Budget Resolutions

Debate between Charlie Elphicke and Stewart Hosie

Wednesday 8th March 2017 Commons Chamber

[Stewart Hosie]

The pattern that we have seen over the past few years confirms that. It is not just about the photovoltaics and the contracts for difference changes, which were not helpful, but all the other issues that the hon. Lady has raised too. She is right to keep on making those points.

One reason why the Government cannot fund their policies is to do with the yield from taxes. I believe in tax competition, but if we look at the corporation tax yield, we can see that it has flatlined and fallen in real terms for the past four years of the forecast period. In order to make amends today, or to make the numbers stack up, we have seen a scandalous attack on aspiration and on the self-employed by taxing more and making more changes to national insurance contributions to the tune of £4.2 billion or so. The party of aspiration is taxing those who are self-employed, pouring in active, real hard disincentives to starting businesses, to employing people, and to stepping out on one’s own. That is a decision that will come back to haunt this Chancellor.

[Charlie Elphicke (Dover) (Con)]

Does the hon. Gentleman not agree that, if people work, they should be taxed equally? There is a non-level playing field when it comes to taxing people who are employed and taxing those who are self-employed. Does he think that that is fair or sustainable?

[Stewart Hosie]

This is the problem with Tories. They talk about business as if they know it. They assume that every businessman is a multi-billionaire. When most self-employed business people start, they earn less than the minimum wage. If they can take out £1,000 or £2,000 in a dividend to help them make ends meet at the end of the year, that is the right thing for them to be able to do. If they become half a Microsoft in the future, they pay taxes, employ tens of thousands of people, and we all get to benefit. None of these people will now do that automatically. They will take a second look, have a pause, and wonder whether the risk is worth taking because of the disincentive put in place today.

Charter for Budget Responsibility

Debate between Charlie Elphicke and Stewart Hosie

Tuesday 13th January 2015 Commons Chamber

[Stewart Hosie]

That is absolutely right. I will answer that question directly. Instead of the provisions in the charter, we should be tackling the deficit reduction and the debt reduction in a different way. It should not be a fixed-term approach; it should be a principles-based approach based on the medium term. It has been proven to work in New Zealand, and I want to refer to the way in which it goes about that. It says that the first principle should be about reducing debt to a prudent level, where the Government of the day specify what is or is not prudent, depending on the circumstances that they face—precisely the point that my hon. Friend made. The second principle should be that once debt is reduced, the Government should maintain a balanced budget over the medium to long term. That would not prevent any Government from implementing the steps they believe are necessary to achieve the long-term objective of having a prudent level of deficit, but it would mean that it would happen, on average, over the medium to long term, rather than arbitrarily specifying one cycle or one Parliament.

The third principle says that the Government should achieve and maintain a level of net worth that provides a buffer against unforeseen future factors. The fourth principle calls on the Government to manage fiscal risks prudently, and the fifth is that the Government must pursue policies consistent with a reasonable degree of predictability about the level and stability of tax rates. That is incredibly important, because the tax system, tax rates and tax certainty, which have not yet been mentioned today, are a vital component of fiscal stability and fiscal responsibility. In the sense that we have seen tax yields reduce, it is all the more important to get that bit right.

[Charlie Elphicke (Dover) (Con)]

The hon. Gentleman talks about fiscal stability and fiscal responsibility, but let me take him to task on the plans the SNP made, based on the price of oil, and what has happened to the price of oil. Does that not show that what the SNP has to say on these matters is not worth listening to?

[Stewart Hosie]

That is a ridiculous argument. If one thinks that those oil revenues, which are most certainly falling, are causing a big hit to the UK tax yield, all the more reason, one would have thought, to allow a degree of flexibility in the economic plan so that the overall strategy of deficit consolidation and debt reduction is achieved, rather than the facile political comment from the hon. Member for Dover (Charlie Elphicke).

Before I move to the second and third criticisms of the plan, on the overall plan for deficit consolidation and our opposition to it being on a fixed-term basis, when the New Zealand finance committee looked at alternative models—rigid, straitjacketed models—it made a number of interesting observations. The committee said that there was no solid theoretical justification for any particular fiscal target to be maintained over a period of time, and that judgments on the appropriate level of fiscal aggregates vary over time and depend on the prevailing economic circumstances. A fixed-term target with a fixed objective cannot do that.

