EIS, SEIS and VCT reliefs: risk to capital

Part of Finance (No. 2) Bill – in a Public Bill Committee am 2:30 pm ar 9 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury 2:30, 9 Ionawr 2018

I will speak to our amendments to schedule 4, which also affect clauses 14, 15, 16 and 17.

May I start by telling the hon. Member for Middlesbrough South and East Cleveland, who was slightly confused as to which way he should vote, I am not sure whether if I had a spoken a little less he might have come our way, or perhaps he would have done so if I had spoken a little longer. We will never know, alas.

Clause 14 seeks to amend the requirements for investment to qualify for relief under the enterprise investment scheme, seed enterprise investment scheme or the venture capital trust scheme. As indicated, it also introduces an overarching risk-to-capital condition to deter investment companies whose activities are mostly geared towards protecting capital through minimising risk rather than supporting long-term growth and development of UK enterprise. It is important to start with that proposition.

Clause 14 also introduces a new principle-based risk-to-capital test that would change the current regime in which HMRC provides assurances for investments in advance. In the not too distant future, I am also going to introduce the T word—the transparency factor— I am giving notice of that.

Under this measure, HMRC would no longer provide advance assurance for investments that would appear not to meet the terms of the new rule. The Treasury has stated that if the new test proves effective in simplifying the conditions, this approach may be used to simplify further aspects of venture capital schemes legislation. It is clear that the current legislation is a maze of complexity that makes it difficult for businesses and advisers to establish that qualifying conditions are met with certainty, and also for HMRC to ensure that the reliefs are being used correctly and are not subject to abuse.

The current complexity creates a scenario whereby cash-strapped start-up companies have to use their limited funds to purchase professional advice on how to access the relief. The Chartered Institute of Taxation, for example, has argued that this creates a conundrum, where ultimately the success of the start-up and its ability to access these funds is simply down to whether it can afford professional advice.

The new principle-based risk-to-capital test will mean that start-up companies are largely dependent on the guidance issued directly by HMRC on its website. This guidance will be wholly dependent on whether HMRC decides to update the website. It may also be contingent on the fact that HMRC has seen funding and staffing levels cut consistently in the past few years. I have referred to my own constituency as a victim of that practice. I think those cuts will continue. This is why the advance assurance service currently in use is under pressure and it appears that the Treasury is seeking to pursue a cheaper option that will ultimately require fewer staff and, importantly, result in a lower-quality service.

The very people the relief is intended to help struggle to access it. The changes outlined will only make it harder. In my experience, and I suspect the experience of many members of the Committee, very few start-ups can afford the expensive and technical financial advice that will be needed to access this cash. Therefore, it is more likely to be taken up by companies that are established and may be in less need of the relief.

That poses a particular concern for tax accountants who will have to interpret the guidance on the HMRC website and make a judgment call as to whether the client is entitled to the relief. The withdrawal of the advance assurance service in relation to the new test has the potential to undermine certainty and practicability for these tax advisers, unless there is detailed guidance from HMRC that provides real-life examples. There appears to be a lack of confidence among professional bodies representing tax accountants on the reliability of HMRC in issuing this guidance. There is a fear that investors and accountants could contravene the conditions for the relief and have to pay expensive penalties.

Those conditions lead to the wider question that underpins new clauses 7 and 8 on the operation of the reliefs. As we were told by the Chancellor in the Budget, the UK’s public finances are in a precarious place. Our finances are so limited that we must expect a further decade of belt tightening and more cuts to public services. With that economic background in mind—low growth, all the stuff we have discussed before, and so on—it is only right for the Opposition to ask the Government to provide a review of the operation of these reliefs and their effectiveness against the stated aims.

The Minister talks about 12 or 19 months not being an appropriate period of time. The problem with that is that if we had said two, three or four years, I suspect the Government would still have declined our generous offer for a review, but there we are. The Minister may not have the figures to hand—he often does, I must say—but I would like to try to establish how many individuals have benefited from the EIS, SEIS, SI and VCT reliefs since their introduction; the value of these reliefs in terms of the tax breaks given; and in what sectors these reliefs have been made, as well as any economic assessment of their impact on the economy. To be fair, I think the Minister touched on some figures.

New clause 8 raises those questions, which go to a deeper question of tax transparency for the Government. The Government have been handing out millions of pounds each year in tax breaks and what has become known as corporate welfare to private companies, wealth corporations and wealthy investors who operate in the UK economy yet refuse to publish a clear list of where that money has gone, to whom it has been given and its direct impact on the economy. That is particularly important, given the fact that some of these investors will take their profits and put them offshore. It is a strange set of circumstances where the ordinary taxpayer is held to a higher level of transparency through the disclosure of huge amounts of detail to HMRC than wealthy investors who are able to gain large tax reliefs through investing in venture capital trusts.

New clause 7 seeks a review of changes to EIS and VCT reliefs for knowledge-intensive companies. That review would require the Minister to report to Parliament on whether those tax reliefs have been effective in encouraging more investment in innovative companies that exploit new technologies which have ultimate benefit for the UK economy—and, importantly, for UK taxpayers and workers. As the Opposition made clear in our response to the Budget, we do not believe that these measures alone represent anything near the level of investment we are going to need if we are to revitalise the economy, and trickle-down economics is not working. The Government have argued that tax cuts and tax reliefs will somehow generate growth and wealth for all; yet living standards continue to fall. Some 7.4 million people in working households live in poverty; they work harder and longer, on lower wages, and have little money of their own to invest, yet they will not receive such a generous tax break from the Government. It is imperative that their tax money is used responsibly and that there is transparency over who benefits from these reliefs and what effect, if any, they have on the wider economy and the ordinary person’s daily life.