When Stephen Burnett, an entrepreneur from Lincolnshire, needed a loan to expand his software business, he was turned down by three banks and told to remortgage his home instead.
Burnett’s Retail Data Partnership manages point-of-sale data for retailers and turns over about £1m a year. He had just signed a deal with Booker, the FTSE 250 wholesaler, that had the potential to double the size of his business.
“It was the deal I had been working towards for 15 years and the reason I established the business. The banks simply would not lend,” he said.
His first port of call was Lloyds, with which he had banked since setting up the company, but he was turned down flat. It was the same when he approached Barclays and Triodos, the ethical bank.
Finally, he turned to Funding Circle, an online marketplace that cuts out the banks and brings together cash-rich investors and small businesses in need of finance. He managed to secure a loan of £65,000, spread over 700 lenders, at 8.4%.
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Burnett is exactly the type of businessman George Osborne will be hoping to help when he launches a £20 billion national loan guarantee scheme on Tuesday, designed to lower the cost of borrowing by about one percentage point for businesses with turnovers of up to £50m. Another £20 billion could be available longer term, as the Treasury has diverted £40 billion from the Bank of England’s asset purchase facility to fund the scheme.
Osborne’s championing of credit easing ahead of the budget is one of the few concrete measures for enterprise to emerge from a week of wrangling over taxes on higher earners. The chancellor is believed to have bowed to pressure from the Tory party and business leaders to cut the top rate of income tax from 50p to 45p, but the price will be a widespread crackdown on tax avoidance by the wealthy. A final decision will be taken tomorrow.
For all the fevered pre-budget speculation about taxing the rich, the truth is the chancellor has little room for manoeuvre. Public borrowing may undershoot the Office for Budget Responsibility’s target by as much as £10.5 billion for 2011-12, but Osborne is still walking a tightrope in terms of sticking to his fiscal rules.
Last week’s warning from Fitch, the ratings agency, that Britain could still lose its AAA credit rating was a reminder of the dangers of straying too far from the chancellor’s deficit reduction plans.
Against this backdrop, Osborne wants to make growth his priority. Vince Cable, the business secretary, has warned that the lack of access to credit is one of the biggest barriers to economic recovery.
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Osborne believes that if the cost of bank loans can be brought down, firms will be able to unblock expansion plans that have been on ice since the credit crunch, and create much-needed jobs.
He has agreed to underwrite banks’ five-year corporate debt so they can benefit from the government’s AAA rating. This will allow them to borrow at about 2% in the bond markets, compared with rates of 4% or more without a government guarantee.
At least four banks are believed to be ready to sign up to the scheme — Lloyds, Royal Bank of Scotland, Barclays and Santander — although HSBC is holding back for now. It funds most of its loans through retail deposits rather than the wholesale markets, so it has no need for a government guarantee.
The banks will pay a fee of about 1% to take part in the loan guarantee scheme, and will pass on the remaining 1% saving to small companies such as Burnett’s.
Neil Carberry, director for employment policy at the CBI, the employers’ organisation, said: “With the recovery at a critical stage, it’s vital that the chancellor uses this week’s budget to unlock business investment, as only sustainable private sector growth will help tackle unemployment.”
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Tim Breedon, chief executive of Legal & General, the insurer, has also unveiled the results of his taskforce looking into finance for smaller businesses. It has proposed aggregating small-company loans into funds to make it easier for institutions to invest.
Business organisations welcomed such schemes in principle — but said they did not go far enough. Terry Scuoler, head of the EEF, the manufacturers’ organisation, said: “Despite the government’s measures, something seems to be missing in the short term to drive overall growth, especially given the overwhelming reliance on business investment.
“We believe that capital allowances should be increased for a two-year period to 100% to provide a clear signal to firms sitting on cash that they should invest now to maintain their competitive positions.”
The chancellor is also expected to go further by signalling a cut in corporation tax. It is due to be reduced by one percentage point to 25% from April 1 and to 23% over the parliament, but Osborne could set a new target of 20% to signal his support for business.
However, each one-point cut costs £800m and the chancellor must balance support for business with pressure from his Liberal Democrat colleagues to help the squeezed middle.
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The Lib Dems are pushing for a faster increase in the personal income tax allowance, already due to rise from £7,475 to £8,105 in April and to £10,000 by 2015. Meanwhile, David Cameron is putting pressure on his chancellor to find money to ease the “cliff edge” of the cuts to child benefit.
Companies should expect a crackdown on aggressive tax avoidance to help pay for these moves on personal tax. A general anti-abuse rule, known as GAAR, could raise between £1 billion and £1.5 billion, according to Baker Tilly, the accountant.
Law firms and companies must already notify HM Revenue & Customs of aggressive tax schemes — this is how it found out about the two Barclays schemes that were closed down this month — but HMRC must legislate to prevent wider abuse. Under a general anti-abuse rule, however, it would be able to go to an independent review panel to close schemes that it believes abuse the “principles” of tax planning.
Accountants are generally relaxed about the rule, recognising that the worst abuses of the tax system must be stamped out, but they are more worried about a potential attack on pensions. The Tories appear to have won the argument that Osborne should not meddle with higher-rate relief on pension contributions, which would raise about £7 billion, but there is an even chance he could reduce the annual limit on the amount that can be put tax-free into a pension from the current £50,000 to £40,000.
Innocuous though this may seem, it could have big implications for final salary schemes. Middle earners in public and private sector schemes could face effective tax rates of as much as 94% on pay rises as a result of the move, with senior executives looking at bills of more than 200%, according to calculations by Buck Consultants, the actuary.
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Fraser Smart of Buck said: “A reduction in the allowance would create a big administrative burden for companies and hit their workers with huge tax bills. Why would any company want to keep its final salary scheme?”
Of all the measures likely to be announced this week, this has the potential to be Osborne’s “stealth tax”, one that could haunt him for the rest of the parliament.
Last orders for tax breaks
Many groups are pleading for tax cuts from the chancellor — and few more loudly than the booze industry, writes Matthew Goodman.
Their pleas seem likely to fall on deaf ears, though George Osborne may stop short of introducing minimum pricing for alcoholic drinks in his budget on Wednesday.
Most in the industry expect him to increase duty on beer in line with the “duty escalator” introduced in 2008 — a rise of 2% plus inflation.
Ralph Findlay, chief executive of Marston’s, operator of 2,150 pubs, believes the government should rethink: “We made £80m in pre-tax profits last year. We paid £33m in dividends and £291m to the government [including all forms of tax]. It seems bizarre they are taking 10 times more than shareholders.”