Clause 38 - Seed enterprise investment scheme

Finance Bill – in a Public Bill Committee at 9:45 am on 14th June 2012.

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

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

With this it will be convenient to discuss the following:

Government amendments 148 to 156.

That schedule 6 be the Sixth schedule to the Bill.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

The clause deals with the seed enterprise investment scheme, which is a tax-advantaged venture-capital scheme designed to incentivise investment in small, early stage companies, with a focus on those companies carrying on a new business in a qualifying trade. The scheme attracts income tax relief at 50% and an exemption from capital gains tax, which also applies to some roll-over investments. As a result, the cost to the Exchequer will be high, but will gradually fall from £50 million to £20 million per annum. The policy is designed to support growth by helping to attract investment in smaller, riskier early-stage UK companies. It is specifically limited to businesses raising up to £150,000, for companies who have not benefitted from EIS or VCT investors, and who employ 25 or fewer employees and have gross assets of under £200,000. This is of course an important priority, and hon. Members will be keen to support local businesses, ensuring that they receive the capital that they need in these difficult economic times, especially as the project Merlin agreement has failed to get bank lending going.

As we have discussed, the Bank of England figures from May show that net lending to businesses has fallen, year on year, in every single month since May 2010. It is welcome to see some concrete action on small-business lending, but I would like to hear from the Minister about the expected outcomes. The policy was of course designed some time ago as it is the result of a consultation made in Budget 2011. As I am sure that hon. Members are aware, the economic forecast in Budget 2011 varied from that in Budget 2012. Have the expectations of the costs to the Exchequer been revised in the light of those changes and in the light of the recent confirmation that we are back in recession? Will the Minister enlighten the Committee on the anticipated level of take-up for the schemes over the remaining years of this Parliament?

How will small businesses attract this form of finance? Although seed investors may know tax regulations like the back of their hand, that might not apply to the small businesses that we hope will benefit from such investment. The Institute of Chartered Accountants in England and Wales has raised concerns about the complexity of the seed enterprise investment scheme. In relation to the guidance from Her Majesty’s Revenue and Customs, the ICAEW has stated that

“this is no substitute for well written legislation in the first place.”

It is also

“concerned that companies which are supposed to benefit from it will not seek the necessary professional advice”— both accountancy and legal advice—

“needed to implement SEIS because they fear that the cost will be disproportionate to the amount of money which can be raised under the scheme.”

That is a fair concern.

What is the Minister doing to ensure that small businesses know about the steps they must go through? Are any advertising campaigns or measures being considered to enhance take-up? Has he consulted other Departments about what steps could be taken to advertise the scheme and to ensure that businesses know about it? Will the Government’s local enterprise schemes play a role in advertising the scheme and making businesses aware of it? I am sure that the Minister shares our commitment to ensuring that businesses throughout the  country can develop and grow and can benefit from the scheme. If the Minister answers those important questions positively, that will ensure that the scheme is as successful as possible.

Photo of John Mann John Mann Labour, Bassetlaw

I am minded to support this clause, but I have a question for the Minister. Support for businesses, especially new and small ones, is vital across the country. Ministers are happy to talk about interest rates in terms of gilts and base rates, but last week it was revealed that real interest rates for business in this country are the highest in the European Union. When I raised that in Committee earlier, there were surprised looks on the faces of Government Members, who are regularly informed about how low our interest rates are, but that relates not to the base rate of the Bank of England, but to the interest rate that businesses have to pay.

There are two problems with project Merlin: first, of course, there is the problem about the availability of finance to businesses; and secondly, alongside that, there is the bigger problem of the cost. Businesses tell me, and this has now come out in official statistics for the first time, that the cost is very high. They are paying phenomenally high interest rates. We now have evidence from the OECD and the European Union that compares real business lending rates—actual rather than notional rates—charged by financial institutions to businesses. It shows that we have the highest interest rates for businesses borrowing money of any EU country. We are several points higher than Germany. We are higher than France, and we are even higher than the problematic countries on the periphery of Europe, which have other financial problems.

Why is that the case? Why are British businesses being charged more? Why do we have the highest real interest rates for businesses in the European Union? Crucially, what is the Minister doing about that? Do the proposals in the clause and other Government’s proposals for business have any significance, given the real lending cost to business and the fact that the economic crisis and the Government’s incompetence in economic affairs have pushed our interest rates higher than those of Germany, France and other countries in the EU?

Photo of Grahame Morris Grahame Morris Labour, Easington

On a point of order, Mr Chairman. Will you clarify that we are debating clause stand part?

Photo of Grahame Morris Grahame Morris Labour, Easington 10:00 am, 14th June 2012

Thank you. It is a pleasure to serve under your chairmanship, Mr Sheridan, come rain or shine. I am grateful to have the opportunity to explore a couple of points on what I think is quite an important clause.