Having looked at other countries, the committee said that their experience of legislated targets suggests that there are substantial risks attached to their use. In particular, rigid adherence can seriously distort decision making and, unless carefully handled, minor variations from target can result in significant but unnecessary damage to credibility. The committee went on to observe, in the context of the inherent inflexibility of a fixed target system, that it

“makes it difficult for fiscal policy to respond appropriately to the inevitable volatility of economic circumstances.”

Given that we have seen, and hon. Members have commented on, the eurozone crisis, the Cyprus banking crisis, the Irish bank bail-out and other issues, to put this country back into a straitjacket of a policy which has failed so far, ignoring the possibility that similar shocks could occur in the near and medium-term future, is silly and wilful. It is most certainly a political dividing line which we will not support.

Apart from its inherent inflexibility, our second criticism of the measure is that it sets in concrete a further attack on welfare budgets. With 22% of Scottish children, 11% of Scottish pensioners and 21% of working age adults in poverty, to launch a further attack on welfare at this time under the guise of amending the charter for budget responsibility is simply wrong. Thirdly, to set out a plan for future discretionary consolidation, on which the charter is predicated, which changes the ratio of cuts to tax rises from 4:1 to 9:1 to try, in effect, to balance the books on the backs of the poor is completely wrong.

We do not believe that anyone genuinely opposed to austerity could support the measure tonight. We do not believe that anyone who is genuinely opposed to the draconian changes to welfare can support this Government tonight. We do not believe that anyone who is opposed to trying to balance the books on the backs of the poor and take public spending levels back to those of the 1930s can support this Government tonight. My right hon. and hon. Friends and I will oppose the measure tonight.

Finance Bill

Debate between Charlie Elphicke and Stewart Hosie

Wednesday 2nd July 2014 Commons Chamber

[Charlie Elphicke]

Let me develop my point, and I shall give way again in a few moments.

It is important and instructive that this Government have incentivised investment. What the hon. Member for Newcastle upon Tyne North (Catherine McKinnell) did not develop during the debate is what underpins the whole issue of investment allowances and capital allowances. Why we need capital allowances takes us to the whole issue of business investment. The challenge we all face, and have done for a very long time, is the rising corporate cash balances—about £750 billion—and the desire of us all to see that money spent.

Let us look at the Government’s policy in this area. They initially announced a reduction to £25,000 from April 2012. The hon. Lady’s first argument was that that created some form of uncertainty. The traditional argument goes, “We need to give businesses time to plan ahead; otherwise, we create uncertainty.” Well, the reduction was part of the June 2010 Budget, and it was about two years after the policy was announced before it came into effect, so I do not think that the certainty argument succeeds. The Government increased the amount substantially after only a short period of time, highlighting their concern to ensure investment.

The second problem I have with the hon. Lady’s case is that it is high risk to consider a policy on setting an investment allowance or a capital allowance on its own, as the Minister argued in an intervention. It is instructive that when Labour introduced the investment allowance, they funded the initial £50,000 by reducing general capital allowances from 25% to 20%. All policies need to be seen in a package taken together; they cannot properly be considered and debated unless the other pieces in the jigsaw are taken into account.

[Stewart Hosie]

That argument is fine as far as it goes, but in the space of seven years, we went from the abolition of the industrial buildings allowance to having an annual investment allowance of £100,000, which was then reduced to £25,000 followed by the very welcome increase to £250,000 for two years—and then there was another change. Of course making that many changes in such a short period of time is going to have an impact on planning for investment. Surely the hon. Gentleman can understand that.

[Charlie Elphicke]

The hon. Gentleman reinforces my point, which is that under Labour there were substantial reductions and changes to capital allowances that were part of the 2008 package. As I said, the main rate of capital allowances was reduced from 25% to 20%, followed by the creation of what was effectively the old first-year allowance—initially at £50,000. A number of other changes went on in parallel, including the phased withdrawal of the industrial and agricultural buildings allowances—IBA and ABA. We need to look at all policies in context and think about what else was going on, and that includes the changes that the Government announced in the Budget of June 2010. No policy can be viewed in a vacuum.

