Could tax cut unlock billions in SME investment?
This week, Prime Minister Boris Johnson has refused to rule out further tax rises, calling the pandemic a “fiscal meteorite”. Speaking at the Tory Party conference in Manchester, Boris Johnson praised the UK’s economic recovery which is so far ahead of other G7 nations. Meanwhile, Jacob Rees-Mogg highlighted that the country was already at the “upper reaches” of the tax burden.
There have been, however, tax cuts previously that have both boosted business investment and total tax take. When EIS tax reliefs were last extended in 2011, investment into small businesses that qualify for the scheme rose by around £1billion, while it has been estimated that for every £1 of lost direct tax revenue, £3 is generated by job creation and innovation.
The Enterprise Investment Scheme (EIS) is one of the UK Government’s most successful initiatives in terms of driving investment into high-growth early-stage companies. It has helped produce some incredible business successes that otherwise may not have got off the ground due to the reluctance of banks to lend to these firms. Growing SMEs offer huge opportunities in terms of job creation and increasing the tax efficiencies of EIS is a certain way to increase investment into these firms, offering a part of the solution to economic problems.
When the EIS income tax relief was extended from 20% to 30% in 2011, the amount invested in small companies through the scheme saw a tremendous jump. If the Government were to extend the scope or tax efficiencies of the scheme again, it could really help catalyse private investment – a crucial source of growth finance.
Extending the Future Fund to include EIS investments will open up the scheme to a whole new sector of investors and private capital; from angel investors to VCTs. This is not an insignificant amount of money that could be a big boost to companies trying to survive or grow.
SMEs are famously more nimble and adaptable than big firms and some of the most successful private firms to come out of this arena have been at the cutting edge of innovation. This includes finance, science and engineering, and while loans are helpful, they can lead to an untenable debt burden on firms that need time to develop technology or software before going to market.
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