues. In our relatively recent history, we have been quite successful in getting stock markets, large and small, to raise equity capital for small and growing businesses. Between 1998 and 2008, the Alternative Investment Market—AIM—and the PLUS market provided many hundreds of UK companies with early-stage equity finance. It is the belief of the Drury report that if the small-cap sector was rejuvenated in the way it suggests, a further 200,000 people could be found work as the businesses were helped to grow in the way that those behind the report believe they can.

I have to tell the Minister that, sadly, all is not well in the small-cap market in the UK. Between 2009 and 2012, there was de-listing of 722 companies on the AIM. Indeed, the amount raised on the AIM in 2012 was barely 17% of the £16 billion raised on that market in 2007. Let me quote one small paragraph from the Drury report. It states:

“For us the small-cap sector is ‘Middle England’: the millions of people trying to run and grow their businesses against all the odds. The sector is friendless, ignored by the banks, hounded by officialdom, bullied by bigger brothers and misunderstood by some politicians.”

I hope to rectify some of that misunderstanding today.

Many people are not even aware of all the markets that enable smaller businesses to raise funds. In addition to the AIM, we have the ISDX—the ICAP Securities & Derivatives Exchange—formerly known as PLUS markets. Currently, 112 companies are listed on it. That story is not happy either, I am afraid—there have been 35 de- listings from the ISDX since the ICAP relaunched the exchange in October last year, but only eight additions.

There is also the GXG, on which 106 companies are listed; again, that could be larger. At the moment, 859 UK companies are listed on the AIM, whereas in 2007, before the great recession, there were 1,347. Companies de-list for a number of reasons, one being the cost of being on a market; I will talk about that and regulatory issues, which we need to consider, in a moment.

Today I was given some stunning figures—they really jumped out at me—by the London stock exchange. In the United States of America, bank lending as a percentage of external, long-term funding is 19%—that is, under a fifth. In the European Union, however, the figure is 81%, or more than four fifths. Those figures are stunningly divergent. If the Minister and his officials take back only one set of figures from this debate, I ask them to consider why there is such a different financing model in the US and why so much more share capital and long-term investment are put into businesses there than here in the European Union.

The European Commission green paper on the long-term financing of the European economy has been published and the Government will respond to it. It has some sensible suggestions. The London stock exchange has urged a “think small first” approach and asked the Commission particularly to assess the regulatory impacts on access to capital for smaller companies, the costs of capital and the fiscal bias against equity, which I shall come to.

For the sake of completeness, I should say that there are three other, smaller equity markets: Sharemark, AltCapX and BritDAQ.

Clearly, there is a funding gap for British industry and many businesses. Banks are increasingly nervous of lending to businesses that do not have strong balance sheets. I am not setting up equity capital against loan finance; if a business has a strong balance sheet and a decent amount of share or equity capital, it is more attractive for a bank to lend to. The two issues go together.

As we know from recent research from smallbusiness. co.uk, one in six small businesses has had to resort to a payday loan and just one in 10 was able to secure a loan from its bank in the first year of trading. The Minister’s Department, the Department for Business, Innovation and Skills, has said that it estimates the current funding gap facing British industry up to 2017 at anywhere between £84 billion and £191 billion, of which between £26 billion and £59 billion relates to smaller businesses. Those are huge figures. It is clear why we need to consider how share capital can help bridge some of that gap. Many smaller businesses are simply unaware of even the possibility of raising share capital and how they would go about doing it. I shall come to that in a second.

It is worth putting on the record that the tax treatments of share capital and debt are very different. Debt interest payments are tax deductible, whereas share capital is taxed four times—on purchase, for stamp duty; when profits are declared, through corporation tax; when profits are paid out, through income tax on dividends; and when shares are finally sold, through capital gains tax.

Credit where credit is due—the Government have reduced stamp duty on AIM shares, which is excellent, and we are lowering corporation tax. The Government have already helped in some areas. However, the Minister will see that there is a significant difference between the tax treatments of share finance and loan finance.