Economic Growth

Debate between Charlie Elphicke and Stewart Hosie

Wednesday 15th May 2013 Commons Chamber

[Stewart Hosie (Dundee East) (SNP)]

It is a pleasure to take part in the debate. This Queen’s Speech is important, sandwiched as it is between the Budget and Red Book, which we already have, and the forthcoming spending review, the details of which we do not have but which still casts a shadow over the potential for growth and recovery in the UK. The Prime Minister mentioned growth in his speech on the opening day of the debate, stating that the measures in the Gracious Speech would “grow the economy”. He also said that they would

“deliver a better future for our children…win the global race”—[Official Report, 8 May 2013; Vol. 563, c. 28.]

and “cut the deficit”. Given the austerity programme so far, it looks like it will lead to 300,000 more children being in poverty by the end of next year, and the forecasts are that there will be up to 4 million children in poverty in a few years’ time. It is difficult to see how any of the measures in the Queen’s Speech can possibly live up to the billing that the Prime Minister gave them.

Given that the balance of trade has been in deficit to the tune of more than £100 billion for the past two years, and that the gap in the total balance of trade has risen by more than £10 billion in the past year, it is difficult to see how anything in the Queen’s Speech can live up to the Prime Minister’s description and do anything to allow us to “win the global race”, whatever that means.

Bringing the deficit down was another of the Prime Minister’s claims, but as the right hon. Member for Coatbridge, Chryston and Bellshill (Mr Clarke) said, net borrowing was forecast at £92 billion but ended up being £121 billion. The cumulative deficit—the net debt—was forecast to rise to about 92% of GDP in a couple of years, but it is now forecast to hit more than 100% of GDP and about £1.6 trillion. There is a great deal of Government rhetoric about what the measures in the Queen’s Speech are supposed to do, but very little real evidence.

However, it is not as though the Queen’s Speech contained no growth measures. There was one potentially significant one—the national insurance employment allowance—but that was not altogether new. It was in the Red Book and budgeted to cost the Government £1.3 billion next year. It is welcome, but because the impact of the Budget policy decisions is to be fiscally neutral over the five years from 2013-14, the overall impact on economic growth of that one meaningful measure will be muted to say the least. It is worse than that, because any beneficial effect on growth of that sensible policy will be wiped out entirely by the additional cuts to expenditure that are anticipated in the forthcoming spending review.

[Charlie Elphicke]

If Scotland became independent, which currency would it use?

[Stewart Hosie]

It would use sterling. We have answered that question many times. We are speaking about the UK Government’s Queen’s Speech and how their programme for the Session will fail to deliver growth not just for Scotland but for everybody throughout the UK.

Let us be clear that the impact of the one good thing in the Queen’s Speech, the employment allowance, will be wiped out entirely if the economy is supposed to absorb the anticipated £11.5 billion of new cuts. That is the figure most commonly used for what is likely to be in the spending review. That will take the UK to discretionary consolidation—tax rises and cuts—somewhere in excess of £155 billion a year, every year, from 2015-16 onwards. Indeed, the Institute for Fiscal Studies has helpfully provided some information stating that it believes the real level of discretionary consolidation could reach £172 billion a year by 2017-18.

The Government plan to cut £11.5 billion, in addition to the cuts so far. To return to the point made by the hon. Member for Dover (Charlie Elphicke), that will be added to the 8.7% real-terms departmental expenditure limit cuts and 25% capital DEL cuts in Scotland. It seems extraordinary that when we are looking for real growth, the Government seriously propose stripping consumption out of the economy to the extent of about 8% of GDP and putting an additional £11.5 billion on top of the £140 billion or so of discretionary consolidation that is already planned, and replacing it with only a single sensible measure, the employment allowance.

What the Government are trying to do is not doable. They are trying to cut their way to growth, which cannot be done. They are ignoring all the evidence that austerity is hurting across the board, and I urge them even at this late stage to think again about their plan. They should rethink not just the contents of the Queen’s Speech or what we are likely to see in the spending review in June but the measures that we have already had in this and previous Budgets. Those measures will lead, as Olivier Blanchard from the International Monetary Fund has said, to the Government “playing with fire” if they allow the economic stagnation to continue.

