By Maximilian Clarke

The Forum of Private Business is repeating its call for the Government to hand private lenders tax breaks in next 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 not-for profit Forum’s submission to the autumn statement and growth review, which take place on Tuesday, 29 November. Other measures include freezing fuel duty and business rates rises scheduled for early 2012.

The Forum’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 Forum’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.”

William Flatau, founder of First Funding, agreed: "Private lenders are willing to fill the lending gap in small businesses that the banks are not providing. The Government needs to encourage lending by offering tax incentives which will allow private lenders to keep the interest that they earn.”

In a recent letter to HM Treasury in response to the Government’s ‘tax-advantaged venture capital schemes’, the Forum 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 cash flow 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 Forum 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 Forum 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.

The Forum’s Chief Executive, Phil 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 is 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.” (1)

The Forum 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.

The Forum of Private Business has written to Business Secretary, Vince Cable, Small Business Minister Mark Prisk and the Chancellor, George Osborne - who will deliver the statement on Tuesday — outlining its main arguments for change.

In line with its Get Britain Trading campaign, the Forum wants to see the Government take action in a number of crucial areas, including education and training, export, tax, finance, and bank lending.

Key requests in the Forum's letter are:

- A focus is schools to improve employability — employees require work ready recruits.

- A greater business voice in how skills money is spent — employers are eager for either a voucher scheme for skills training or NI reductions for apprentices.

- Support from Government on raising awareness of mid-caps towards exporting for the first time.

- To ensure the Regional Growth Fund delivers funds on a much quicker basis by relaxing requirements on due diligence for low value bids, while continuing to support and clarify the role of LEPs.

- Help rural businesses access the support they need, including support for shared banking services where counter services are diminishing.

- Ensure retailers who treat suppliers unfairly are properly punished with fining powers available to the Groceries Code Adjudicator.

- Business Rates frozen in April.

- Postpone all fuel duty increases scheduled for next year.

- Further tax breaks for private lenders, as well as equity investors, which would ease credit conditions for small firms.

- Do more to increase confidence in alternative sources of finance for low turnover businesses, and introduce tax incentives for alternate lenders.

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