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Author: Sacha Bright & Oliver Murphy
Now, along with the Enterprise Investment Scheme Association (EISA), and the P2P industry, we are calling on the government to embrace new proposals to complement the current measures designed to support small businesses in the UK.
As NextFin has reported, there are a number of flaws in the government relief packages. Already, it has been revealed that around 800,000 small UK businesses cannot access the government Coronavirus Business Interruption Loan Scheme.
According to the EISA, 42% of small firms could go bust if the government-imposed lockdown continues for three months or more, resulting in 10 million people facing unemployment.
Equity funding for small businesses has reduced by 70% since the outbreak of Covid-19, there is great uncertainty due to the current environment and the start-up economy is failing.
The situation for small businesses trying to raise funds is dire. The EISA who surveyed over 250 small and medium businesses have found:
Raising the tax relief of EIS and SEIS
As NextFin has already discussed, the government can support SMEs through the coronavirus by raising the rate of income tax relief for EIS to 50% and SEIS to 70%. This will stimulate private investment, by mitigating a larger proportion of the risk for investors. Doing so would mobilise millions of pounds of private funding into startups, via EIS funds and equity crowdfunding.
In 1999, for example, when Capital Gains Tax exemptions were introduced to the EIS - there followed an immediate rise in both private funds raised and companies raising funds. This was also the case in 2011 - when the income tax rate of relief was increased from 20% to 30% - again, there followed an immediate rise in both funds raised and companies raising funds.
As the EISA have demonstrated, increases in the rate of relief under the EIS scheme result in the mobilisation of private investor’s capital which is passed onto businesses that require a cash injection. In the words of one private investor: “Any improvement in the tax benefits in SEIS / EIS will increase flows of EIS investment into our Startup Series Fund, which in turn can be passed to businesses in our portfolio.”
According to Sacha Bright, CEO of NextFin: “It's a no brainer. If you look at the jobs that EIS/SEIS creates, the businesses that grow and the resulting tax revenues the companies generate, it can often make a profit for the government.”
“The government should relax the rules, increase the allowances and thousands of jobs and companies will prosper even with the coronavirus epidemic”.
Mobilising £60bn worth of cash ISAs into IFSAs
With the recent cut in interest rates, many savers are receiving little or no interest on their savings. In-fact, with financial advisor’s and fund management fees added in, some savers are losing money.
At present, independent financial advisors across the country are reluctant to recommend investment in P2P platforms because savers’ money is at risk. If the government were to offer CBILS 100% guarantees for small businesses via P2P platforms, which Rishi Sunak hinted he would consider in this week’s Downing Street daily coronavirus briefing, the interest that is paid by the businesses would transfer to the savers that have invested in an innovative finance saving account (IFSA) which has the same tax relief as ISAs.
P2P platforms usually offer much higher interest rates than a traditional ISA and because of the protection of the government’s guarantee. Financial Advisors across the country would start to recommend investment in P2P CBIL loans to their clients, mobilising billions of pounds of private investment into small businesses.
NextFin has reported that there is £60bn invested in cash ISAs at present, receiving little or no interest. If the government allowed P2P platforms to issue CBILS with a 100% guarantee, not only would the loans be issued faster due to their fintech, but savers would be receiving high-interest rates - ‘killing two birds with one stone’.
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. SEIS and EIS tax benefits are dependent on your financial circumstances. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
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