HMRC is undermining vital investment tax reliefs and becoming a law unto itself

Too many hardworking bosses are quitting the UK because of investment allowances red tape

At over 21,000 pages, the UK has the longest tax code in the world. Hong Kong’s weighs in at a mere 350 pages. The Roman historian Tacitus once observed that “the more corrupt the state, the more numerous the laws”. If he were right, we have a major problem in the UK.

In 2000, public spending accounted for 35pc of gross domestic product.

This year, the OBR believes it will weigh in at 44.8pc. This is a staggering rate of growth – much of which has mirrored the decline of the private sector that HMRC taxes to fund this largesse. Again, in 2000 tax was just under one third of GDP. The OBR now forecasts it rising to a post-war high of 38pc. This undermines the trading and investment position of an open economy like the UK, and will damage our competitive position. Honest, decent taxpayers watch the “central planners” waste money like water on vanity projects like HS2 while public services deteriorate. And when the Government isn’t taking your money directly, it’s eroding its value through quantitative easing.

HMRC is a law unto itself. The customer service is appalling, the tone and manner high-handed. Its policy of pushing people towards digital services, such as webchats, results in tedium, frustration and surely all too often taxpayers missing out on valuable refunds or suffering penalties.

It was a shock to read that Jeremy Hunt revealed that Treasury officials had provided him with “clear” proof that countries with lower tax burdens enjoyed higher economic growth. After all, he has spent his time as Chancellor raising taxes while extolling the virtues of risk-taking in the over-regulated British economy.

All his entreaties will mean nothing if HMRC continues to make claiming investment tax allowances difficult. The two main forms of tax driven investment are EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trust). Both are suffering at the hands of HMRC. I have spoken to several EIS practitioners who wish to remain nameless, but who made the same complaints. HMRC, they say, gives advance clearance to an EIS and then resiles on its assurance. The organisation appears to have torn up its own issued guidelines and instead is “winging it” with applications, while there is a clear disconnect between politicians and civil servants, with HMRC prioritising a higher tax take over nurturing young companies.

It’s a similar story with VCT, where practitioners again wanted to remain anonymous. HMRC appears to have adopted a more aggressive interpretation of the financial health requirement in the legislation. This involves the definition of an “undertaking in difficulty”, the guidelines for which come from EU legislation, as the VCT/EIS schemes still requires state approval from the EU to operate in Northern Ireland. The VCT legislation defines an “investing period”, which is seven years for most companies and 10 years for knowledge-intensive companies, from the date of first commercial sales. For companies within this period, the definition of being in difficulty includes a situation where “the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities”. This is problematic enough for some businesses.

But once a company has gone beyond this date, then HMRC adds an additional definition, such that the company “will also be regarded as being in difficulty if more than half of its subscribed share capital has disappeared as a result of accumulated losses”. Because VCT money is raised mostly to fund losses to achieve growth, a large percentage of VCT/EIS funded companies will fail this test once they reach the end of their “investing period”.

There are lots of high potential companies that take longer than seven to 10 years to achieve profitability, and many lost two to three years of development because of the pandemic, so effectively to stop VCT/EIS investment because they have accumulated losses in the past seems hugely counter-productive.

Hunt urgently needs to address the size of the state before the 32m hardworking British taxpayers are ground into the dust by his tax, spend and regulate Government. The subset of taxpayers who account for the highest returns are also the taxpayers who invest in early stage, high-risk companies. And it is they who are increasingly leaving the UK.

Rupert Lowe is Reform UK’S business spokesman