My Lords, I have been looking at Clause 12 through a particular prism. As my entry in the register of interests discloses, I have a particular interest in financial services. I am also an investor in various enterprise investment and seed enterprise investment companies, which I will refer to as EIS and SEIS companies, and venture capital trusts. For those who are not aware, EIS schemes are those which allow UK investors to invest in UK companies
and deduct the amount invested in those companies against their income tax at prescribed rates to encourage investment in private companies.
For some time, I have been frustrated that these truly excellent schemes have been hampered by restrictions. The schemes are hugely popular. EIS has helped some 66,000 companies in the UK in total, with some 3,755 companies raising over £1.5 billion last year alone. Since 2018, VCTs have made some 1,000 investments, raising £1.7 billion, of which 45% were less than £1 million. So I am very concerned by anything that threatens the existence of these schemes and am keen to find ways of enhancing their effectiveness. There are, however, restrictions and regulations reducing the opportunity for UK businesses to raise this vital small equity for essentially risky enterprises, and I have been concerned that these restrictions have in part been due to the requirements of EU state aid rules.
The enormous success of the EIS and VCT schemes is very much a British phenomenon and probably viewed with some mistrust by the EU, given our tremendous track record in starting and growing new UK businesses. In fact, most businessmen and investors I have spoken to are amazed to discover that it is governed by EU state aid rules. Fortunately, at the moment we have EU approval for the design of the EIS and VCT schemes under Article 107 of the Treaty on the Functioning of the European Union, and the smaller SEI schemes, due to their size, fall within Article 21 of the general block exemption regulation. However, as we decide how to plough our own path post Brexit, it is important that we are entirely free to create our own rules concerning subsidies that might amount to state aid—within, of course, the constraints of WTO and other commitments.
As mentioned by the noble Lord, Lord Purvis of Tweed, we now have our own Subsidy Control Act but, under the protocol, some EU state aid rules still apply. I can see the issue, namely that the EU is worried that a company based in Belfast has cheaper finance than a competitor in Dublin—but, frankly, that should be our choice and the choice of other countries to offer incentives to finance their businesses.
Why do we have this problem? As Andrew Harper helpfully wrote in the British Tax Review in autumn 2020, the two sides promote opposing perspectives: the EU very much promulgating its state aid regime on the basis of the level playing field and the UK adopting the subsidy language of the World Trade Organization. This is much more than a semantic or linguistic distinction. It is one of substance, both in the scope and the enforceability of the rules.
In these circumstances it appears sensible to point out the key issues that could arise. Without Clause 12 —and I am aware that there is a stand part debate following—first, the EIS and VCT schemes as they operate in Northern Ireland will presumably have to remain fully EU state aid compliant because of EIS companies and VCT investees based in the Province trading with the Irish Republic or the wider EU. Secondly, following from that, barring the UK Government being prepared to countenance two separate systems within the UK, the EIS and VCT schemes as they apply to England, Wales and Scotland will be difficult to modify.
Thirdly, if, post transition, these schemes were to diverge as between Northern Ireland and the rest of the UK, what is the position in the case of, say, an English EIS company raising scheme funding that would be in excess of that sanctioned by EU state aid rules? If that English company then sends its goods to Northern Ireland, where potentially they can be traded with the south or the rest of the EU, how will that be allowed to happen? It simply cannot make sense to exclude Clause 12.
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Just to give some perspective and a feeling of the situation at the moment, the proportion of EIS recipients in Northern Ireland is really very small. In 2020-21, out of the aforementioned 3,755 recipients of EIS I mentioned, only 40 were based in Northern Ireland—some 1%, and by no means all are goods traders, to whom the protocol applies. Some may say that the state aid provisions in the protocol do not really apply to the sort of state aid such as EIS and VCT, but there is a risk that it might—and, of course, famously, of reach-back, which would be wholly unwelcome. That is why we need Clause 12(1). I welcome Clause 12 to ensure we have a single UK-wide subsidy control policy and that, for example, with a Covid-19-type recovery loan scheme there would not be greater restrictions on Northern Ireland companies than GB ones, and that we would be free to amend our own rules freely.
There is a pressing example of an EU state aid restriction that needs urgent attention: the sunset clause imposed by EU state aid rules on EIS and VCT, which kicks in on 6 April 2025. It urgently needs to be repealed, as suggested in the mini-Budget. Indeed, the current Chancellor specifically said that those sunset clauses would go; it is about the only bit of the mini-Budget that he said he wanted to keep. This issue of sunset clauses was raised on page 119 of the May 2021 report from the Taskforce on Innovation, Growth and Regulatory Reform, which people cannot resist calling TIGRR, chaired by Sir Iain Duncan Smith, along with other restrictions that it wanted to see lifted. These include the age restrictions that apply to an investee company and, of course, the maximum investment thresholds, particularly those for the smaller SEIS, which presently has to be less than £150,000. The mini-Budget seeks to raise that to £250,000 for a single company, but it is still far too low.
The criticisms of Clause 12, which is needed to enable a Government to accommodate the result if the EU successfully takes international action in respect of something it regards as unhelpful, are answered by my amendments, which tighten up the ability to make change through regulation. In particular, proposed new Clause 12(4)(c) in my Amendment 19 deals with the most unfortunate case, if there is a change, to stop it applying retrospectively. My amendments would ensure a minimum framework for the Minister’s regulatory power, which could arise following alterations in national law to provisions within the scope of EU state aid at the international level, and set the boundary between the exercise of the regulatory power by the Minister and the requirement for primary legislation. I appreciate that, under Clause 23(3), any regulation has to be a statutory instrument and is treated as such. However,
most importantly, the amendments would ensure that the Government were unable to make any retrospective provision, so that investments and reliefs to date were protected.
I hope all those speaking to Clause 12 standing part understand that there is a fundamental difference in approach to subsidies between the EU and UK. The EU tends to favour money handed out to companies at its discretion for the companies’ direct benefit—frequently, of course, through individual states. We like to empower investors and, as such, the markets to decide where the money should go. It is, in effect, the investors who decide which companies will benefit from their money, which is enhanced by a tax break. Like so many areas in business life, we have a different way of thinking from the EU and we have to protect our interests first. Concerns that this is a breach of other international treaties or laws are fair to raise and difficult for many of us non-lawyers to understand. But even if they are correct, what I do know is that UK companies need protection to enable them to carry on being financed in the way our Parliament feels appropriate.