Enterprise Investment Scheme and Brexit

graph representing financial growth

Lord Flight, the Chair of the EIS Association, claimed today that EU state aid policy has been used to damage the UK's Enterprise Investment Scheme (EIS), and has 'reduced risk capital for SMEs.' He made the claim in a post on Conservative Home this morning, in which he argued that most of the City favoured leaving Europe, and would benefit from a 'Leave' vote.

His comments are at odds with recent polls (like this poll and this poll) which show that the UK's startups - who benefit from the EIS and SEIS schemes - are overwhelmingly in favour of remaining in Europe. We look at the evidence.

the Treasury has effectively been bullied and dictated to by the Commission 

The row started last summer, in the run up to the Autumn statement, when the Treasury stated that it would change the rules for the Enterprise and Seed Enterprise Investment Schemes (EIS and SEIS).  The changes were approved by the European Commission in October.  Here is a briefing note from accountants PwC

At the time, Lord Flight paintyed a picture of Whitehall officials being bullied and over-ruled by their opposite numbers in Brussels: "the Treasury has effectively been bullied and dictated to by the Commission to change and complicate the EIS rules", he said (also on Conservative Home) "in ways which are to result in a substantial reduction in the flow of risk equity for SMEs, and, potentially, to cause chaos." Strong stuff.

The first source we checked was the European Commission's response. Here is the full text, but one sentence sums it up:

The Commission wishes to inform you that it has decided to raise no objections to the amendments of the above mentioned measures, for the reasons set out below.

In other words, Whitehall asked for the rules it wanted, and Brussels nodded and said Yes, without asking for any changes.  We're sure the HM Treasury officials did their homework, but it hardly sounds like bullying.

When is state aid to businesses right?

So what are the 'EU State Aid rules', and are they harming our SMEs? The UK is more inclined to free-market liberalism than most of Europe. It is generally accepted that state subsidies to industry distort markets, and should not be allowed. But there are exceptions.

The rationale behind the EIS and schemes are based on three principles:

  1. Growth and innovation are good for the economy in a variety of ways.
  2. Startups and high growth firms are high risk, and frequently fail - so investors are reluctant to come in.
  3. When these business succeed, the benefits aren't only enjoyed by the investors - society and industry benefit too. 
The rules may be complicated, (you can download them here, in a PDF)  but the policy onjectives are simple - to ensure that tax subsidies are channeled to entrepreneurs and investors who take risks and undertake activities that will lead to positive outcomes, and they don't get wasted on those who don't deserve it.
Lord Flight talks about Brussels denying risk capital to our SMEs, but that's not how the schemes work. They offer tax reliefs to investors who providr the capital, and the investment is always linked to the business plan. 

So, what would Brexit change?

First off,  we don't actually believe that the Chancellor of an independent UK would redraft the regulations to make them more generous, or lax.  And if the rules seem complicated, they are the rules our own Treasury officials drafted themselves.
And we're sorry, but we suggest that anyone that anyone who expects Whitehall bureaucrats suddenly to change the way they draft regulations, just because the country is independent of Europe, is in for a rude awakening.