The regulatory costs of raising share capital are significant, and the Government need to look at that issue very closely. I am delighted that we have here not only this Minister, who is an excellent Minister for whom I have the very highest respect, but a BIS Minister. I sometimes wonder who in Government is looking at this issue, not just from the investor’s point of view in making sure that every box is ticked as regards regulation, but in being the champion for these 4.5 million small businesses as regards their need to raise share capital. I would love the Minister, as well as dealing with the very many important tasks he has to deal with, to be that champion. I am throwing down the gauntlet to him and hoping that he will take up that challenge as part of his many important responsibilities.

Financial Conduct Authority costs are high in this regard. One broker who deals in the small-cap market in the City, in a relatively small firm, estimated that the regulatory costs are about £10,000 per member of staff. A company that has large volumes of business can cope with that, but for one with relatively small volumes of business the whole thing will border on being unviable. Yesterday morning, at a breakfast meeting, I put that point to Martin Wheatley, the chief executive of the FCA. He acknowledged that the costs of raising share capital for smaller businesses are high and that regulation is onerous. He did not disagree with me, but I am not sure that we quite worked out what we can do about it.

I am convinced that we need to have a proper campaign of education for businesses up and down the country about the advantages of raising share capital rather than just going to a bank for finance. I would like chambers of commerce, the Federation of Small Businesses, the Institute of Directors, the CBI, accountants, lawyers and other business advisers to work together in our communities explaining to businesses how they can raise share capital if they are having difficulty raising loan finance. They could explain that having outside shareholders in a company does not mean that it loses control. Many businesses think that if they have an outside shareholder they lose control of their business, but they do not; if they still own 51% of the equity, they retain control. Yes, their standards of corporate governance may need to improve a bit, and that is generally a good thing, but they retain control. That is often not understood, and changing that would further open up the possibility of raising share capital.

It is important to give praise where praise is due. I was delighted when stamp duty was removed from AIM shares earlier this year; indeed, I was one of the people who lobbied very hard for that. AIM shares can now be included in individual savings accounts. It is not generally understood that if someone is lucky enough to have an estate that might breach the inheritance tax threshold, any money they have in AIM shares is not counted towards that threshold. That is another good thing that will encourage vitally needed investment in this important and growing sector of the economy. Indeed, I understand that the Share Centre reported an increase of over 106% in AIM stock purchases on the day that the policy was introduced.

There are some tremendous success stories; I would not want the Minister to think everything was bad. Let me give him an example. Abcam plc is a business involved in cancer research that sells antibodies to researchers. It listed on the AIM in 2005 with a £58 million flotation. By the summer of 2012, it had grown to a market capitalisation of £770 million. Its revenue rose from £12 million to about £100 million, and the number of staff grew from 78 to 600. The company has significantly expanded, opening up offices abroad, and it is now looking to join the main stock market. That is a huge success story, and we want many other businesses to do the same.

I mentioned the European Commission. I was encouraged to see that posted on its website on 18 October, just six days ago, was information about its “Competitiveness of enterprises and SMEs” programme, known as COSME. Its remit includes improving SMEs’ access to capital markets, so that is good.

The London stock exchange is making representations to the European Union and has asked the Government to do so as well. On the markets in financial instruments directive II, it is pressing for the creation of an “SME growth market” classification in order to, again, make it easier, less expensive, quicker and less of a burden for our vital small and growing companies to raise the capital they need. It also wants to ensure that the implementation of the solvency II directive does not divert capital from equities, and it wants the Government to engage with the Commission’s green paper—I know they will—on long-term loan financing.

In conclusion, I think I am remedying this House’s failure to highlight the significance of share capital to small, fast-growing businesses in particular. I repeat my request to the Minister to be, among others, a champion for the needs of businesses large and small up and down the country to raise equity finance and to help them get the funding they need so that they can grow, prosper and create the jobs that our constituents need to help power our economy forward and pay off our deficit so that we can have a secure and prosperous future as a nation.

