Call for tax breaks for private lenders to boost competition in SME borrowing markets
The Forum of Private Business is repeating its call for the Government to hand private lenders tax breaks in this week’s autumn statement in order to stimulate competition with leading banks and bring down borrowing costs. It is one of several tax proposals to help small firms and get the economy started in the Forum of Private Business’s submission to the autumn statement and growth review, which take place tomorrow, 29 November. Other measures include freezing fuel duty and business rates rises scheduled for early 2012.
The FPB’s initial call for tax breaks for private lenders came ahead of the Budget in March 2011, when the Forum’s Chief Executive joined William Flatau of First Funding, an online network that connects private lenders with business borrowers, in urging the Government to support lenders willing to take risks where leading banks are not.
“The Government should encourage private lenders by easing their tax burden when they invest in small businesses, often taking risks where mainstream banks fear to tread,” said the FPB’s chief executive Phil Orford.
“It is already incentivising venture capitalists taking equity stakes in firms. Small businesses need a range of finance options but the preferred funding route remains lending at interest. Providing a tax environment that encourages private lenders to come forward will increase competition, drive up levels of service and bring down costs.
"More broadly, in order to help small businesses to drive economic growth we need a tax system that is fit for purpose, one that is simpler and more proportional rather than benefitting large companies at the expense of small firms.”
In a recent letter to HM Treasury in response to the Government’s ‘tax-advantaged venture capital schemes’, the FPB welcomed a proposal increase to 30% tax relief available for equity investors under the Enterprise Investment Scheme (EIS), but called again for similar tax incentives for private lenders to boost the provision of non-equity finance for small firms.
Interestingly, 43% of small business members on the Forum’s recent cashflow and finance panel said they would not consider equity finance – and none indicated it as a preferred option.
In all, 24% of small business owners called for more choice between ‘traditional' banking services, but 21% want better access to alternative forms of funding.
In total, 26% of respondents said they were seeking alternative financial products, with 21% of these interested in sourcing them from outside the main high street lenders and just 7% from mainstream banks.
Clearly, the responses reveal that, while traditional bank lending is still the most popular form of funding, there are signs of a growing small business market for non-mainstream financial products.
Specifically, the FBP believes the following measures would stimulate the lending landscape for small firms:
- Reducing to 0% the tax on interest received during the lifetime of a loan – instead of the 50% top tax rate, providing the loan is still outstanding after three years.
- Giving a 20% income tax relief on loans – meaning a loan of £100,000 would effectively cost a lender paying the top rate of tax £80,000.
- Providing an additional tax relief if a business fails before the loan is repaid – the lender could claw back up to 50% income tax relief (at the top rate) on money lost if the firm fails, in addition to tax saved when the loan was issued.
The FPB believes that the first point in particular – complete tax relief on the interest received lending to small businesses – would work effectively to stimulate lending to small businesses at a relatively low cost to the Government.
Orford, explained: “There are two elements to incentivising private lending by the removing taxation on interest earned from funding the small business community.
“Firstly, according to British Bankers’ Association (BBA) data from June 2011, small businesses have almost £58 billion on deposit in the UK’s leading banks, with borrowings of £44 billion. The panacea would be that business lending was self-funded by peer-to-peer and private lending initiatives. But there is no financial incentive to do so.
“Secondly, we estimate that the cost to the Treasury of removing tax on interest completely would be just £3.6 million in every billion invested via private lending initiatives – an extremely reasonable price to pay for increased competition in the small business lending markets and the economic stimulus that would be created.”
The FPB is calling for tax breaks for private lenders on par with those benefitting equity investors as part of its submission to the 2011 autumn statement and growth review. The call is based on the forum’s Get Britain Trading campaign, which aims to raise awareness of the huge contribution small firms play in the UK's economy.
www.fpb.org