Clause 39 - Enterprise investment scheme

Finance Bill – in a Public Bill Committee at 1:00 pm on 14th June 2012.

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

Photo of Sir David Amess Sir David Amess Conservative, Southend West

With this it will be convenient to discuss the following:

Amendment 43, in schedule 7, page 260, line 34, leave out ‘£5 million’ and insert ‘£10 million’.

Government amendments 157 to 168.

That schedule 7 be the Seventh schedule to the Bill.

Clause 40 stand part.

Amendment 44, in schedule 8, page 270, line 37, leave out ‘£5 million’ and insert ‘£10 million’.

Government amendments 169 to 176.

Government amendments 28 to 31.

That schedule 8 be the Eighth schedule to the Bill.

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

It is a pleasure to serve under your chairmanship, Mr Amess. Clause 39 makes changes to the enterprise investment scheme, which is different from the seed enterprise investment scheme that we discussed earlier under clause 38. The EIS is much older than the SEIS. Created in 1993, it has been described as its little sister. This measure increases the size of companies eligible for the EIS to companies with 250 employees, gross assets of £15 million and a  maximum annual investment of £5 million. It also relaxes the rules relating to those who are linked to a company and increases the scope of eligible shares.

Amendment 43 refers to the annual investment limit that applies to the EIS. Given the general state of the economy, businesses that I visit often ask what the Government are doing to support them. The Government are failing to get the economy back on track, to deliver on the national insurance holiday for small businesses that we have called for, and to deliver through the regional growth fund. Bank lending statistics are disappointing at a time when the Government have steered the economy back into recession. As I have said before, bank lending to small businesses is disappointing.

Under the 2011 Budget, the annual investment limit for qualifying companies was increased to £10 million, but since then the Government have quietly slipped it out that the limit will in fact be £5 million. The reason for the reduction had to do with a lack of approval for state aid funding from the EU. Will the Minister tell us what progress he has made in his negotiations, whether there is scope for achieving state aid approval for the promised £10 million in the future, and what effect the difference will have on businesses seeking investment? After all, we are talking about halving the amount from £10 million to £5 million.

More fundamentally, should not the Government have considered the EU state aid implications before making the announcements? They either thought that they could get the change through and failed, or misled people at the beginning. The fact that the Government announced a £10 million figure with some fanfare and later decided that they would slip out the information that the limit would in fact be £5 million should come as no surprise, but what effect does that have on business confidence and certainty about this policy?

What are the Government doing for businesses seeking investment above £5 million but below the £10 million threshold at which venture capitalists tend to invest? The 2009 Rowlands report estimated that between 25,000 and 32,000 UK businesses are growing and/or restructuring and have characteristics that may make them suitable for growth capital, and that

“up to 5,000 of these firms per annum will be viable SMEs which are likely to experience significant problems in accessing capital as the economy emerges from recession. It is likely that those SMEs which are seeking to access growth capital in amounts above £2 million—the current upper limit of public/private provision—and below £10 million—the minimum level at which private equity providers will fund—will face particular difficulties.”

I understand that the Minister’s hands are somewhat tied, but has his Department commissioned updated data, given the state of the economy? What steps is he taking for businesses that require access to growth capital above the EIS threshold of £5 million but below the £10 million mentioned in the Rowlands report? How much investment does he expect over the next year under the current threshold, and at what cost to the Treasury? Does the Minister have the figures for how much would have been invested under a £10 million threshold?

Clause 40 raises similar questions. Amendment 44 again questions the level of the annual investment limit, which was £10 million and has been reduced to £5 million. It is welcome that state aid approval has been found for the £5 million limit. I will not repeat the comments  I made about negotiations and announcements associated with the increase in the previous clause, as those points remain the same, but what effect does the Minister expect the new thresholds to have on take-up on the part of venture capital trusts in the next year, and will he report on that to the House? VCTs channelled £250 million to small and medium-sized enterprises in 2010-11. Given the new threshold, what does the Minister expect to happen to that figure, and what would the effect have been had the Government been able to stick to the original figure of a £10 million annual investment limit?

