Chancellor believes 500,000 companies will benefit from the business rates holiday
George Osborne is expected to announce a £300m-plus package of tax breaks to stimulate investment in small businesses in his autumn statement.
Designed to dovetail with proposals to ease the credit constraints on firms struggling to obtain finance, the chancellor is planning four new measures designed to boost growth.
Small companies will see the one-year holiday on business rates extended – due to expire in October 2012 – for a further six months at an estimated cost to the Treasury of £210m.
Osborne believes 500,000 companies will benefit from the tax break, with 330,000 not paying any business rates in 2012-13. The holiday offers 100% relief on business rates up to £6,000, with progressively smaller rebates on amounts up to a cap of £12,000.
The chancellor is also expected to unveil a seed enterprise investment scheme for business start-ups. ‘Business angels’ – individuals who support start-ups – will be offered the carrot of 50% income tax relief on investments of up to £100,000 in new enterprises, with each company eligible for £150,000 of investment in total.
The scheme will start in April next year and will include a capital gains tax holiday for the first 12 months to encourage those sitting on profits from previous investment to plough their money back into start-up companies. Government sources said the two schemes were likely to cost the exchequer £50m and were intended to help raise capital for those companies seen as potentially risky in the current climate.
Help for slightly larger businesses operating in those regions of the UK particularly hard hit by government spending cuts will also be earmarked for assistance through a business angel co-investment fund. Small and medium-sized companies with turnovers of between £200,000 and £2m a year and seen as having high growth potential will be eligible for help using £50m from the regional growth fund.
Finally, Osborne is expected to assist the cash flow of construction companies working on government projects by the setting up of bank account arrangements to pay companies within five days or less of the due date. At present some companies have to wait up to 100 days for payment.
The measures will augment the £20bn that the chancellor is announcing for so-called “credit easing” — money that will be channelled from existing promises that had been made by the Treasury to the Bank of England to enable Threadneedle Street to buy corporate bonds. The Bank has not purchased many corporate bonds and some of the £50bn of guarantees will now be used, instead, to help banks raise money more cheaply on the markets – and in turn reduce the price of loans to small businesses.
The banks are waiting to learn the size of any fee they will be charged to benefit from the government’s top-notch triple A rated guarantee that, theoretically, should reduce the price they pay to borrow money on the markets – either directly from other banks or buy issuing bonds.
Will Hutton, co-author of a report on how to revive small business lending, said: “As it is structured, this won’t add £1 extra of new credit.” His report, written with academic Ken Peasnell, argues that the government would have been more effective if it had created a vehicle to buy up small business loans from banks, freeing up their balance sheets. Under the government’s scheme, the cost of loans to small businesses should fall by one percentage point, according to Treasury projections, although this may be less if the government does decide to levy a fee for the guarantee.
Banks paid for the benefit of the government’s triple A rating in October 2008 when Labour introduced the credit guarantee scheme to help banks to borrow money from lenders that were otherwise reluctant to lend. But according to analysis by Credit Suisse, as of 27 October there was £34bn of such loans outstanding.
An earlier scheme to help banks raise funds was known as the special liquidity scheme and is due to expire at the end of January 2012. Analysts at Credit Suisse believe that these existing schemes still have a purpose. “We think that the current liquidity schemes will be extended in the UK to help ease the first quarter funding burden,” the Credit Suisse analysts said.
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