04/02/2011

By Modwenna Rees-Mogg, AngelNews

I am not sure whether it’s Howard Flight’s sheer intelligence, his clarity of vision, his integrity or his boundless charm and courtesy that makes him one of the most influential and popular figures in UK enterprise today. We interviewed him last month and here is what he had to say.

You were ennobled in the last Honours and are now Baron Flight, of Worcester. How is it going?

It is marvellous to be back in the cut and thrust of Westminster and I am busy settling into the House of Lords. It is a fascinating time to be in politics and the importance of the role the House of Lords plays in overseeing legislation has never been greater. I hope that I can contribute on lots of areas as a committed Conservative, but particularly I can offer up my skills and experience particularly in education, financial services and enterprise. My economic vision for our country is to be a successful, highly competitive, low tax, globally orientated economy.

Tell me a bit about your career to date.

I suppose my career falls into four parts, the last being very recent! Until 1997, when I formally entered politics as MP for Arundel and South Downs, I was a City man. I worked in London for NM Rothschilds and in Hong Kong and India for the Hong Kong Bank’s Merchant Bank in the early days, which showed me capitalism in its full glory.

After being at Guinness Mahon, I got the entrepreneurial bug and set up Guinness Flight with Tim Guinness in 1986. So I experienced all the ups and downs from being a start-up until we sold it to Investec in 1998. It was a good result and I am still a director of Investec Asset Management, so I guess I did something right.

I have always been a passionate Conservative and from 1997 until 2005 it was a great honour to serve as an MP. I am also a great believer in not being afraid to have clear views which made my time in the House of Commons particularly interesting! I particularly enjoyed leading the opposition during the Committee Stages of the Financial Services and Markets Acts and 4 Finance Acts between 1999 and 2004. It was these acts which set up the current regulatory framework for investment activity in the UK, so I got a really in depth knowledge of the issues of how you marry the needs of the market with the demands of politics and the tax framework.

Having left politics in 2005 (temporarily as it turns out), I was asked to sit as a director on a number of boards of companies in the financial services sector and to be a consultant to others. I became a bit of an angel in fact. The last few years have been very enjoyable and fascinating, seeing, at first hand, the impact on a very important sector in the economy of a boom and then big bust. It only made me more determined to keep in touch with the political establishment so I could explain to them about the real world impact their political decisions were having.

Now that I am in the House of Lords, I see this role continuing, albeit from a slightly different angle. Not all politicians are businessmen, let alone City people, so it’s important that they get as many contributions as possible from people in these worlds about what is going on and what should and shouldn’t be done. Sometimes it is particularly helpful to be able to explain issues in a political language. All through my career I have been fascinated by economics and politics and I am particularly interested in the UK’s position relative to the rest of the world, especially the emerging economies. Whether you are a politician, a businessman or a politician you ignore the global landscape at your peril.

How did you get so involved in the Entrepreneurial market in the UK?

When you get to my age (and I see this happening to many of my friends, not just me) almost inevitably you get involved in trying to help young people with their careers and in finding the right job. For me, I also found myself advising young entrepreneurs and sometimes investing in their businesses. If you have been in investment management you end up disenchanted with stock market listed companies who’s share prices go up and down mostly with changes in the money supply and have very little opportunity to make things change. So you turn to entrepreneurial businesses for some excitement and interest. It’s a different sort of fun to that which I had when I was younger and running my own business.

One of the people I am helping at present is Shamus Ogilvy who is an entrepreneur with a honey business both as a bulk importer and with his own brand. He’s learning a lot and it’s a pleasure to work with him.

How did you get involved with the Enterprise Investment Scheme Association?

Thinking back, it was the Association that approached me, largely as they thought my political connections would be useful. The EISA team nobbled me and invited me to become Chairman. I though I could be useful and it would be a platform to become more involved in the SME sector. I had supported the EIS Scheme since its inception and it is one of the best things the Conservatives did for enterprise. You can see from the £billions of investment that have gone into SMEs under the Scheme what a massive impact it has had over the last 15 years or so.

I got involved in the EISA because I could see how important it was, and also that it was essential that the users of the Scheme could have a conduit into both the civil servants at HMRC and HM Treasury and the politicians so they could help guide policy. I am glad to say that relations with all of these have never been stronger than today. The EISA secretariat, various players in the market such as the Motts at Oxford Capital Partners and I have regular meetings with one or other. I am glad to say that our views are always taken very seriously.

What are the current big issues in EIS?

Understandably HMRC is keen to stop abuse of EIS. Earlier this year there was an HMRC initiative to introduce the EU definition of an SME. The real problem here would have been that it would have created huge uncertainty that would have given HMRC the power to disqualify EIS relief retrospectively if they felt there was “connected business” abuse. The EISA has pointed out to HMRC that they already have significant powers to disqualify EIS applications where they perceive the proposed business is abusing the rules.