As my hon. Friends the Members for Bassetlaw and for Leeds West have indicated, the clause is one of a number of measures in the Bill designed to encourage investment in small businesses, and the Opposition welcome that. Indeed, the seed enterprise investment scheme is one such way to help small businesses that the Chancellor envisaged in his Budget.

As we have already heard, the scheme applies only to start-up businesses with 25 or fewer employees holding assets of up to £200,000. As I understand it, the companies must be genuinely new ventures, just at the point of  getting up and running. According to the explanatory notes, investors may obtain up to 30% of shares in the start-ups and gain a significant tax relief on their investment. In the first year of the scheme, investors will also be eligible for a capital gains tax break on the shares, as well as on any gains reinvested from assets in 2012-13.

The scheme is certainly a shake-up of the incentives on offer for investors in small businesses. It clearly seeks to encourage more investors to put their money into small businesses—up to £100,000 in a single tax year or £150,000 over two or more tax years into a single UK company. Interestingly, I understand—again, from the explanatory notes—that eligible companies must trade in an approved sector. Will the Minister elaborate on precisely what an approved sector would be? Have the appropriate sectors been drawn up yet, and will they specifically exclude finance and investment companies, as has been suggested by some media commentators?

The scheme went live in April this year. What data does the Minister have on the take-up so far, and when will we be able to see the figures? I know that Government Members throw their hands up in horror when we ask to see data or for reports to be published and placed in the Library, but I am sure the Government collect the data anyway—it would be prudent of them to do so—and, frankly, I cannot understand why it should be such an onerous task to publish the data, given that it is in everyone’s interest to scrutinise how particular measures are working.

Will the Minister ensure that any data on businesses benefiting from the seed enterprise investment scheme are presented in such a way that we can see the regional impacts and assess their effectiveness in regional economies? Business investment is a key element in the recovery of the UK economy. The Opposition are keen to encourage jobs and growth, which we have not seen a great deal of in my region over the past two years. Indeed, the north-east, like the rest of the UK, has seen plummeting business investment, compounded by Government investment in infrastructure and capital being pulled away in the same period.

Small businesses in my region, and perhaps in other regions, have been calling for targeted help, better capital allowances and better business support from the Government and the banks, as well as better public investment in the surrounding infrastructure, as was the norm under the previous Labour government. I am sceptical of the ability of the scheme to help start-ups, especially in my region of the north-east, and to attract investment, simply because the problem we face in the north-east economy, perhaps more so than elsewhere, is a complete lack of demand—demand is flat. We need specific measures to stimulate demand.

The measures we have seen so far, embodied in the clause, show a lack of understanding of the distinct problems that we face in the north-east. They will do little to offset losses, such as our regional development agency money over the past two years. Jobs and growth have been hard-hit in the north-east, not just because of the lack of business investment but because of the colossal amounts of money that have been sucked out of the north-east economy over the past two years. We have heard hon. Members refer to the figures, our region has lost two thirds of our regional development funding. As I have mentioned previously, changes to the welfare benefit system will remove £170 million from  our regional economy. Hundreds of millions are being cut from local authority budgets—£67 million in the first year alone from my local authority, Durham county council. Clearly, the private sector-led recovery that we were promised by the Chancellor has not materialised to any great extent in the north-east, and certainly not enough to offset the considerable job losses in the public sector.

Photo of Graeme Morrice Graeme Morrice Labour, Livingston

My hon. Friend accurately describes the failure in his region of the UK Government regional growth policy. Of course, the UK Government regional growth policy applies only south of the border. Is he aware of the equal failure of the Scottish National party Government when it comes to lack of stimulation of growth and economic demand, capital project expenditure and job creation in Scotland?

Photo of Grahame Morris Grahame Morris Labour, Easington

A basic problem is that this measure is essentially a supply-side solution when the problem we face is fundamentally one of demand, and, as I said, I wish to return to that subject. However, we are dealing with the proposal in clause 38 regarding the seed enterprise investment scheme, which is essentially a supply-side measure.

My concern is that no amount of rich investors in small businesses will conjure up the necessary consumers and create demand in an area such as mine. People simply do not have the money to spend. The Nobel prize-winning economist Paul Krugman, who had a bit of airtime recently on the BBC and in the national press, says:

“The urge to declare our unemployment problem ‘structural’—a supply-side problem of some kind, not solvable by the ‘simplistic Keynesian’ notion of just increasing demand—has been quite something to behold. It’s rapidly entering the category of a zombie idea, which just keeps shambling forward no matter how many times it has been killed.”

