Clause 88 - Enterprise investment scheme

Finance Bill – in a Public Bill Committee at 11:00 am on 20th May 2004.

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

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I should first declare an interest, as I have been an investor in several enterprise investment scheme companies, nearly all of which have failed.

The clause and the accompanying schedule make a number of amendments to the EIS. These include increasing the maximum amount that can qualify for relief to £200,000 from £150,000, and relaxing a number of the technical rules as to what types of shares and companies can qualify. Those provisions are welcome. One or two technical issues have been raised in relation to them, and it would be helpful if some clarification could be put on record about those.

The EIS same-day rule is causing some concern, and although conversion of debts or loans to share capital is regarded for the purposes of the Companies Acts as the issue of shares for cash, it has not been treated as such for EIS purposes. The issues of shares in such circumstances can disqualify other shares issued on the same day. Paragraph 3 of the notes on the clause refers to the same-day rule, and paragraph 6 refers to the rules relating to the payment of loans being relaxed. The concern is that the conversion of debt or loans will disqualify other shares issued on the same day, by virtue of section 289(1)(B) of the Income and Corporation Taxes Act 1988. Will the Economic Secretary give some assurance on that point?

All moneys subscribed for shares in a company are technically loans for the company until shares are subsequently issued. There are concerns that schedule 18 might mean that any subscription for shares will be defined as a return of value when shares are issued if the cheques are banked before the issue is confirmed by the recording of shares in the company register. Again, some clarification would be appreciated.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I recognise the hon. Gentleman's personal experience with such schemes, and regret that his investments mostly appear to have failed, but I trust that the loss relief available to him for such schemes may have proved useful.

The clause will make a number of improvements to the enterprise investment scheme, as the hon. Gentleman recognises, to increase the flow of funds to small entrepreneurial companies in the higher-risk bracket, making it more flexible and responsive to

commercial factors. The main changes are as follows. First, we are increasing the amount of investment in a tax year that can qualify for EIS income tax relief from £150,000 to £200,000. Secondly, under current rules, all the shares of the same class issued by the company on the same day have to be paid for in cash. For example, shares issued to professional advisors in lieu of payment could taint the EIS shares. That requirement will no longer apply, but it will still be necessary for an investor who wishes to claim EIS reliefs to subscribe for shares in cash.

Thirdly, the active company rule is abolished. That rule requires that the company's trade or research and development benefits from the money that is raised under the EIS is earmarked at the outset and must remain the same, usually for three years. The new rule will enable that trade or research and development to be moved within the group, provided it is carried on by the company in which the investment is made, or by a qualifying 90 per cent. subsidiary.

Fourthly, the rule is amended that allows any EIS company to have subsidiaries, but only if it has a direct or indirect 75 per cent. interest in each of them—the so-called 75 per cent. qualifying subsidiaries rule. The new rules require that any subsidiary must be a 51 per cent. subsidiary of the EIS company. However, any subsidiary that was carrying on the activities for which the investment funds were raised, and any property managing subsidiary, must be a qualifying 90 per cent. subsidiary.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Will all the losses of a 51 per cent. subsidiary, if there are any, be available throughout the group, to be channelled as and where they are required by the holding company?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I hope to deal with that. If I do not, the hon. Gentleman will need to come back to me.

Fifthly, we are making an important change. Investors cannot currently make a short-term loan to help to tide a company over a cash-flow problem without jeopardising their eligibility to EIS income tax relief on investments in the company's shares that are made in the next 12 months. That impediment is removed, provided that any repayment of the loan is not connected with the share issue. There is no question of giving EIS relief on loans that are converted to equity.

I should like to respond to specific points that have been raised. The answer to the question asked by the hon. Member for Torridge and West Devon is no. I hope that I have dealt with the first point raised by the hon. Member for Arundel and South Downs. On his second point about return of value, that has been raised with us by some of the professional bodies, and we have given an assurance that there will be no return of value. We intend to make that clear in the Inland Revenue guidance that will accompany the changes.

The changes respond to a number of representations that we have received. They have been warmly welcomed and demonstrate our commitment to encouraging the provision of capital for smaller, high-risk companies. I commend the clause and schedule to the Committee.

Question put and agreed to.

Clause 88 ordered to stand part of the Bill.

Schedule 18 agreed to.