Clause 55 - SEIS: income tax relief

Finance Bill – in a Public Bill Committee am 10:15 am ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

As the Minister will be aware, the seed enterprise investment scheme is dear to my heart, and I would to like to put on the record my thanks to Lord Young of Graffham and Rohan Silva in No. 10 Downing street for the work that they have done in creating such a great initiative. There is a great problem when it comes to raising finance in this country, particularly at the lower end where many companies rely on angel investors. SEIS turbo-charges the incentives for angel investors to provide capital to start-ups, where the need for money is greatest nowadays. The extra incentive, beyond the enterprise investment scheme, of 50% income tax relief on investments has been highly attractive. SEIS has been in operation for only a year, however, and every little bit extra that the Government can do to incentivise angel investors to provide capital is to be welcomed. For that reason, I would like to put on the record my support for clause 55, particularly subsection (4), which introduces the concept of the “on-the-shelf period”. The measure will give investors an extra opportunity to join in with the great initiative that the Government have provided.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

It is an honour to follow the hon. Gentleman. Clause 55 makes clarifying amendments to the seed enterprise investment scheme requirements, which currently prevent off-the-shelf companies that are formed by company formation agents from using the seed investment vehicle. The Opposition of course support the provision of help for business start-ups; nothing is more important in the current economic circumstances, which continue to be extremely challenging. Confidence is absolutely key and is thin on the ground for many small businesses, which still have great difficulty accessing bank lending.

In last year’s Finance Bill Committee, we discussed at some length the continued problems with bank lending, as well as the countervailing issue of introducing supply-side measures when the fundamental problem in the economy is a lack of demand. I want to touch briefly on a couple of the issues raised in those debates, as this is a useful opportunity for the Minister to provide an update on progress. Committee members, who I am sure scour  Hansard daily for this issue, will be aware of a recent answer by the Minister to a written parliamentary question on 11 March, which stated:

“No benchmarks or targets have been set.”

However, he explained that the Government have

“estimated that 300 completely new companies will benefit from SEIS in the first year. In total 1,000 companies will benefit from investment under the scheme.”—[Official Report, 11 March 2013; Vol. 560, c. 40W.]

An answer to an earlier parliamentary question given by the Minister in January showed that HMRC has approved investments totalling £7 million for about 85 companies. Therefore, given that the first year of the scheme’s operation has concluded, will he provide an update on that figure of 300? It might not be a target, but has it been met or exceeded? How confident are the Government that 1,000 companies will benefit and in what time frame? How much investment has HMRC approved under the scheme to date?

At the moment, the unemployment figures are deeply concerning: we have 2.52 million people out of work. Of those, 958,000 are young people and there is also a significant number of long-term unemployed. Will the Minister update the Committee on how many jobs have been created by SEIS approvals, and have the Government assessed how many jobs might be created through the scheme?

I appreciate that creating significant numbers of jobs is not the scheme’s intention—

Mr Newmark rose—

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Have I anticipated the hon. Gentleman’s intervention?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

Yes. The hon. Lady makes a valid point: the scheme is attractive and it has attracted firms to participate. She might perhaps ask the Minister whether he has considered raising the cap, because there is a limit on the number of employees that a qualifying SEIS company may have—I believe it is about 25—that limits opportunities. Does the hon. Lady agree that there should not be an employee cap?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

It would be useful if the Minister would reply to those comments. The scheme might not have the intention of creating jobs, but as the unemployment figures are deeply concerning those companies could provide a boost to sustainable private sector growth that would, I hope, create good quality, sustainable, decent jobs for many people.

On the question of the specific change to clause 55 and the use of shell companies, the tax information and impact note states clearly that this is a simplifying measure to ensure that:

“eligible companies will not inadvertently be disqualified from taking advantage of the regime, by virtue of having been established by a corporate formation agent.”

The decision—inadvertent or otherwise—originally to exclude off-the-shelf companies was strongly criticised by, among others, the Chartered Institute of Taxation, which welcomes the change made by this year’s Bill.

Queries have been raised, however, about why the amendment, which corrects what the Government effectively admit is an unintended trap, is not backdated to the  start of the SEIS scheme, which would allow some SEIS users to climb out of the trap into which they might have inadvertently fallen. Will the Minister address that point? In that same regard, will he confirm what assessment the Government have made of the number of off-the-shelf companies that may have been inadvertently excluded from the scheme?

The impact note suggests that the change under the clause will have no impact on the Exchequer. Will the Minister outline how many additional companies the Government have assessed will benefit from the change?

Finally, Committee members will be aware that the shadow Minister for small businesses, my hon. Friend the Member for Chesterfield (Toby Perkins), launched a small business taskforce report entitled “An Enterprising Nation”. The findings of that report, commissioned by the Leader of the Opposition and the shadow Business Secretary and based on the work of the taskforce and its late chair, Nigel Doughty, suggested that SEIS was being hampered by the following important limitations:

“Founders are unable to invest their own money via SEIS...There is a disincentive for Founders with personal capital to deploy it into their own businesses. For those Founders without capital, ‘bootstrapping’ a business using salary income from another job is extremely expensive as only post-tax income may be invested…(S)EIS is only available for equity investments, not debt. This has two major disadvantages. First, it makes finance much harder to obtain for those businesses unable or unwilling to issue equity. Second, it creates an additional cost for start-ups because the legal work surrounding equity issuance is typically more expensive than simple investor debt contracts.”