[The Minister for Skills and Enterprise (Matthew Hancock)]

It is a great pleasure to respond to this debate, because I agree with the central thrust that motivated my hon. Friend the Member for South West Bedfordshire (Andrew Selous) to call it, namely the importance of equity finance, especially for small and medium-sized businesses, and the fact that it is not discussed as often as it should be in this House.

It is telling, as my hon. Friend has pointed out, that during Treasury and Business, Innovation and Skills questions we tend to get more questions on access to finance than on any other subject. There is some evidence that access to finance is improving, although it is still not in a strong position. Thanks to the tough choices we have made since 2010, I think it is widely recognised that the economy is, broadly speaking, on the mend. It has not fully recovered by any means, but it is on the way back. That is reflected in the number of businesses, not only in my hon. Friend’s constituency, where businesses are creating jobs, but across the country. Companies House records show that there were 480,000 new incorporations in 2012-13, which is the highest figure on record. If I may correct one of my hon. Friend’s figures—I do so as gently as possible—yesterday’s figures show that the number of SMEs in this country is now 4.8 million, not 4.5 million. I hope he is not too disappointed by that minor correction.

I accept my hon. Friend’s challenge to be, along with the BIS team, a champion of smaller businesses in their quest to access finance. Our programme is vital. The Breedon report made a series of recommendations, many of which have been acted on, including the introduction of the business bank, which my right hon. Friend the Business Secretary announced in September.

We know that it has been much harder for businesses to access finance since the crisis. One of the lessons of the crisis was that the economy had become too reliant on one source of finance, namely bank finance from the four big banks. The business bank will help to solve that problem, but it is by no means the only solution, because we need to increase the supply and diversity of finance available, which brings me to the subject of equity finance.

I will take on board all the points my hon. Friend has made and if I miss any out I will read Hansard and make sure they are acted on. I would stress that when talking about equity finance, we need to be cognisant of the importance of the wider availability of both private equity finance and public equity finance. Although it is difficult to measure with precision, in recent times, the amount of private equity finance, whether through angel investing, venture capital investing or bigger private equity financing, has been greater than the amount of public equity finance. Both are important. It is important to have diverse forms of finance, not only so that if one form struggles, others can take up the slack, but because different forms of finance are right for different companies.

It is true that we have extended tax relief, not only by cutting corporation tax, removing stamp duty on AIM shares and allowing individual savings accounts to invest in AIM shares, which is a tax relief in a sense, but through the extension of the enterprise investment scheme and the introduction of the seed enterprise investment scheme, both of which are extremely popular schemes for investing in small and fast-growing companies for those who pay UK income tax. The encouragement of equity finance, in whatever form, through tax relief is an important part of our programme to solve the problems that my hon. Friend highlighted.

Tax treatment plus regulatory costs, whether in the public or private sphere, make up the gap between the equity that an investor can put in and the investment that a small business receives. I hope that drilling down on both will bring more liquidity and finance where they are needed, which is in growing companies that can make good use of them.

I was struck by the figures that my hon. Friend set out. In the United States, 19% of this kind of finance comes from the banks, compared with 81% in Europe. The UK is one of the more friendly destinations in the EU for non-bank finance, but the figures are striking. When I was in the United States last week, I was struck by the powerful fact that more venture capital is available in the skyscraper in which the British consulate in Boston is housed than is available across the whole of Europe. That shows the difference between the two continents not only in the amount of finance that is available, but in the number of people who have started and grown a business and are now reinvesting. The United States, whether on the east coast or the west, is a generation ahead of us. Part of our job is to catch up as fast as we can. That challenge is real; the good news is that the opportunity that it presents is great.

