Examination of Witnesses (Questions 200-208)
Mr John Cridland, Mr Mervyn Woods and Mr Richard
Baron
7 MAY 2008
Q200 Lord Blackwell: I do not know
whether you have seen the study by the Institute for Employment
Studies, University of Sussex, but its key findings are that neither
the EIS nor the VCT investments have a material effect on fixed
assets and employment in recipient companies; it has some effect
but not very much. Companies with EIS and VCT investments tend
to have lower profitability and survival rates. Firstly, do you
accept the results of that analysis? Do they accord with what
you expect? Does it lead on to the question of the validity of
the Government subsidising risk-taking in this way and do you
think it is justified?
Mr Baron: I think the limited success does raise
the question of the wisdom of Governments trying to, if you like,
manipulate the economy and encourage the economy in particular
directions by special reliefs. As I have already indicated, a
big debate about the general direction of the tax system is something
which we ought to have. The second conclusion which you mentioned
from the study deals with companies with EIS and VCT investments
having lower aggregate profitability and survival rates, but the
cause and effect may be the other way around. It may be that if
your business is marginally profitable or rather high risk given
its likely profitability, you will only attract investors in and
your business will only get started with the advantages of the
EIS and it may be that which biases the outcome. So EIS may not
be the cause of the problem, it may be the reason why businesses
which have problems exist.
Mr Cridland: I would very much concur with that
view. Frankly, the results surprised us. They do not fit in with
our anecdotal experience but we have no reason to question them
and when we tried to rationalise why the researchers found that
result we came to the same conclusion, that the causal relationship
may be different.
Q201 Lord Blackwell: So you are generally
supportive of these schemes if they are simply enough to be effective?
Mr Cridland: Yes. The CBI Tax Taskforce Report
made very clear that there is more benefit for business in Government
introducing lower rates of business taxation with fewer allowances
delivering an overall simpler system. That is the long-term vision
and therefore any intervention, be it an R&D tax credit or
an EIS, that complicates the system has to be demonstrably successful.
But I do think with the EIS there have been constant changes to
the scheme and we have never had in a sense a fair run of making
the EIS work.
Q202 Lord MacGregor of Pulham Market:
I think you have made your position about the complexity of the
EIS clear, can I ask you whether you think the scheme is capable
of reform given the underlying policy reasons which determine
much of the complexity? That is question one. Question two follows
on from the last question. EIS of course is really quite different
from the VCT scheme and sometimes they are lumped together, in
my view mistakenly. Do you think the criticisms you have been
expressing of the EIS scheme also apply to the VCT schemes?
Mr Baron: Firstly, is the EIS capable of reform?
Yes, of course you can cull a lot of the complicated restrictions
around it, the problem is that some of those restrictions are
there for very good anti-avoidance reasons and if you culled all
of the restrictions which surround EIS investment the Revenue
might find the cost of it rocketed and it got abused in all sorts
of ways. So one can see why a lot of complexity is there. This
is the problem if you try and do something special for a particular
group, you then need a whole raft of legislation to make sure
you only do it for that group in the way you intended and not
for other groups or not in ways you did not intend. That goes
with the territory of special reliefs. EIS and venture capital
trusts, I think the main criticism which does apply to both is
the complexity, a lot of the rules are the same or very similar
for the same kinds of reasons of wanting to target particular
groups.
Mr Cridland: I would concur with that. Just
to give an example of one of the things which frustrates business
people, the connected parties criteria, I came across an example
recently of two partners in a small planning business who had
made a separate investment in the same business but because they
were partners in their employing business were considered to be
connected parties. That does not seem to me to be a necessary
restriction on the use of that scheme. You will quite often find
people who are in the same community helping to support through
investment the same small business, so to me it was an unintended
necessary complexity.
Q203 Lord MacGregor of Pulham Market:
That applies to the EIS?
Mr Cridland: Yes. There are things which could
be done to the EIS which would improve it without opening up the
problems which Richard described which, as with Richard, we would
not want to run the risk of—the avoidance issue.
Q204 Lord Barnett: You are saying
there are other ways of helping when looking to improve the EIS
scheme. Have you spelt them out specifically to the Revenue?
Mr Cridland: Not recently. We will be doing
in response to the consultation exercise, we will be consulting
carefully and putting in a detailed submission on it.
Q205 Lord Barnett: I am very glad
to hear that but you want to make it more simple, it is too complex.
Is the problem here that because of the complexity many small
firms simply do not know it is available and are not claiming
it?
Mr Cridland: Yes.
Q206 Lord Barnett: That is the big
problem, is it not?
Mr Cridland: Indeed it is, and one of the reasons
why we did not get too excited about moving from 400,000 to 500,000
was because there will be people who will benefit and we do not
want to throw the thing back in the Government's face. One of
the reasons we do not get too excited is that for me the target
group we need to help is at a much lower level of relief and for
many of them, given the complexity that such a scheme will always
have, it is much more likely they will get involved in the EIS
through an approved or unapproved fund rather than through an
individual. I think through the consultation, my Lord, we have
to focus on who we are trying to reach and have a simple approach
to helping those people use the scheme to good effect.
Q207 Lord Barnett: If we are not
careful some small firms might be suing their advisers for not
telling them?
Mr Cridland: Anything is possible.
Q208 Chairman: I think we have come
to the end of our questions and I would like to thank you again
for spending your time with us this afternoon, both for your written
evidence and for your very helpful answers to our questions.
Mr Cridland: Thank you, my Lord.
Mr Baron: Thank you.
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