Lord Flight was Shadow Chief Secretary to the Treasury from 2001-2004. He is now chairman of Flight & Partners Recovery Fund.
I have become increasingly concerned and annoyed by the damaging, creeping control by the EU over issues which should be entirely our own affairs.
I have long championed the Government’s Enterprise Investment (EIS) Scheme, which has delivered over £12 billion of high risk equity funding for SMEs. Following the 2010 General Election, David Gauke, the Treasury Minister, proposed and obtained EU clearance for a significant widening of the size parameters of companies qualifying for EIS.
This has meant that SMEs which survive, cut their teeth and are then look to expand can qualify for and obtain further EIS funding. Not only is this, arguably, the best risk-and-return territory for investors but, more particularly, also for HMRC in terms of tax revenues generated exceeding, by a substantial margin, the costs of the tax incentives. Over the last three years, the volume of equity risk funds raised for SMEs under EIS has approximately trebled.
HMRC and the EIS Association had an interesting visit by the French tax authorities three years ago. Far from wanting to cause problems, the French wanted to understand why our EIS was working so well, so that they could introduce a similar scheme. This they did – bringing in one even more generous than the UK’s – which has resulted in France raising even more risk equity for SMEs last year than the UK.
Negotiations with HMRC have also resulted in a straightforward way to prevent potential abuse of the EIS: pre-clearance of EIS qualification by HMRC has not only given investors greater certainty. but has also enabled HMRC not to pre-clear schemes which they feel are abusive: these are then most unlikely to proceed.
Over the last six months, however, the Treasury has effectively been bullied and dictated to by the Commission to change and complicate the EIS rules in ways which are to result in a substantial reduction in the flow of risk equity for SMEs, and, potentially, to cause chaos. The major change is limiting the total EIS and venture capital trust (VCT) investment which a company can receive over its life time to £12 milloom. This is not on a going-forward basis, but includes historic EIS/VCT funds raised where there may not be full information easily available.
This change will hit, in particular, SMEs that are expanding. Substantial additional costs will also be incurred in monitoring while EIS fund raising, in order to remain within the rules. As soon as any EIS investment has its reliefs withdrawn, retrospectively, for failure to comply with often impossible conditions, the appetite for EIS investing will decline overnight. The rules in relation to previous and recently acquired subsidiaries and staff composition of knowledge-based companies are completely unrealistic, if not impossible, to comply with, and will have serious consequences for both the investee companies and the EIS/VCT investors in terms of compliance monitoring costs.
In an entirely different territory, I was horrified to learn that the Commission is now insisting that the tax allowances relevant to historic houses and valuable contents (particularly paintings) will be forfeit by EU dictat unless the same terms are made available to UK owners of historic buildings and works of art, outside the UK, on a pan-EU basis.
The practical solution is to agree to the latter since the amount of assets qualifying is likely to be very small. As matters presently stand, however, the stately home and contents tax allowances, particularly with regard to inheritance tax, will be forcibly ended. This is crazy, given the importance of historic houses and their contents to the tourist trade: furthermore, our historic houses are amongst the most prized British assets by the population as a whole. It should be of no business to the EU how we provide for the conservation and management of our historic houses and their treasures.
I have also been horrified to learn that the UK regularly incurs millions of pounds of costs each year in EU fines, when the Commission decides that we are not complying adequately with a wide range of EU rules and regulations. Indeed, the Treasury has to hire top UK tax barristers to defend our position vis-a-vis the Commission here.
While the EU has got it wrong in some important aspects, there is a practical argument for financial regulation rules throughout the EU being at least similar, to accommodate EU-wide financial markets; but rules such as those governing EIS rules for SME equity investment were put in place to preserve our historic stately homes and their collections have no such justification. I will be looking to identify other areas in which EU imposed requirements and rules also apply inappropriately. I ask why we do not hear more, especially from the Treasury, about the territories they are defending, and those where we are paying huge fines for breach of EU imposed rules.
I hope the Prime Minister has a list of all of these territories and is demanding repatriation of powers back to the UK to make our own policies as part of his negotiations. My fear is that his advisers will not be aware of the half of this Commission micro-management which has crept in under the EU treaties of recent years.