Big Society

Debate between Charlie Elphicke and Stewart Hosie

Monday 28th February 2011 Commons Chamber

[Charlie Elphicke]

The central point I am making is that people who want to take charge and responsibility feel put off from doing so by the concern that they will somehow be held liable. The law on rescuers used to be very clear: if a person attempted a rescue but completely messed it up, they would not be held liable. That position has changed in recent years. There is a fear that if one clears the snow on the pavement, one will be sued by someone who slips up because one has done it ineffectively. The balance needs to change so that the individual who takes responsibility, acts and steps up to the plate for the wider social good is encouraged and given the maximum possible latitude to do their best. That is at the heart of my point about individuals.

I will move on and warm to my theme of decentralisation. Something is slightly overlooked in discussing decentralisation. It is often seen as just being, “Oh, let’s get rid of big government.” That point is important because if things are too top-down, they tend to squash the vitality of communities. The benefits from decentralisation and from enabling communities to take more responsibility are not simply social. It is not simply about making people feel that it is worth looking out for their neighbour, or about giving them a sense of belonging and a sense of enthusiasm that they can change things around them in their lives. It is not simply about giving people more of a sense of responsibility and well-being. Decentralisation is also important in the growth agenda because of its economic effects.

If we allow greater decentralisation, allow communities a greater sense of confidence and allow communities to take charge of their direction, they will develop. That has economic benefits. As all Members know, the more confidence, energy and buzz a community has, the greater the economic effects. That is not only true of the private sector. There is evidence from the European Central Bank that the countries with the most efficient public sectors are much less centralised than the UK. The United States, Australia, Japan and Switzerland enjoy an average efficiency lead over the UK of some 20%. To put that in context, if Britain could match those efficiency levels, spending would be cut by £140 billion with no diminution in the standard of public services. That is not un-equidistant with the size of our budget deficit today. We should consider carefully whether decentralisation can be captured in order to produce positive effects on the economy and the public sector.

[Stewart Hosie (Dundee East) (SNP)]

The hon. Gentleman has talked about a lack of confidence, but in my constituency we have all the volunteering that one would expect. There are community councils, traders associations, crime prevention panels, neighbourhood watch schemes and all the very things that he wants to see. There is no lack of confidence. In Scotland that is normal—it is simply civic society. If the big society is anything other than simply cover for the cuts, why the rebranding of what already happens the length and breadth of the country?

[Charlie Elphicke]

It is in no way, shape or form cover for cuts. It is a vision that the Prime Minister set out well before the crisis that engulfed the public finances and made necessary the tough decisions that the Government are taking. I do not want to focus on the deficit and the current difficulties in reining in the size of the state, because the big society is about much more than that, and it is more important than that. It is about giving people and communities a sense of responsibility.

I shall take the example of Dover, my constituency, which I advance as a case study of the difference that can be made. Before the election, the previous Government were planning to sell off the port of Dover. That proposal was in the operational efficiency report, the so-called car boot sale. There was to be an allegedly voluntary privatisation, but it was pretty clear that there was a desire for the port to be sold. My constituents understood that it would almost certainly go to a buyer overseas, and there was a sense of frustration about that.

That sense of frustration in relation to the port has existed for many years, because the directors have always been appointed by Whitehall and have had very little to do with the local community in their direction or in community engagement. That connection with the community has not been in place. The port is not simply an economic and transportation facility, it is also a social facility, as anyone with a port in their constituency will know. The interconnection between a town and the port in it is deep, and there is a symbiosis between the two. That is very much the case in Dover. With a whole load of directors having been appointed in Whitehall, hundreds of miles away, the people of Dover have been unable to effect positive engagement.

If the port were sold off overseas, we would simply be swapping one remote interest for another, and the community would not be engaged with it. Part of the difficulty in that situation would be that the community would think that the port’s management did nothing for the town and did not engage positively with it. Sadly, the port has gone to war with the ferry companies, which are the key port users for both berthing charges and general relations. There has been a breakdown of the relationship in the heartland of Dover’s local economy. The town and the community are not happy, and the key businesses are not happy. The port is on the block, threatened with being sold off overseas.

