It has been well documented that UK business has been battered and bruised over the last 3 years, especially given the lack of availability of credit which has slowed their growth. Given this backdrop and the turmoil in the equity markets, the content of the Chancellor of the Exchequer’s recent 2011 Autumn Statement was eagerly awaited. This article explores what the Government has proposed in order to encourage small and medium sized enterprises (SMEs) to blossom in these tough times.
The critical message delivered by the Government in the Autumn Statement was “Building a stronger economy for the future.” Praise was given to the Government providing a strategy for growth by John Cridland, Director General of the CBI, who commented “This Autumn Statement works with the realities of today and provides an imaginative framework for UK businesses as it strives to secure growth and jobs.”
As this article highlights, SMEs seem to be among the winners with potentially cheaper loans being available and also tax breaks for investors. Below are the key aspect of the Autumn Statement and their potential impact.
Credit for SMEs
(i) National Loan Guarantee Scheme
The first of three steps the Government is imposing to help SMEs obtain credit, is the announcement of up to £20 billion of support (known as the credit easing programme). The objective of the scheme will be to reduce the cost of borrowing from 2012 by underwriting some of banks’ lending to SMEs, (therefore reducing the costs of the banks resulting in hopefully more lending).
So how does the National Loan Guarantee Scheme actually work?
The scheme will target companies with an annual turnover of less than £50 million with the Government guaranteeing their borrowings over the next two years (thereby reducing the amount the banks have to pay to fund their lending in the markets). This will save banks an estimated 1 per cent. of their lending costs.
Whilst the scheme is a welcomed development, many commentators question how the Government will force the banks to pass on their lower costs to SMEs. So far, there has been no mention of the scheme being policed by the Government to ensure this is the case. Furthermore, to audit this process would be both complicated and costly.
(ii) Business Finance Partnership
The second credit easing step announced is that the Government will provide credit through the Business Finance Partnership, which will provide a non-bank investment source for mid-sized businesses and SMEs.
The Government will borrow up to £1 billion over the next five years to match loans provided by the private sector. The partnership will be launched next year with an initial £150 million and will be fully invested by 2017 and will initially focus on co-investment with the private sector through loan funds.
(iii) Enterprise Finance Guarantee
The third credit easing step announced is that the Government will extend the Enterprise Finance Guarantee scheme (EFG). This facilitates additional bank lending to viable SMEs and, from January 2012, will include businesses with up to £44 million annual turnover. A number of new lenders will be accredited to offer EFG lending.
Seed Enterprise Investment Scheme – Relief on investments in start–up companies
A new equity initiative for start up companies has been launched called the Seed Enterprise Investment Scheme (SEIS). The SEIS is a new scheme offering capital gains tax exemptions on gains realised in 2012–2013 and investment through SEIS in the same year and also a 50 per cent. income tax relief on such investments.
SEIS will available from 6 April 2012 and will target start up companies. This is seen as a very positive step taken by the Government and its key features are:
- a cumulative investment limit of £150,000 per company will apply and an annual investment limit of £100,000 per individual will apply;
- gains arising on the disposal of other assets in 2012/13 will attract a capital gains tax exemption if they are reinvested through the SEIS in the same year; and
- income tax relief of 50 per cent. of the investment will be available to individuals who invest in qualifying companies, irrespective of their respective tax rate.
It is expected that companies taking advantage of this scheme will then be able to transition into the main Enterprise Investment Scheme (EIS) regime at a later point. EIS, along with Venture Capital Trusts, are also having their rules simplified.
Cutting the red tape of employment legislation
In conjunction with its drive to encourage lending/equity investments, the Government is also looking for ways to reduce the burden of employment legislation on SMEs. It was announced that there will be an increase in the qualification period for unfair dismissal claims from one to two years from April 2012. The Government is also looking to overhaul employment legislation for businesses with fewer than 10 employees.
A three year £1 billion scheme has also been proposed to fund businesses taking on staff between the ages between 18-24 on short term placements. The “youth contract” will offer work experience for young persons employed for three month periods.
Research and development
Finally, there will be tax relief to SMEs on their research and development expenditure. The Government announced that the 2012 Finance Bill will “introduce an above the line tax credit in 2013 to encourage research and development activity by larger companies”. We await details of this but hopefully this will lead to more R&D being undertaken in the UK, and increasing demand for scientific and technical trained staff.
British companies, and in particular SMEs, need to ensure they take full advantage of these incentives in order to stimulate growth and create jobs for UK plc. Whilst the measures taken by the Government will help small businesses think about growth, we also urge the Government to ensure that the banks are geared up to increase their lending as soon as possible.