I note that the Government have tabled amendments to clause 40, and I look forward to hearing from the Minister on them. The amendments seek to move the start date for some venture capital changes from 6 April to Royal Assent of the Bill. In the Budget, there were changes to the amount that any business could receive through the provision that we are discussing and from other state sources in the previous calendar year; that was limited to £2 million. Any amount invested that is over that limit would lose its tax-advantaged status. Many investors have contractual commitments to make investments, and have had very little notice to enable them to make any changes. The deadline of 6 April came very shortly after the Budget. Will the Minister share with us what representations were made to him about the change of the start date? The delay to the change has been welcomed by industry, but once again the Government should have taken that into account before starting the process.

The clause and the amendments to it that the Government had to table are yet more evidence of a flawed process. We have seen rhetoric unravel since the Budget in March, which slapped VAT on pasties, caravans and church renovations, and claimed that a tax increase on pensioners was a mere simplification. It has been estimated that the Government do a U-turn every three weeks. The amendments are yet more evidence of ill-thought-through policy that has had to be changed in response to industry concern, though it will probably never be added to the growing list of U-turns.

Photo of David Gauke David Gauke The Exchequer Secretary

Perhaps I can address the hon. Lady’s concerns. Clause 39 makes a number of changes to the enterprise investment scheme to support and increase equity investment for SMEs, while ensuring that the scheme remains targeted at genuine high-risk investment.

The enterprise investment scheme is designed to encourage direct investment in smaller, high-risk companies by offering a tax incentive to investors in qualifying companies. Since the introduction of the EIS in 1994, approximately £8.1 billion has been contributed to qualifying companies from private investors. Small business is the lifeblood of the economy, and the ability to start and grow companies is vital to the economic well-being of the country. That is particularly the case now, given the need for a private-sector-led recovery. The Government’s aim is to encourage investment in start-ups and small, growing companies. That is why we are introducing the reforms to the EIS.

Clause 39 will remove the £500 minimum annual investment limit for investors and will increase the maximum investment limit to £1 million, giving investors increased flexibility in how they invest. It will also relax  the rules defining when a person is connected to a company through an interest in its capital, and will widen the definition of shares that qualify for relief. Changes are also being made to prevent tax relief being provided for investment in companies or activities outside the purpose of the schemes. That will ensure that the scheme continues to support genuine risk capital investments and so help smaller, high-risk UK companies to obtain finance.

To achieve that, clause 39 introduces a new disqualifying purpose test for the scheme; provides that acquiring shares in another company will not be a qualifying use of moneys raised; and provides that receipt of feed-in tariffs or similar subsidies will not generally be a qualifying activity. We are also increasing both the size limits of companies that may receive EIS investment and the amount of investment that an investee company may receive in any 12-month period.

Amendment 43, tabled by Opposition Members, seeks to increase the annual investment limit for qualifying companies to £10 million. After a review of the evidence, we have concluded that £5 million is the appropriate figure at which to set the limit. It is the figure that most closely describes the equity gap at the present time. It is the figure at which a majority of companies could be expected to benefit. As with all taxes, we will keep this under review in case circumstances change.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury 1:15 pm, 14th June 2012

Could the Minister clarify whether the change was due to his analysis that £5 million was the correct limit, or had to do with state aid rules? If he thinks that the correct limit is £5 million, rather than the previous estimate of £10 million, is that consistent with the Rowlands report of 2009?

Photo of David Gauke David Gauke The Exchequer Secretary

We have looked again at the evidence. The hon. Lady is right that there are state aid constraints in this area. I should point out that the increase to £5 million more than doubles the current limits and provides one of the most generous schemes in the European Union. The decision was also taken in light of concern that expanding the scheme to extremely large investments would lead to a reduction of smaller investments at the £2 million level, where the equity gap is more acute.

The weight of the evidence suggests that for the majority of businesses the shortfall in the supply of equity extended to around £5 million, with investment below £2 million remaining the point on the scale where the equity gap is most acute. There are some sectors and companies that require larger investments, and these will not be able to benefit from an annual investment of £10 million. However, they should still benefit from the increase to £5 million, and the Government’s UK innovation investment fund is in place to provide sectoral support when it comes to those in the £2 million to £10 million range. Obviously the Government will keep the situation under review to ensure that Government support remains effective in helping to address the equity gap.