What can the community do? Under the traditional model, the solution would be about either the big state or big business. We say that it is time to try something new and different—giving the community a chance to take charge of its future and its destiny. We have been asking why, instead of the port being sold off overseas, the community cannot buy it as a community mutual and run it in partnership with those who use the port, the ferry companies that effectively account for all the port’s money. Many people will ask, “How can you possibly do that? How can these stupid yokels know what they are doing? Either you need big Government running it or big foreign business doing it, but you cannot possibly expect a community to have the intelligence or wherewithal to run an important facility like that.”

Finance (No. 2) Bill

Debate between Charlie Elphicke and Stewart Hosie

Monday 11th October 2010 Commons Chamber

[Stewart Hosie (Dundee East) (SNP)]

It is a pleasure to follow the hon. Member for Northampton South (Mr Binley), and particularly to comment on his pleas on behalf of small business. In Scotland, we have 302,000 businesses, and 285,000 employ fewer than 50 people. They do not issue commercial paper or corporate bonds. They do not do rights issues. They are not listed on markets or exchanges in the main. Ninety-nine per cent. of them are owned in Scotland. They are almost exclusively solely dependent on the retail high street banks for their credit lines and working capital, so the more the Minister and her team can do to ensure that affordable lending goes up, and that we do not get the conversion of mortgages to loans, which puts the houses of small business directors on the line should a business fold, the better. Those businesses are hurting. Given that they provide the vast majority of employment in Scotland, we need to ensure that that powerhouse, the SME sector, drives forward with all the capital that it needs. However, that is not what I wanted to speak about today. It was, however, a fantastic opportunity to get it in again.

It would be normal on Second Reading of a Finance Bill to refer to the Budget which it follows, although this is the second Finance Bill following the emergency Budget debate on 22 June. It was the debate that followed that and the debate on the Finance Bill on 6 July that gave us the opportunity properly to debate the Government's whole approach to dealing with the economy, although listening to many of the earlier speeches, I am not sure whether I have gone back three months and we are having the first Second Reading debate. Those were the opportunities, along with the debate on VAT on 13 July, to point out that this Government plan an additional £40 billion of fiscal tightening—over and above the £57 billion of cuts and tax rises planned by Labour—to remind the House that the ratio of cuts to tax increases has gone from 2:1 to 4:1 and to remind it also of the damage that would cause. The debate on the VAT rise, which, as Shelter explained to us helpfully in advance, will lead to the poorest families in the country paying £31 every week in VAT, was the opportunity to make the case against that rise.

This Finance (No. 2) Bill—the third in the calendar year—is different. It contains what the Minister described on 15 September as minor and technical measures, but that does not mean that we should not give it our full consideration, in particular those clauses and schedules which tax practitioners have raised real concerns about. I am grateful, as was the shadow Chief Secretary, to the Institute of Chartered Accountants for its response to the Government consultation. I will draw on that heavily and do something quite unusual in a Second Reading debate: refer in detail to clauses in the Bill. I hope we will get some technical answers when the Minister sums up.

The Institute of Chartered Accountants asks, in respect of part 3, clause 25 and schedule 9, paragraph 7, which inserts new paragraphs 2A and 2B into schedule 53 of the Finance Act 2009, whether, where a company has a profit in an earlier period and a loss or non-trading deficit on loan relationships in a later period that is carried back, interest on the earlier period profits will continue to accrue if in the absence of a claim late paid corporation tax would have been due, up to nine months after the end of the later period. I would welcome formal confirmation that that mirrors the existing rules. The institute adds that those rules perpetuate the existing differences between the interest rules where losses are carried back and offset against profits of an earlier period. Under existing rules, where losses are carried back against profits and where additional corporation tax would be due, interest will run from nine months after the end of the first accounting period. However, in cases where losses are carried back resulting in a repayment of corporation tax, repayment interest will only run from nine months after the end of the later period. I would have expected that, in a genuinely harmonised regime, late paid interest and interest on overpaid tax would ideally run from the same date. Therefore, will the Minister explain the Government's thinking on those proposals?