He also applies that argument to the UK economy as a whole. Professor Krugman cited evidence from the United States showing that the overwhelming factor holding businesses back is “lack of sales”—in other words, there is not enough demand in the economy. Next to that, restraints on capital are not really an issue—certainly not of the same order of magnitude—and not having enough skilled workers is no more of a problem now than it was two years ago, before the global recession hit. Government Members often raise concerns about regulations and red tape. Businesses certainly complain about red tape, but I would say no more than usual. What has changed over the past two years is that there is no demand. That is what Professor Krugman said in an interesting interview on “Newsnight” on 30 May. In The New York Times, he wrote:

“Britain…is suffering much more than acknowledged from a lack of effective demand—and also has a much smaller underlying budget problem than the government claims”— this is from a Nobel prize-winning economist.

“The British may be poor-mouthing their economy—and in so doing creating a self-fulfilling prophecy, in which excessive pessimism about potential leads to policies that in fact impoverish the nation.”

In my mind, no one has put it any better.

To conclude, I urge the Minister to reassure me that we will be able to determine the regional effects of the seed enterprise investment scheme. If it is shown that the benefits are skewed towards the south-east and London, will he indicate what sort of response we can expect from the Chancellor?

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

In response to the hon. Gentleman’s opening comments, and those of the hon. Member for Bassetlaw, I have been called many things in my political lifetime, but a ray of sunshine is certainly a new one. I am sure that that is not the case for Mr Ian Mearns.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I beg to differ, Mr Sheridan. I always regard your company as being like a ray of sunshine. You should have a better opinion of yourself, sir.

I intend to focus on the importance, particularly in a regional economy such as the north-east’s, of beginning, nurturing and growing small and medium-sized enterprises. I think it important also to point out that, following the demise of the regional development agencies across England, local enterprise partnerships and the regional growth fund are, unfortunately, barely scratching the surface of what we need to do to stimulate and grow our economy and business base.

It may surprise Members to learn that in a place such as Gateshead, largest private sector employer employs fewer than 1,000 people. Twenty-five or 30 years ago, many of the large industrial heavy engineering enterprises on the banks of the River Tyne employed several thousand people, and even as many as 10,000, but we are not in that game any more. In Gateshead, there were such large industrial manufacturing employers as Northern Engineering Industries and Clarke Chapman. The largest private sector employer now is AkzoNobel, which is known locally as Nobel International Paint and is an excellent manufacturer of marine, yacht and protective coatings.

Gateshead is on the south bank of the River Tyne, and has a deep, rich industrial heritage involving the railways, mine-working, and mine-working engineering, but it now has a much more diverse economy. It has the A1 running through it and the north-south east coast main line. It is the home of the Angel of the North and so much more, but in itself, Gateshead is an important employment hub for the whole north-east. People do not realise that in the borough of Gateshead, over 100,000 people are employed, but most people who are not in the public sector are in small and medium-sized enterprises. The Team Valley trading estate, which is an important employment hub and probably in the top five purpose-built industrial estates anywhere in the country, has more than 25,000 employees in its environs, mostly in the SME sector. 100,000 people are employed in the borough, as I have said.

Why do we need investment incentives for small and medium-sized enterprises, when British industry and commerce is sitting on £0.75 trillion, in terms of investing capacity, but is not investing? The real question that we have to pose to the Government is how we stimulate demand. It is quite clear that investors will not invest because of the lack of demand in the domestic economy. That is exacerbated in north-east England because of the massively different impact of the cuts imposed by central Government.

The private sector in the north-east does not have the capacity to pick up the burden of public sector job losses, which now, sadly, number well over 30,000 in the region. That was the last figure I saw from midway through last year, and the overall number of job losses in the public sector is probably closer to 50,000 by now. Public sector job losses have been mirrored in the private sector by more than 10,000 job losses in construction, and more than 10,000 job losses in manufacturing.

The private sector is not picking up as we were promised. It is being impacted by the cudgelling of public sector jobs, which is depressing demand. There is a particular impact on small businesses; they rely on local spending power and disposable income, which are further diminishing due to more cuts in public services, jobs, and benefits among the large sectors of the population that rely on them.

Geography is also important. North-east England is one of the peripheral regions of the UK and English economies. The geography means that to get goods and services to markets, there are increased costs, including fuel costs. It also means a new political reality, in that we have Scotland just over the border. I agree with my hon. Friend the Member for Livingston that the Scottish National party is possibly not doing as much as it should to stimulate the Scottish economy, but it is doing more in Scotland than the Government are doing in the regions of England. Scotland still has a tourism strategy and still spends money trying to attract visitors to Scotland. I am afraid to say that the good “Passionate People, Passionate Places” advertising regime that we had to stimulate tourism in north-east England has dried up—it has gone. Sadly, just north of the border, 50 or 60 miles away from where I live, the Scots are still spending money in great measure on employing a tourism strategy.

