Government Urged To Give Private Lenders Same Tax Breaks As Equity Investors

The Forum of Private Business and the Institute of Financial Accountants (IFA) are calling on the Chancellor George Osborne to use Wednesday's budget to give generous tax breaks to private lenders who support firms in need of finance.

Both organisations believe lower tax bills would encourage more high net worth individuals paying 50% in income tax to lend to small businesses, providing a real alternative to traditional banks.

They are urging the Government to adapt existing Enterprise Investment Scheme (EIS) rules, which acknowledges the risk equity investors take by giving them tax breaks of up to 60%, to private lenders paying top rate of tax. The scheme could work by:

• Giving 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

The Forum's Chief Executive, Phil Orford said: "Private lenders are themselves entrepreneurs who are taking the real risks when they step into the breach to fund businesses, often treading where traditional banks are not prepared to venture.

"These lenders should be valued and nurtured, not taxed at a much higher rate, which is the situation we have at present.

"Ideally, we would like to see these types of lending arrangements with small businesses made completely tax-free, or at least tapered depending upon the sums of money involved.

"As part of a ‘big society for business' agenda, tax relief of this nature would be a significant incentive for private lenders to provide better, more cost effective funding for small businesses than we are seeing now.

"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. It is tax policies like the one we are lobbying for that will get Britain trading profitably once again."

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 and 80% of investors surveyed had used the EIS at least once and 57% of the businesses invested in also made use of it. Further, 24% of investments would not have been made without tax incentives.

There is also a growing market for both equity investment and private lending. Recent research carried out by the not-for-profit Forum found that business owners are seeking out alternative sources of funding to high street banks.

According to the Forum's Economy Watch member panel for February 31% of respondents are using money from friends, family and directors. This accounts for about 10% of overall funding. Estimates for 2011 spending indicate that non-bank lending is expected to account for 40% of all funding.

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 Budget, which is based on its new Get Britain Trading campaign, which aims to raise awareness of the huge contribution small firms play in the UK's economy.

(BMcN/GK)