Tax benefits on equity would help SMEs thrive

Michael Bear
MARKET sentiment turned dramatically for the worse last week as political worries and disquieting economic data on both sides of the Atlantic outweighed relief at the threat of a US debt default being narrowly averted.

Amid concerns deficit reduction plans will hit global growth prospects, UK politicians have focused on how the financial services sector can support the recovery in choppy market conditions.

This issue came to a head again when the Bank of England released mixed second quarter lending data at the end of July. Under Project Merlin banks fell just short of the agreed targets for small and medium-sized enterprises (SMEs).

Vince Cable and the Chancellor have both reiterated the importance of SME lending in recent weeks.

Clearly the UK recovery is contingent on viable firms being able to access appropriate funding. I would argue, however, that we need to move the SME funding model on by thinking about the tax incentives available for different forms of finance.

The City recognises that it has a crucial role to play in supporting SMEs’ requirements to access the finance that they need to thrive.

Credit will always be an important source of finance but, in many instances, equity can be better suited to a business environment which is more fluid than ever before.

Take up of equity finance will only increase, however, if impediments imposed by the tax system are removed. The cost burden of stamp duty, capital gains, and tax on dividends means that many small companies view it as inefficient. Unless we re-think how to provide the same tax incentives on equity as debt we will be having this same discussion again years down the line.

Mark Hoban’s announcement that two deregulatory amendments to the EU Prospectus Directive have been brought into effect a year early, to help small businesses access equity finance more cheaply and effectively, is a step in the right direction.

This measure will save UK’s 4.8m SMEs around £12m a year by allowing them to raise more equity finance before a prospectus needs to be produced. They will also be able to target a larger pool of investors.

But more needs to be done to reduce the cost burden for SMEs looking to access equity finance and to create a level playing field.

SMEs have different financing needs throughout their life cycles. We therefore need a wider range of mechanisms to support their growth. The same strategic considerations apply in wider Europe and the USA, and will surely form part of the solution to the ongoing global crisis

Michael Bear is Lord Mayor of the City of London