The institute also believes that paragraph 10, inserting new part Al into schedule 54 of the Finance Act 2009 on repayment interest, would deliver the opposite provisions to what is proposed in new paragraphs 2A and 2B in schedule 9. Again, please confirm that the new rules mirror the existing rules. The same question applies to franked investments in paragraph 11 of schedule 9. Do the new rules mirror the existing provisions?

Paragraph 12 inserts new schedule 54A into the 2009 Act and makes two further changes to the general rules that were introduced in 2009. This relates to new paragraphs 1 and 2. As I understand this, subject to certain conditions, HMRC can recover as late payment interest amounts of repayment interest that have been paid, but which ought not to have been paid. However, this provision does not apply in cases where the whole or part was a result of HMRC error. Therefore, can the Minister please confirm that it is intended that these new paragraphs will have the same effect as those currently set out in section 826(8A) to (8C) of the Income and Corporation Taxes Act 1988? I know that these are technical questions but they are important. If we get this wrong, there will be all sorts of chaos within business. Some of the other clauses that I will come to pose even more dangers. Can the Minister also confirm that the latter provisions will be repealed when these new rules come into force?

New paragraphs 3 and 4 of new schedule 54A suggest that where there is an underpayment of corporation tax for one accounting period and an overpayment of corporation tax for another accounting period, neither late payment interest nor repayment interest will arise during a common period. The Institute of Chartered Accountants understands that this provision is intended to give statutory effect to HMRC's existing practice, but I would welcome confirmation of that.

A number of other questions are raised about particular provisions in those schedules and I would welcome the Minister’s assurance that, if there have been errors in drafting, oversight or inconsistencies as a result of what is in this Bill, the Government will table the appropriate amendments in Committee.

I turn now to clause 7, entitled “Settlor to return excess repayment to trustees etc”. Is there not a problem with that because of the change to make trusts pay income tax at 50%? Should the aim of the tax regime for trusts not be to maintain equality between income and gains of trusts and non-trusts? Does not taxing trusts at a 50% rate when the majority of settlors pay tax at other rates cut across that objective?

I understand that the scope of the clause is limited to repayments in respect of trust income deemed to be that of the settlor rather than reductions in the settlor's liability. Therefore, for the avoidance of doubt, can the Minister confirm that the settlor need not repay anything to the trustees where the settlor has miscellaneous income losses of his own brought forward which he has to use against the trust income?

There is also a general concern about the costs and administration burden on trustees, settlors and the Revenue in relation to implementing some of the measures in the Bill owing to the large number of tax repayments that now have to be made for small, or indeed very small, amounts, and the need for all settlors to be added into self-assessment. I would welcome the Minister’s comments on that. People with no or modest savings or dividend income are in the self-assessment regime, which is complicated and worrying for some people. Even for modest savers, the regime can cost £100 or so for an accountant to prepare a tax return.

Clause 5, “Venture capital schemes”, and paragraphs 1(4) and 2(8) of schedule 2, introduce a “financial health requirement” that prevents tax relief for investment in a firm that is “in difficulty”. The explanatory notes make it clear that the issuing company is in difficulty if it is reasonable to assume that it would be regarded as a firm in difficulty for the purposes of the Community guidelines on state aid for rescuing and restructuring firms in difficulty. However, the guidelines would appear no longer to have any effect. Paragraph 109 of directive 2004/C244/02 states:

“The Commission will apply these Guidelines with effect from 10 October 2004 until 9 October 2009.”

That implies that the guidelines have now lapsed. Will the Minister clarify whether the guidelines are still effective? Even assuming that they are, it is unclear how they will affect companies raising money under enterprise investment scheme or venture capital trust legislation, because paragraph 9 of the directive guidelines states that

“for the purposes of these Guidelines, the Commission regards a firm as being in difficulty where it is unable, whether through its own resources or with the funds it is able to obtain from its owner/shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business”.

The implication is that for as long as the company can raise funds from its existing shareholders or creditors, but presumably not from new, external investors—that is not explicit—it does not fall within the definition of a firm “in difficulty”. I would be grateful if the Minister could confirm whether that interpretation is correct.

Paragraphs 10 and 11 of the directive guidelines clarify particular circumstances in which a firm would be regarded as being in financial difficulty, but they appear to be subsidiary to the primary condition—if a company can raise funding from existing shareholders, those paragraphs simply do not come into play. I would like the Minister to confirm whether that interpretation is correct.

