Examination of Witnesses (Questions 240-242)
Mr Richard Stratton, Mrs Penelope Williams, Mr Edward
Reed and Ms Isobel d'Inverno
12 MAY 2008
Q240 Lord Blackwell: Can I ask about
the complexity of these schemes? The Law Society of Scotland and
Wales refer to the complex rules which we understand are there
to ensure they are targeted and people do not abuse them. Equally,
that makes them very difficult to use. Do you think it is possible
to have these schemes that are less complex or do you think complexity
is part and parcel of trying to make them work?
Mr Stratton: They do end up being complex to
some extent. The trade off for complexity is not having lots of
anti-avoidance provisions in. The general scheme of the rules
is that they have fewer anti-avoidance provisions in but they
have a longer set of rules you have to comply with. Where it might
be possible to look at things is to consider loosening some of
the rules, which is what is occurring in the current consultation
on EIS on the connection rules. It is quite easy to trip over
the connection rules and become connected and lose relief on EIS
investment in circumstances that you would consider to be relatively
innocent. That would be a useful thing to look at. Similarly,
the control provisions are also very difficult to comply with.
Ms D'Inverno: There are lots of difficult areas.
One thing that might help would be to have Inland Revenue guidance
that was more accessible to the owners of small companies. At
the moment it is possible to find out absolutely everything you
want to know about the EIS but not to find out just in broad terms
how it works and what the outline of it is. It could be tailored
more towards the people involved in these companies. There are
lots of difficulties with advising smaller companies because obviously
the time you have to spend looking at it you cannot really charge
for, because it would extinguish the investment in some cases.
Sometimes you wonder whether, if some of this money was just directly
given to the companies as a grant for legal and accountancy fees,
that would have a better effect. The Inland Revenue Small Company
Enterprise Centre is incredibly helpful. Without them the EIS
would be much harder to operate, but you can always phone them
and ask questions. They will help you navigate round, but the
problem is that with any scheme like this the avoiders will try
and design risk free, fake EIS arrangements, so it detracts from
the way the scheme works for the genuine, small company.
Q241 Lord Barnett: Can I revert to
the issue of effectiveness? Given the almost inevitable complexity
of tax based schemes, are you opposed to the whole idea of tax
based schemes and would you prefer non-tax based subsidies or
do you think the government should not be involved at all?
Mr Stratton: The good thing about EIS/VCT schemes
is that the principle of them is to try and put some capital into
companies to be spent on businesses. I was in favour of the tax
based schemes for that purpose. In the other study, Enterprise
Unlocking the UK's Talent, you can see how many other schemes
there are that are available to you if you are a small company.
It may be best if the tax based schemes are looked at in the light
of everything else. It may be better not to have so many things
on the menu if you are a small company. It must get quite confusing
if you are faced with possible guaranteed loans, VCT investment,
EIS investment, business link, tax credits. It is an extraordinary
menu. It may be the answer that, in the light of everything, you
could abandon these and come up with something that is simpler,
but it is important to look at it in the context of everything
available to small businesses.
Q242 Lord MacGregor of Pulham Market:
You are mainly talking about EIS. Do you think the same points
apply to VCTs?
Mr Stratton: Yes. VCTs are in some ways harder.
Some of the avoidance provisions in EIS do not apply in VCTs.
There are some special return capital provisions in EIS that a
VCT does not have, but a VCT has the problem that it has to balance
its portfolio all the time. It has to have 70% of the money raised
invested in companies of the right type. It is for ever worrying
that if two or three of these companies cease to qualify the VCT
itself ceases to qualify as a tax advantage vehicle. None ever
has. I think that is because HMRC have done an enormous amount
of work on these rules to try and make them fit and they respond
every year, trying to get the rules better and better. You might
look at loosening some of the VCT rules now that the limits have
come down, so you have to have a large number of investments held
by a VCT. You have to have 70% qualifying, which is a very significant
proportion. It is a problem for follow-on investment and so that
has to be taken and thought about, going forward.
Chairman: That brings us to a close. Thank you
again very much for your written evidence and indeed for your
clear answers to our questions.
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