Scotland is also able to attract other advantages. Inward investment incentives in Scotland have resulted in businesses such as Amazon, which looked at potential sites in north-east England, locating in Scotland. That decision was based only on the fact that there were inward investment incentives. Our transport infrastructure is teetering on the brink. All that is important in attracting inward investment and growing the economy in regions such as north-east England. That cannot be ignored by Government Members.

Photo of John Mann John Mann Labour, Bassetlaw 10:15 am, 14th June 2012

On a point of order, Mr Sheridan. I note that there is to be a statement on banking reform in the Chamber. The business appears to have been timetabled by the Government this morning. That statement will clash with the Committee’s sitting this afternoon. There is to be an urgent question on fishing discards, followed by a business statement and the statement on banking reform. My calculation is that there will be a straight overlap with this Committee’s sitting. If that is the case, that seems rather disappointing, from the point of view of the Government’s business managers.

Photo of Jim Sheridan Jim Sheridan Labour, Paisley and Renfrewshire North

That is a perfectly valid point. At the end of the day, it is up to the Government to make the time available. I am sure that your concerns have been heard, Mr Mann.

Photo of David Gauke David Gauke The Exchequer Secretary

I am sorry that you, Mr Sheridan, have never been compared to a ray of sunshine in the past, and I am glad that that has been put right today. I am reminded of the quote from P.G. Wodehouse, who said:

“It is never difficult to distinguish between a Scotsman with a grievance and a ray of sunshine.”

I have never seen you as someone with a grievance, Mr Sheridan. P.G. Wodehouse, of course, never served in government with the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown). How apposite those remarks may have been.

Clause 38 introduces schedule 6, which establishes the new seed enterprise and investment scheme, known as SEIS. The new scheme will encourage investment in new early-stage companies by providing 50% income tax relief for individuals who invest in shares in qualifying seed companies. The clause also introduces a capital gains tax holiday on gains realised on the disposal of assets in 2012-13 that were invested in the same year. Shares qualifying for SEIS income tax relief will be exempt from capital gains tax. The Government recognise that market failure, leading to an under-supply of risk capital, is particularly acute at the seed level of investment. The smallest companies, especially start-ups, face particular difficulties attracting investors to make early-stage investments.

At Budget 2011, the Government announced that they would consult on providing new support for seed investment in response to the difficulties that start-up companies can face in seed finance, including options for a new scheme. Following consultation over the summer, we announced in the autumn statement the introduction of the SEIS and the CGT holiday for investments made in the new scheme. The new scheme is designed to increase the amount of equity investment available to smaller companies. The relief is claimed by investors, rather than by the investee companies. There is therefore unlikely to be any extra administrative burden on companies. The SEIS is expected to benefit businesses in all regions, assuming a similar distribution to that of the enterprise investment scheme, the data for which are published in table 8.4 on the website of Her Majesty’s Revenue and Customs.

I will just pick up on the point raised about the regional impact, because there could be a concern that EIS is too focused on London and the south-east. It is worth pointing out that the national statistics are based on the location of the registered office of the company issuing EIS shares, but that is not necessarily where the money raised by the share issues is used. The location of the registered office does not necessarily reflect where the company actually carries on its trade. For example, it is common for a company’s registered office address to be care of an agent or a lawyer, while a factory is located somewhere else. It is also worth pointing out that the SEIS provides additional support to encourage business angels, who are spread throughout the United Kingdom. They tend to invest locally, so we hope that take-up will be spread across the UK, and, although it is still early days, inquiries so far suggest that that will be so.

It is estimated that an extra 300 or more companies will benefit from investment under the Government’s tax relief schemes in the first year as a result of the SEIS. The scheme is designed to be simple and easy to use. The rules are aligned as far as possible with those  for the existing enterprise investment scheme to allow companies to use both schemes sequentially without needing to become familiar with two sets of rules. I appreciate the point made about complexity, but the measure will provide a generous tax relief, and the scheme needs some rules to prevent abuse. Where possible, it duplicates the already familiar EIS rules, as we envisage that many companies will raise money under both schemes in sequence. As I say, it will be easier not to have to learn two different sets of rules.

Amendments 148 to 156 concern the anti-abuse provisions. Following recent discussions with industry specialists, an amendment is required to the anti-abuse provision in schedule 6 to ensure that it is effectively targeted. Similar amendments are required to the anti-abuse  provisions in schedules 7 and 8. The legislation is intended to prevent two types of abuse. First, it will prevent arrangements where the aim is to deliver to investors a tax mitigation product with no other commercial purpose. Secondly, it targets arrangements that aim to provide the benefit of tax advantage investment to entities or projects that do not themselves qualify under the schemes, or whose owners want the benefit of cheap financing without relinquishing equity. These amendments will ensure that the legislation targets the abuses effectively without inadvertently preventing legitimate use of the venture capital schemes.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at One o’clock.