My hon. Friend spoke eloquently about the various small exchanges. I urge him to look also at peer-to-peer finance, whether equity or loan, because that is a small but growing part of the market that companies can look to when trying to access finance.

As well as bringing tax relief and bearing down on regulatory costs, the Government make direct interventions. In the business angel sector, the Angel CoFund makes equity investments of between £100,000 and £1 million in SMEs. It does that alongside syndicates of business angels. It encourages greater levels of angel investment and syndication, and provides companies with experience and expertise alongside the capital. I echo my hon. Friend’s remarks that when finance comes into a small business, it brings not only pure capital, but better governance and advice from people who have skin in the game and who therefore take care in the advice that they deliver.

In the Budget this year, we announced that another £50 million would go to the Angel CoFund, doubling its size. I hope that it will help to strengthen the whole business angels sector, because it invests only when appropriate due diligence has been undertaken and a deal is structured properly. The UK Business Angel Institute, founded by the UK Business Angels Association and AngelNews, is creating standards of professionalism in UK angel investing, which by its nature often involves investing early in quite high-risk companies. If we can have more quality in training courses for private investors, such as those that the UK Business Angels Association is delivering, that will strengthen investing skills in that important area of the market.

My hon. Friend made the point that equity is taxed four times whereas bank debt is tax-deductible. A number of non-tax factors have an impact on whether a business decides to use debt over equity financing, so tax is not the only issue. Different companies look to different forms of finance, and debt can be quicker to obtain and less complicated to use. Of course, there is the also the question of the amount of ownership that is given up in return for equity financing.

I turn to deductions for interest as a business expense. To protect the UK Exchequer, a number of rules limit how much interest a company can deduct from its tax liability. My hon. Friend made the point that dividends are paid out of a company’s tax profits. However, they are exempt from tax in the hands of the company receiving them. In the case of an individual shareholder in the income tax system, the combination of dividend tax credit and the lower rates of tax for dividends ensures that dividends are taxed at broadly the same level as other forms of income, even after corporation tax is taken into account. It is important to take into account not just the number of different taxes that apply to a piece of income but the rates of them, so that we can work out the relative rate on each form of finance. Having said that, it is clear that the Government are moving in the direction that he wants, for instance through abolishing stamp duty on AIM shares and other growth markets, making investments eligible for ISAs and so on.

I wish to mention one other area of tax, which is the entrepreneurs’ relief. That is a valuable incentive and reflects the fact that entrepreneurs take risks and are often the beating heart of growing businesses, which should be recognised in the tax system. We have increased the amount of relief that can be used and allowed it to be used in more situations, so that more businesses and entrepreneurs can benefit from the 10% capital gains tax rate rather than the normal 28% or 18% rates. Over a number of Budgets, there has also been an increase in the lifetime limit for entrepreneurs’ relief to £10 million, so shares acquired from the enterprise management incentive can qualify for a lower capital gains tax rate. There has been action on stamp duty, capital gains tax and corporation tax, three of the four taxes that my hon. Friend mentioned as part of the barrier. The direction of travel is clear, and his argument is strong.

The value of small businesses to our economy makes them absolutely vital, and helping small businesses create jobs and take people on has been one reason why we have had such strong growth in the number of people employed in the private sector in the past few years.

[Andrew Selous]

I am heartened by what the Minister has said and by the tone and general thrust of his reply. Will he reflect briefly on my points about the cost of regulation? Might he perhaps meet Martin Wheatley of the Financial Conduct Authority, who admitted to me yesterday morning that the costs of raising capital are high? With his business hat on, representing 4.8 million businesses, will he consider whether there is any way to lower the costs of raising capital through regulation, while keeping investors safe?

[Matthew Hancock]

My hon. Friend will be delighted to know that I am already arranging a meeting with Martin Wheatley to make the arguments that he has eloquently made today and broader arguments about ensuring that we can get good finance into our small and growing businesses.

Question put and agreed to.