On the question of how many companies will lose out because the limit is only £5 million rather than £10 million, let me just say that the £2 million was introduced from July 2007 for the EIS. Data for 2007-08, the last year with no limit, shows that only seven companies raised in excess of £5 million. The majority of companies raising EIS moneys raised sums below  £250,000. I hope that provides some reassurance that the scale of the issue we are talking about is not as concerning as the hon. Lady may fear.

Turning to amendments 157 to 168, as with schedule 6, an amendment is required to the anti-abuse provisions in schedule 7 to ensure that they are effectively targeted. That is the purpose of those amendments.

I come now to clause 40. It is helpful to be able to debate clauses 39 and 40 together. I should like to say a word or two about venture capital trusts. The VCT scheme is designed to encourage indirect investment via intermediaries, known as VCTs, in smaller, higher-risk companies by offering a tax incentive to investors in the trust company. VCTs have been in operation since April 1995, with around £4.3 billion raised. As with the EIS, VCTs support small business, which is vital in achieving the Government’s objective of a private-sector-led recovery.

Clause 40 removes the £1 million limit on investment by a VCT in a single company, giving VCTs more flexibility in the investments they can make. It will ensure that the scheme continues to support genuine risk capital investments, preventing tax relief from being provided for investment in companies or activities outside the purpose of the schemes, and so helping smaller, higher-risk UK companies to obtain finance. As I said a moment ago, that is achieved by introducing a new disqualifying purpose test for the scheme; by ensuring that acquiring shares in another company will not be a qualifying use of moneys raised; and by ensuring that receipt of feed-in tariffs or similar subsidies will not generally be a qualifying activity. The measures increase both the size and limits of companies that may receive VCT investment, and the amount of investment that an investee company may receive in any 12-month period. The changes made by clause 40 will increase receipts by approximately £25 million per annum.

The Opposition’s amendment 44 would increase the threshold to £10 million. As I have explained in relation to schedule 7, £5 million is the figure that most closely describes the equity gap at present; it is the figure at which a majority of companies could be expected to benefit, but we will of course keep that figure under review.

Amendments 28 to 31 relate to paragraphs 2 and 3 of schedule 8, which ensure that a VCT may not make an investment in a company over the limit agreed with the European Commission, in view of state aid rules. The annual limit is not a new concept. However, the legislation now requires VCT managers to take into account other risk capital state aid received by an investee company in determining how much it may invest. As these elements of the legislative changes have arisen in the course of recent discussions with the Commission, there has been no opportunity to consult on them with industry. I therefore intend to delay bringing paragraphs 2 and 3 into effect until the date on which the Bill is passed, giving VCT managers some leeway to finalise deals already in the pipeline.

Amendment 31 is a minor drafting correction to the commencement provisions relating to the increases in company size limits and investment limits. Paragraph 20(2) should refer to “shares or securities” rather than merely to “shares”, as VCT investments may comprise both or either. As I explained a moment ago, an amendment is also required to the anti-abuse provisions in schedule 8 to ensure that they are targeted effectively.

In conclusion, the changes will ensure that EIS and VCTs continue to support small and medium-sized companies that rely on equity investment for their development and growth. I commend the clauses and schedule to the Committee.

Question put and agreed to.

Clause 39 accordingly ordered to stand part of the Bill.

Amendments made: 157, in schedule 7, page 261, line 16, leave out ‘in consequence’ and insert

‘, nor any money raised by the issue employed, in consequence or anticipation’.

Amendment 158, in schedule 7, page 261, leave out lines 19 to 29 and insert—

‘(a) the main purpose, or one of the main purposes, of the arrangements is to secure—

(i) that a qualifying business activity is or will be carried on by the issuing company or a qualifying 90% subsidiary of that company, and

(ii) that one or more persons (whether or not including any party to the arrangements) may obtain relevant tax relief in respect of shares issued by the issuing company which raise money for the purposes of that activity or that such shares may comprise part of the qualifying holdings of a VCT,

(aa) that activity is the relevant qualifying business activity,’.

Amendment 159, in schedule 7, page 261, line 35, leave out from ‘is’ to end of line 36 and insert

‘, in the course of the arrangements, paid to or for the benefit of a relevant person or relevant persons.’.

Amendment 160, in schedule 7, page 261, line 38, after ‘that’ insert

‘the whole or greater part of’.

