Is May’s GDP increase the first sign of economic recovery?

15th July 2020

Figures released recently by the Office for National Statistics (ONS) show that, in the three months to May, the UK economy shrank by 19.1%. The figures for May show a slight increase of 1.8% in GDP as more firms got back to work after the full lockdown of April. While figures for May have left some economists disappointed, there are hopes that June and July, which have seen significant roll backs of restrictions, could lead to a V or even U shaped economic recovery.

SMEs make up 99.9% of private sector businesses and so supporting entrepreneurs to start businesses as well as providing vital growth finance is clearly of the utmost importance to the overall health of the UK economy. Small firms also employ over 16million people in the UK and the sector before coronavirus was growing at a faster rate than the overall job market.

These figures, while not the bounce many were hoping for, are at least a step in the right direction. We have already seen billions spent by the Government and now may be time to take a proactive – rather than reactive – step to boost the economy back to where we were in February, and beyond.

The small business community and its success is as important to the economy as anything else in the near future. With an economic contribution of over £2trillion, the success of the UK economy as a whole may in future hinge on the prosperity of SMEs, start-ups and high-growth firms. There are a fantastic range of innovative, growing SMEs that we work with which are likely to drive our private sector forward in the coming years. There are a few ways that we feel the government could encourage this.

Extend tax reliefs on SME investments

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.

Make the Future Fund EIS qualifying 

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.

Innovation grants

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 a untenable debt burden on firms that need time to develop technology or software before going to market.

Capital Gains Review

The review commissioned by the Chancellor could be a boost for small business investment in the next few years, as long as the right allowances are made. If, as many have predicted, the review leads to rising capital gains tax liabilities many more investors and higher rate tax payers may be looking more closely at the implications of their investments on the tax.

If capital gains disposal relief and deferral capabilities are continued within the EIS, a rise in capital gains tax could well lead to an increased appetite to make use of the scheme and invest in small businesses.

This is a topic that our CEO Luke Davis has recently commented on in greater depth, in an article published by i-Invest.

To find out more about IW Capital, or for more information on investment and non-executive opportunities, please speak to a member of the IW Capital team today on 020 7015 2250, or email info@iwcapital.co.uk