The matter gets more complicated, because paragraph 12 of the guidelines states:

“For the purposes of these Guidelines, a newly created firm is not eligible for rescue or restructuring aid even if its initial financial position is insecure. This is the case, for instance, where a new firm emerges from the liquidation of a previous firm or merely takes over such firm’s assets. A firm will in principle be considered as newly created for the first three years following the start of operations in the relevant field of activity. Only after that period will it become eligible for rescue or restructuring aid”.

I understand that in effect, a newly created company would not be regarded as a firm falling foul of the firm-in-difficulty provisions for three years after the commencement of operations. Even if it were, I would welcome clarity on how the measure would apply in a group context. Does the three-year rule apply to a new holding company, operating subsidiary or indeed to the entire group?

On the point in time when the financial health requirement is viewed, proposed new section 108B(1) to the Income Tax Act 2007 states:

“The issuing company must meet the financial health requirement at the beginning of period B”,

which means the period beginning with the date of the issue of the shares. However, it is unclear how the Revenue will approach that in practice. The logical interpretation is that the issue should be considered only when the application for formal EIS approval is made using form EIS 1. It would create considerable difficulties for companies and their advisers if the Revenue could use the benefit of hindsight and withdraw EIS relief retrospectively, after a formal approval is given and certificates issued. It would also ultimately undermine the company’s ability to attract that EIS investment, as there is likely to be considerable uncertainty on whether that relief would be available at all.

There is also a question over the meaning of “permanent establishment” in paragraphs 1(5) and 2(12) of schedule 2. Proposed new section 191A(7) to the 2007 Act states:

“A company is not regarded as having a permanent establishment in the United Kingdom by reason of the fact that it carries on business there through an agent of independent status (including a broker or general commission agent) acting in the ordinary course of the agent’s business.”

The implication is that if a company employee makes sales in the UK on behalf of the company, the company would have a permanent establishment in the UK. However, there appears to be no requirement for that employee to be resident in the UK, and that a visitor carrying on business on behalf of the company would qualify. Will the Minister confirm whether that interpretation is correct?

There are other issues in relation to that proposal. Proposed new section 191A(2)(b) to the 2007 Act states that

“an agent acting on behalf of the company has and habitually exercises there authority to enter into contracts on behalf of the company.”

It has been suggested that for clarity, the definition should follow that already established in the Finance Act 2003, which is that

“an agent acting on behalf of the company has and habitually exercises there authority to do business on behalf of the company.”

I realise that there could be difficulties in respect of groups with a holding company, because the Bill requires the issuing company—the holding company—rather than the subsidiary company that has the trading operation to which VCT or EIS funds will be supplied, to have a “permanent establishment”.

[Charlie Elphicke]

My understanding is that that provision is fairly well understood: “to do business” is a wider phrase than “to enter into contracts”. The “contracts” provision follows the OECD model of tax conventions on “permanent establishment” in a given jurisdiction, and it therefore tracks better the language of international tax law.

[Stewart Hosie]

I understand perfectly well that “to do business” is a better phrase than “to enter into contracts”, but I want the Minister to confirm the nature of the commissioned agent or an employee of the business. They might be based overseas while carrying out business here, and I should like absolute clarity and certainty on that rather than on the wider point on the difference between the phrases “to do business” and “to enter into contracts”. I am with the hon. Gentleman on that.

I am asking that question because as the Minister knows, in many groups, the holding company is a pure holding company, and undertakes no activity other than holding shares in its subsidiaries. My point is that such a company is unlikely to constitute a business as defined in the Bill. Consequently, to require a company to have a “permanent establishment” through which business is carried on or, if the proposed definition is maintained, a

“permanent establishment…to enter into contracts”,

could be seen as running counter to commercial reality. I would welcome further clarification on how such arrangements would be treated for those purposes.

I am dreadfully sorry, Mr Deputy Speaker, that I did not engage in a classic Second Reading debate or address more widely issues that are not in the Bill, but I thought it important for someone actually to ask some specific technical questions to probe the Government on it, rather than indulging in the kind of debate that I am sure we will have on clause stand part later in the Bill’s progress.