Going forward the EISA is working with HMRC and the treasury to see what else can be done to tighten up on abuse, particularly in the context of the intent of the scheme. Related to this is the £2m EIS and VCT limit in any one year and 50 people rule which the labour government agreed to in order to avoid the risk of EU government aid rules disqualifying the whole EIS arrangements. This is too tight and means that it is difficult for EIS and VCT to address the equity gap which as research has shown is up to £10m. The French rules in these areas are also much more generous. The EISA has therefore urged the government to widen these parameters now — as SME’s are so short of funding, particularly from banks and need all the risk equity they can get.

The government could apply subsequently to the EU for approval that they do not breach the EU state aid rules. There are cases where SME businesses requiring sophisticated technology cannot raise enough money under EIS and VCT and where in the wider economic interest, the only practical route is for diff businesses to share technology. It would be against the countries economic interest for such situations to be disallowed for EIS and VCT qualification on the grounds of linkage.

What do you like most and least about EIS?

The obvious advantages of EIS are CGT deferral, where with the stock market recovery of the last two years, people again have capital gains now chargeable at a tax rate of 28%; IHT relief and the ability to offset losses against income for income tax purposes. While EIS funds are a good thing for investors in providing both diversification and professional management, tax reporting in relation to them, can become extremely complex and expensive.

As there are major differences between the EIS and VCT tax rules (30% v 20% income tax relief for VCTs, but low CGT deferral or IHT relief) I think it would be possible to have an EIS fund structured on a similar basis to a VCT fund where the tax relief applies on investing money in the fund; the fund gets on and invests within the EIS qualification rules; and the deferred CGT comes into charge only on exiting the fund. There are however many investors who would wish to stay with the existing tax rules relating to EIS funds where they can offset losses against income for tax.

I like the fact that the EISA is close to the BVCA. We have people like Patrick Reeve, the managing partner of Albion Ventures to thank for that. He sits on the Venture Capital Committee of the BVCA and is a member of the EISA. He acts as an excellent conduit between the two groups — understanding the issues from both perspectives.

Who should you go to first if you have an issue you wish to raise about the EIS Scheme generally (as opposed to a personal issue with your own investments)?

Firstly, never be afraid to go to your MP. It is good to talk to MPs about issues as they can then find out what it’s like for the people they represent. Secondly, the civil servants are usually happy to engage in a sensible dialogue so do approach them too, though it’s worth bearing in mind that they usually feel more comfortable talking to a concentrated body, like the EISA. I guess this means that I recommend you should also speak to the EISA and ask them to help you present your issue! To be honest we tend to speak to the civil servants first and keep the politicians as second reserve.

I think we have some excellent people at the EISA who know the EIS in great detail, like Christine Fowles at PWC who knows the tax rules backwards, and Susan Philips who knows the fund management/investment angle intimately. I would always speak to them first to find out if their issue is unique or something where others are having the same problems.

If you plan to be using EIS seriously and regularly, e.g., you are a fund manager, join the EISA, not least because we hold two technical seminars a year which are worth their weight in gold. Most of the relevant fund mangers and EIS promoters are already members so you will find yourself amongst friends.

And lastly do you have any observations on EIS in the context of the economic recovery and the new political climate?

We are too heavily taxed in this country and EIS is one way to redress the balance, which thus directs money to enterprise, so it must be kept going and improved on where it can.

And, to be frank, over the last 10 years overall Venture Capital returns have been sufficiently unexciting to entice people to invest without significant tax incentives. Without them people would make their venture capital investments in more economically successful parts of the world such as Asia.

The Financial Services industry is full of clever people who will always try to stretch the rules. This is as true now as in the past. But it’s really important that, at this stage of the economic cycle, they don’t stretch the boundaries of EIS too far. Attempts to do so antagonises the tax man and may in turn antagonise the politicians. If that happens it might challenge the political support for the whole of EIS. And risk EIS being so severely curtailed that it becomes useless. This would be a disaster for economic recovery, which will depend largely upon SME’s.

It’s worth pointing out though that last time someone did try to bend the rules we were able, as the EISA, to go into the Revenue and explain that they already had enough rules in place to address the miscreants. What was great about this was that we were regulating ourselves in effect. The EISA tries to bring an element of self regulation by making it clear to our members that if they try to exploit EIS in ways which are clearly contrary to their spirit and intent, they run the risk that HMRC will clamp down in a heavy handed way. This is surely the right thing to do and is also in the spirit of what “The Big Society” means in the context of the financial services industry.

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