One of the prominent themes in the public debate about tax policy in recent years has been the extent to which the take up of tax reliefs properly reflects the underlying policy intention. HMRC is required to prepare detailed figures for the likely cost of any new tax measures, and although we have expressed some concerns in the past about the robustness of these figures, they do at least represent a genuine attempt to work out the economic effect of an initiative. But once a relief has become embedded in the tax system there can often be no proper monitoring of whether it continues to achieve its stated policy objectives.
Regular readers of this brief will recall the very strong criticism laid at HMRC's door by the Public Accounts Committee a few years ago for not recording this vital information. But HMRC does have good statistical information on some tax reliefs and the publication last week on the latest figures for enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) take up - the two largest tax incentives for companies raising equity investments - enable us to track the extent to which policy developments have been effective in practice.
The full report is complex, and we can only pick out a few highlights. The first is to note that the figures show clearly the effect of policy changes towards the energy sector. There was a big spike in the total amount of EIS funding from 2010 onwards when the relief was opened up to the renewable energy sector and then a significant tailing off from 2016, when all energy activities were excluded from scope. So, it is clear that the policy of allowing certain energy company to benefit from EIS for a limited period did produce major investment. It is notable that this trend is more obvious in the figures for the amount raised than it is for the number of companies claiming relief. This is presumably because it was very large companies who were claiming most of the relief.
The other trend is that the proportion of smaller individual investments into EIS, (defined as under £50,000) has gone up. The commentary with the figures suggests that this may be because of an increase in crowdfunding, which of its nature will tend to attract smaller investments. It is probably too early to see whether this is a definite trend, but it may well be.
HMRC was concerned a year or so ago that it was receiving far too many purely speculative EIS clearances about possible crowdfunding projects and so proposed changes which might have made it very difficult for crowdfunded EIS schemes to get off the ground. Fortunately, HMRC did sit down with the crowdfunding industry and work out a more sensible approach, and the crowdfunding industry is pushing the benefits of EIS and SEIS strongly. We will wait to see whether the figures next year reflect this positive development.
Finally, I can't leave this subject without a brief comment on the regional figures. Almost 50 per cent of companies raising EIS funds were in London alone and 67 per cent of the total funding was raised by companies in London and the South East. Indeed, companies outside London and the whole of the South account for only 21 per cent of the total funds raised throughout the whole of the UK. This may well reflect the fact that by far the biggest sector raising funds though EIS was information and communication, but even so does seem to an extraordinary distortion of overall economic performance. The Northern Powerhouse hasn't yet, at least on these figures, started to show its teeth.
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