Share Capital (Businesses)

Matt Hancock Excerpts

Thursday 24th October 2013 Commons Chamber

[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.