Amendment 161, in schedule 7, page 261, line 40, leave out from ‘by’ to end of line 41 and insert

‘a relevant person or relevant persons.’.

Amendment 162, in schedule 7, page 262, line 10, at end insert—

‘“relevant person” means a person who is a party to the arrangements or a person connected with such a party;’.

Amendment 163, in schedule 7, page 266, line 33, leave out ‘in consequence’ and insert

‘, nor any money raised by the issue employed, in consequence or anticipation’.

Amendment 164, in schedule 7, page 266, line 36, leave out from beginning to ‘and’ in line 8 on page 267 and insert—

‘(a) the main purpose, or one of the main purposes, of the arrangements is to secure—

(i) that a qualifying business activity is or will be carried on by the company or a qualifying 90% subsidiary of the company, and

(ii) that one or more persons (whether or not including any party to the arrangements) may obtain relevant tax relief in respect of shares issued by the company which raise money for the purposes of that activity or that such shares may comprise part of the qualifying holdings of a venture capital trust,

(aa) that activity is the relevant qualifying business activity,’.

Amendment 165, in schedule 7, page 267, line 13, leave out from ‘is’ to end of line 14 and insert

‘, in the course of the arrangements, paid to or for the benefit of a relevant person or relevant persons.’.

Amendment 166, in schedule 7, page 267, line 16, after ‘that’ insert

‘the whole or greater part of’.

Amendment 167, in schedule 7, page 267, line 18, leave out from ‘by’ to end of line 19 and insert

‘a relevant person or relevant persons.’.

Amendment 168, in schedule 7, page 267, line 36, at end insert—

‘“relevant person” means a person who is a party to the arrangements or a person connected with such a party;’.— (Mr Gauke.)

Schedule 7, as amended, agreed to.

Clause 40 ordered to stand part of the Bill.

Amendments made: 169, in schedule 8, page 271, line 30, leave out ‘in consequence’ and insert

‘, nor any money raised by the issue employed, in consequence or anticipation’.

Amendment 170, in schedule 8, page 271, line 33, leave out from beginning to end of line 1 on page 272 and insert—

‘(a) the main purpose, or one of the main purposes, of the arrangements is to secure—

(i) that a qualifying activity is or will be carried on by the relevant company or a qualifying 90% subsidiary of that company, and

(ii) that shares or securities issued by the relevant company may be comprised in any company’s qualifying holdings or that one or more persons may obtain relevant tax relief in respect of such shares which raise money for the purposes of that qualifying activity,

(aa) that qualifying activity is the relevant qualifying activity by reference to which the requirement in section 293(1)(b) (money raised to be employed within two years for relevant qualifying activity) is met in relation to the relevant holding,’.

Amendment 171, in schedule 8, page 272, line 7, leave out from ‘is’ to end of line 8 and insert

‘, in the course of the arrangements, paid to or for the benefit of a relevant person or relevant persons.’.

Amendment 172, in schedule 8, page 272, line 10, after ‘that’ insert

‘the whole or greater part of’.

Amendment 173, in schedule 8, page 272, line 11, leave out ‘business’.

Amendment 174, in schedule 8, page 272, line 12, leave out from ‘by’ to end of line 13 and insert

‘a relevant person or relevant persons.’.

Amendment 175, in schedule 8, page 272, line 26, at end insert—

‘“relevant person” means a person who is a party to the arrangements or a person connected with such a party;’.

Amendment 176, in schedule 8, page 272, leave out lines 27 to 31 and insert—

‘“qualifying activity” has the same meaning as in section 291;”.

Amendment 28, in schedule 8, page 275, line 16, leave out ‘6 April 2012’ and insert

‘the day on which this Act is passed’.

Amendment 29, in schedule 8, page 275, line 18, leave out ‘date’ and insert ‘day’.

Amendment 30, in schedule 8, page 275, line 21, leave out ‘date’ and insert ‘day’.

Amendment 31, in schedule 8, page 275, line 31, leave out sub-paragraph (2) and insert—

‘(2) Those amendments have effect for the purpose of determining whether shares or securities issued on or after 6 April 2012 are to be regarded as comprised in a company’s qualifying holdings.’.—(Mr Gauke.)

Schedule 8, as amended, agreed to.