By Marcus Leach

The Forum of Private Business is urging the Government to cut taxes for private lenders as well as equity investors in order to boost credit conditions for small businesses.

During Monday’s speech at the Conservative Party conference the Chancellor, George Osborne, announced a ‘credit easing’ scheme — likely to involve creating bond markets from mixed small to medium sized enterprises (SMEs) debt packages, reminiscent of the debt trading that sparked the credit crunch and a medium-term strategy at best.

The Forum is calling for further measures to allow alternative lenders to compete with mainstream banks, in addition to a plan to boost equity investment via tax breaks for venture capitalists.

In a 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 also called for tax incentives for private lenders to boost the provision of non-equity finance for small firms.

“The Government is trying to make the right noises by announcing a ‘credit easing’ scheme but doubts remain as to the form it will take and how it will work to free up credit for small businesses,” said the Forum’s Chief Executive, Phil Orford, who is attending the conference in Manchester.

“At best, is a medium-term strategy that will require the creation of small business bond markets in the first place, and there is a concern that the principle of bundling together mixed risk debt for bond trading is what sparked the credit crunch.

“We need to focus not just on incentivising equity investors but on giving private lenders the tax breaks they need to be able to compete in the finance markets dominated by big banks.

“That would be a definite step towards creating the credit conditions small firms need now if they are to create jobs and drive economic growth.”

The not-for-profit Forum is arguing that private funders take real risks by lending to companies that struggle to access bank finance and believes this risk should be rewarded.

The Forum is calling on the Government to adapt the existing EIS to private lenders paying the top rate of tax. We believe the enhanced scheme would work by:

- 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.

- Reducing to 20% the tax on interest received during the lifetime of a loan — instead of the 50% top tax rate, providing the loan is outstanding after three years.

- 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.

Figures from the National Endowment for Science, Technology and the Arts (NESTA), which promotes innovation in the UK, show the importance of tax breaks in encouraging investment.

According to NESTA's 2009 study tax incentives have a ‘material effect' on encouraging business angel investing. In all, 80% of investors surveyed had used the EIS at least once and 57% of businesses invested in also made use of it. Further, 24% of investments would not have been made without tax incentives.

The Forum believes that similar incentives should be given to private lenders without delay.

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