After nearly two and a half years in office it is hard to believe that the Chancellor of the Exchequer can still be making schoolboy errors. Yet that is the only reasonable conclusion that can be reached as the disastrous consequences of the introduction of two of his schemes to help small and medium sized businesses (“SMEs”).
The SEED/EIS Scheme
In November 2011 George Osborne announced the introduction of an innovative initiative called the SEED/EIS plan to help encourage the raising of early stage equity finance for SMEs. A new or up to two years old business would be able to raise, once only, £150,000. Investors would receive 50% income tax relief, up to 28% capital gains tax relief, income tax free dividends and gross gains.
The wheels turned slowly and eventually the passing of the 2012 Finance Bill, containing sixty two pages of regulations, enabled the scheme to proceed. The Inland Revenue has added layers of additional requirements but the basic proposition remains in place.
So far Enterprise Britain knows of no single successful fund-raising under this scheme. The reason for this situation is, once again, the draconian regulatory regime now constraining the recovery of the United Kingdom from this period of austerity. The rules, regulation and atmosphere of fear developed by the Financial Services Authority (“FSA”) is resulting in Compliance Officers refusing to allow their private client brokers from offering these opportunities for investment because of the presumed risks. Independent Financial Advisers (“IFA”) are also taking a similar stance on the basis that if it is a SEED/EIS proposal it is too risky to be offered to their customers.
At this stage it seems that the SEED/EIS innovation is going to flop thus representing an unacceptable and costly misjudgement by the Chancellor and the Business Secretary Vince Cable. Britain’s SMEs struggle on without any support from the Coalition Government.
Funding for Lending
In July 2012 the Chancellor announced a scheme to improve the financing of SMEs called ‘Funding for Lending’. Enterprise Britain examined it closely. Essentially the Government is providing low cost funds for banks and building societies provided it creates net new lending to consumers and SMEs. Up to £80 billion is being made available.
The outcome is proving to be rather different from the hopes of the Treasury. There is no evidence of any new lending to SMEs. However savings rates are falling by up to 10%. The average return on a one-year fixed-rate account has fallen from 2.77% to 2.57%. In the first full month that the scheme was in operation households repaid £276m of mortgage debt and £134m of personal loans.
The abject lack of support for SMEs continues. The announcement of the new British Business Bank by the Business Secretary Vince Cable, which attempts to implement the recommendations of the Breedon Report (“Boosting Finance Options for Business”: March 2012), is so woolly and dependent on further announcements, that it cannot be assessed.
On the basis of the SEED/EIS Scheme and the Funding for Lending initiative, there are few grounds for optimism.