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Lord Flight is Chairman of Flight & Partners Recovery Fund, a former Shadow Chief Secretary to the Treasury, and Chairman of the EIS Association.

Citizens are broadly aware that he prophets of economic doom have turned out to be quite wrong, and rather the UK has been the best-performing European economy.

In particular, Britain has had a surprisingly strong small companies (SME) sector. While we suffer from regulatory cancer affecting particularly larger businesses, we have manged to keep the SME sector relatively open. The UK is by far the easiest economy in Europe in which to set up a new business.

One of the good things which the Major Government did was to introduce the Enterprise Investment Scheme (EIS), providing valuable tax incentives to investors in small companies. This has underpinned the growth and success of the sector. There are now some 70,000 SMEs in the UK, and some 80 per cent of graduates leaving Russell Group Universities go to work for SMEs.

At the time of the EU referendum I argued the case for Brexit at some dozen City debates. Not surprisingly the large institutions were keen Remainers – protecting their oligopolistic position in Europe – while smaller, newer companies were virtually all Brexit supporters. Since 2016 thousands of British SMEs have abandoned EU markets but have been winning far more lucrative export contract all around the world.

The British economy is switching its strategic trading pattern back to its historic international focus and away from the moribund EU. The key high-growth markets for our exports are North America, the Middle East, and South Asia. Exports to Taiwan have grown 40 per cent in the last year.

The Office of National Statistics (ONS) has confirmed the SME boom. It states that UK exports are currently growing faster than at any other time since records began – rises of 22 per cent year on year, reaching a total of £640 billion. If exports to smaller companies not covered by the ONS, and export sales via Amazon and eBay, are included the total growth figure is over 30 per cent. Britain’s exports to Kazakhstan are the same as those to Austria!

The Food and Drink Federation reports a rapid expansion in our food exports to China and that by 2024 China will represent a market 50 per cent larger than the whole of Europe. Over the past year British exports of food and drink reached a record value of £22.5bn, with three out of every four bottles of gin consumed worldwide coming from the UK!

Interestingly, it has not been the more prosperous South East of England taking the lead here; Wales, the East Midlands, and the North West are the leading regions for UK export growth. The number of Welsh SMEs exporting has doubled in the last four years.

It is also becoming apparent that the EU-structured arrangements we had a member have been damaging of our cost of living and current account deficit. We have been paying some 30 per cent more for our food than we should have done if we had bought globally, and we have a current account (trading) deficit with the EU and in particular with Germany of £100bn per annum which has served to suck investment capital from the UK economy.

In a word, Ted Heath did a bad deal with the EU, and I suspect did not understand the economics of the deal he struck. It is substantially for this reason that, outside the EU, the British economy will have the ability to outperform its recent record.

Where EIS has been so important has been in providing a tax incentive to invest in new small companies and, recently, even more in knowledge-intensive companies. Here again, the EU has made the rules more complicated than is needed or appropriate for the scale of the market they address.

The EIS primary legislation is long, highly detailed, and contains many restrictions which are un-commercial and not justified. The legislation needs streamlining to enable faster deployment of EIS funds to provide greater support for SMEs. The EIS legislation is intended to be enabling but has become too much like anti-avoidance legislation. HMRC is in some cases placing restrictions on investments which are not contained in the legislation.

Much of this has been caused by the UK being under EU treaty obligations, where we need to meet the requirements of the risk finance guidelines. A lot of damage has been done by the EU in ruling that EIS is deemed to represent ‘state aid’ – it is to meet the state aid risk guidelines that EIS primary legislation is so long and detailed. Outside the EU there is now the scope to make considerable improvements to EIS, in particular making it much less demanding for SMEs seeking risk finance.

There is also scope for larger amounts of EIS investment. In the tax year 2017/18 37,350 individuals invested in EIS, where there are estimated to be a quarter of a million taxpayers earning in excess of £250,000 per annum.

HMRC has taken a greater interest in EIS and has commissioned its own independent research. This found that three quarters of investees had sought EIS investment, largely to start their business or to develop new products. Additionally, 58 per cent of investee companies said productivity had increased due to their EIS investment, and 38 per cent said funding was raised for working capital and cash flow. Not surprisingly, they found that smaller companies have a harder time securing EIS investment but only 11 per cent felt their investment would have gone ahead without EIS support. Furthermore, 90 per cent of investee companies said their company had grown by a third since they first sought EIS investment, and 90 per cent of companies attributed at least part of their growth to EIS investment.

My biggest task as Chairman of the EIS Association has been to limit and find a way of managing the extra requirements which have come from the EU; and to counter arguments for closing down EIS which have been advanced by both HMRC and the Treasury. The complaint is that the EIS tax incentives cost revenue. Yet from the studies that have been done the reverse appears to be the case – EIS investment in SMEs creates more follow-on tax revenue than the original cost of the tax incentive.

Fortunately, the recent Conservative manifesto contained both a recognition of how effective EIS has been in supporting SMEs, and the commitment for it to continue. That should count for something.

74 comments for: Howard Flight: Outside the EU, our small business sector can really take off

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