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Clause 52 - Removing time limit on CGT relief in respect of re-investment under SEIS

Finance (No. 2) Bill – in a Public Bill Committee at 9:30 am on 13th May 2014.

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

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 9:45 am, 13th May 2014

The clause would amend the Taxation of Chargeable Gains Act 1992, by removing the time limit currently set on gains accruing to the investor between 2012-13 and 2013-14 on capital gains tax relief for investors reinvesting profits in the seed enterprise investment scheme. It would also extend to changes introduced in 2013, which stipulated that half of the reinvested amount, rather than the whole as previously allowed, can be set against chargeable gains.

Again, the background to this is that to help kick-start the scheme and encourage investment in SEIS, CGT relief was given to chargeable gains accruing to an investor in 2012-13 where the gain was reinvested in shares that qualified for SEIS income tax relief and the amount reinvested was exempt from CGT. That was subject to a £100,000 investment limit, which matches a similar cap on SEIS-related income tax relief. In 2013 the CGT relief was extended to chargeable gains accruing in 2013-14.

We welcome the renewal of the time limit on CGT relief for funds reinvested in SEIS. We recognise the particular difficulties faced by small businesses and start-ups in attracting the necessary finance to grow. It is useful to see the progress that is being made here. We want to ensure that there is a way to incentivise lending to SMEs. I have a brief question on the tax impact and information note, which states that

“the extension of the scheme will also continue to encourage individuals to become entrepreneurs with the backing of SEIS investors.”

What evidence does the Minister have that the tax reliefs available under SEIS actually encourage that entrepreneurship? Have the Government conducted a regional breakdown of the impact of SEIS? What analysis have the Government undertaken to ensure that, given the scale of tax reliefs involved, companies invested in under SEIS are successful in the long term? It is obviously important in terms of the start-up work to look at how they progress in the long term.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 52 makes changes to ensure that capital gains tax relief for reinvesting in SEIS shares is made permanent. The capital gains tax SEIS reinvestment relief was introduced in 2012, alongside the income tax relief we have just debated, to help kick-start and build interest in seed enterprise investment schemes. The relief was initially introduced as a one-year holiday for the tax year 2012-13 and worked by exempting from capital gains tax any chargeable gains accruing to an investor in that year where the gain was reinvested in shares qualifying for SEIS income tax relief.

In 2013 we responded to stakeholders who said that more time was needed to build and maintain the momentum of interest in SEIS by extending the capital gains tax relief to chargeable gains accruing in 2013-14. At the same time we reduced relief so that the exemption applies to half the qualifying reinvested amount. The changes made by clause 52 will make the CGT reinvestment permanent in the same way as the main income tax relief is being made permanent. That means that any investors making capital gains in 2014-15, or a subsequent year, will receive 50% capital gains tax relief when they reinvest those gains into seed companies.

This is at a very early stage. SEIS has been in place for a relatively short period so it is not easy to make a long-term assessment of which companies are succeeding. Not all start-up businesses will succeed. It is inherent in a dynamic market economy that some will succeed and some will fail. I have given some aggregate numbers for the regional breakdown of where there has been take-up. There will be a regional breakdown as part of the national statistics being published in December 2014.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

My hon. Friend will recall the studies of the OECD and the European Union, which show that enterprise formation is strongly linked with the growth, and particularly the sustainable growth, of economies. The action that the Government are taking to foster enterprise creation is making a massive difference. There is also the incredible rise in self-employment, with people starting their own businesses, striking out on their own and helping to grow the economy. Is that not a key part of the long-term economic plan?

Photo of David Gauke David Gauke The Exchequer Secretary

I agree with my hon. Friend. For economies to prosper in a sustainable way, it is important to harness the values of entrepreneurism and the entrepreneurial spirit. That is exactly what the Government wish to do.

Photo of Richard Fuller Richard Fuller Conservative, Bedford

On that point, as the Minister is responding to the interesting question about statistics, there is a tension in the Government between those who would like to see an entrepreneur-driven free market approach to how we grow the wealth to pay for our public services and those who would like to see some form of industrial policy that has grand Government-led designs. That is a view that often comes out of the Department for Business, Innovation and Skills. What is my hon. Friend’s view on which of those approaches the clause is designed to support?

Photo of David Gauke David Gauke The Exchequer Secretary

I know my hon. Friend is trying to be helpful. I would say that the clause is about ensuring that we have an entrepreneurial and dynamic economy. My hon. Friend discusses the tensions that may exist. Of most significance to the country are the different approaches to business between the majority party in the Government and the Opposition. No doubt we will have the opportunity to debate those differences at length in future.

As we are discussing clause 52, let me address the specific question about evidence that the seed enterprise investment scheme is working and helping to harness the entrepreneurial spirit. It is very early days, and it is particularly difficult to do a quantitative analysis, although the take-up of the scheme is greater than anticipated.  The qualitative evidence certainly suggests that the scheme is encouraging new companies to be set up, supporting entrepreneurship. Given that the scheme has been in place for only a short time, I am grateful to see that.

I have met some of the companies that have taken advantage of the seed enterprise investment scheme, and it has certainly helped them find finance, inspire new ideas and put those ideas into action. We are pleased with the progress that has been made. It is not just the Government who are pleased, because the CBI said in response to the Budget:

“The Government has heeded our call to make the SEIS permanent to boost the range of financing options available to growing businesses and spur greater use of equity finance in small firms.”

The clause is a widely welcomed measure and one that I hope will have the unanimous support of the Committee, notwithstanding the tensions that exist.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.