The report recommend that SEIS tax advantages should be extended

“to debt investors (as well as equity) and company founders (as well as third parties). Extended (S)EIS would help individuals to use their pre-tax earnings from a salaried job elsewhere to fund their start-ups. To avoid the cash flow burdens of PAYE being paid and reclaimed much later, a one 28-day ‘rapid rebate’ process should be introduced to permit reclaim of PAYE taxes on income invested in (S)EIS eligible businesses.”

I would be grateful if the Minister can address those concerns, and outline whether the Government intend to make the changes recommended by the Opposition’s small business taskforce.

Photo of David Gauke David Gauke The Exchequer Secretary 10:30, 11 Mehefin 2013

As we have heard, clause 55 makes changes to the seed enterprise investment scheme. It amends the legislation to ensure that companies established by corporate formation agents are not inadvertently disqualified from taking advantage of the scheme. The Government are committed to ensuring optimal take-up of SEIS by companies that can benefit, and they have responded quickly to correct the flaw in the legislation.

Before I deal with the details of clause 55 I will give a little background to it. SEIS was introduced in the Finance Act 2012, and was intended to help young start-up companies gain access to vital seed funding. It offers generous tax reliefs to individual investors to help channel funding into those companies. There was a good uptake in its first year, and nearly 2,000 companies have expressed an interest in using the scheme.

As of last Friday, HMRC has approved 466 companies, which together have raised almost £33.5 million. The average investment per company is about £71,000. Companies  cannot apply to HMRC for approval until they have either spent 70% of the moneys raised or have traded for at least four months. Consequently, those figures do not capture all investment made to date under the scheme.

The Government initially anticipated that 300 new companies would benefit from the scheme. The figure of 466—it is likely to be higher than that—is clearly better than that. I do not know how much of that we can attribute to the efforts of my hon. Friend the Member for Braintree, who has been extraordinarily active in promoting SEIS, but undoubtedly we can attribute some of it to his work—[Hon. Members: “Hear, hear.”]Perhaps all of it. I thank him for his efforts in promoting SEIS.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

While I appreciate my hon. Friend’s acknowledgement of my efforts, I would really like him to join me in acknowledging Lord Young of Graffham, whose idea this was. It is an inspirational idea, so will my hon. Friend join me in congratulating Lord Young?

Photo of David Gauke David Gauke The Exchequer Secretary

As ever, my hon. Friend not only makes an outstanding contribution in this field, but does so with such modesty. I would like to put on the record my thanks to Lord Young for his efforts on this issue.

At this point I should perhaps deal with the issues that have been raised about employment, having given the take-up numbers. My hon. Friend is correct that there is a limit of 25 employees for SEIS. The existing EIS is there for larger companies with more employees—its limit goes up to 250 employees.

The hon. Member for Newcastle upon Tyne North asked how many jobs have been created as a consequence of SEIS. HMRC does not monitor the level of jobs created. To be fair, we are talking about early-stage companies, so they may not necessarily employ large amounts of people as yet. However, they could, of course, go on to do so. The scheme is part of our efforts to ensure a strong recovery in private sector jobs. Members of the Committee will be aware of the remarkable progress that we have made on that front over the past three years.

The legislation was designed so that companies owned by another company from the point of their incorporation are excluded from participating in the scheme. That feature is intended to prevent established trading companies from temporarily spinning off subsidiaries to allow investors access to the generous tax reliefs on offer. However, it will also disqualify companies that have been established by a corporate formation agent before being sold to their ultimate owners. That is a fairly common way for companies to begin life, and a number of interested stakeholder bodies and individual companies have raised it as an issue.

The exclusion of so-called off-the-shelf companies is unintended and inhibits otherwise eligible companies from benefiting from the scheme. Clause 55 corrects the unintended exclusion to ensure that the scheme benefits as many start-up companies as possible. The changes made by the clause will amend the existing legislation to ensure that a company owned by another company from incorporation will not be excluded, providing that the company has issued subscriber shares only and has not yet commenced any trade or other business.

The clause takes effect in relation to shares issued to individual investors on or after 6 April 2013, which is the start of the tax year for individuals. It does not take effect from April 2012 because we believe that quite a number of companies have already restructured their activities in order to comply with the existing legislation, and it would be unfair on those companies for the amended legislation to have retrospective effects.

On the number of companies caught by the flaw in the original legislation and how many more will now benefit, we believe that only a very small number have been caught—the majority were able to restructure to take advantage of the scheme—and the amendments made by clause 55 will make it easier to benefit without restructuring, rather than increasing the numbers anticipated to use the scheme.

A couple of more general points were raised about the application of SEIS. In particular, I was asked why debt finance cannot qualify for the tax relief and why founders cannot benefit. On debt finance, debt is lower risk than share capital and therefore does not justify the very generous tax relief attached to SEIS. We want to ensure that that is properly focused.

There is a similar point to make with regard to why founders cannot benefit. The incentives are intended to increase external investment to help grow and develop companies. Relief is not available for those who own more than 30% of the company, and that reduces scope for abuse. Entrepreneurs’ relief provides founders with benefit by giving a capital gains tax rate of 10%, which should not be forgotten. The focus of the very generous reliefs involved within seed EIS are external investors who would otherwise be making perhaps a high risk investment and who would not necessarily have all the information to hand in order to make an assessment as to whether that is a sensible investment. So there is a degree of asymmetry of information, but that argument does not really apply when it comes to founders who will be well informed.

In conclusion, the Government launched SEIS in the Finance Act 2012 to help start-up companies raise vital early financing. The clause corrects a minor issue with the legislation to ensure that all companies that should be able to benefit can benefit, and I hope that it can stand part of the Bill.

Question put and agreed to.

Clause 55 accordingly ordered to stand part of the Bill.