UK government backs non-bank debt with tax relief

The autumn statement from Chancellor George Osborne included a commitment to support alternative lenders and extensions of SME finance programmes.

The UK Chancellor’s pre-election autumn statement focused on treats for voters but it also promised support for alternative finance providers. Measures included new tax reliefs for private placements and peer-to-peer (P2P) debt.

“The government is determined to support a more competitive banking sector where new banks, alternative providers and financial technology (fintech) firms can thrive alongside the established players, competing to offer new and improved services to customers,” reads the preamble of a section of the statement entitled ‘banking competition and financial technology.’

For P2P lenders, the news was very good. As well as committing itself to extending tax reliefs on bad debt losses for P2P platforms, the government promised consultation on the extension of ISA eligibility to lenders using crowdfunded capital and a review of regulations restricting institutional lending via P2P platforms.

The UK’s relatively small private placement market also received a clear boost. The statement outlines a new targeted exemption from withholding tax for interest on private placements.

The statement went on to say that the government will name the large banks that will be forced to share access to their credit data and refer on SMEs turned down for finance to alternative lenders. The credit data will be made available to fintech firms aiming to help consumers and businesses make better financial decisions. It also made a statement in support of action by the new payment systems regulator to open up access to the UK banking market.

Funding for bank lending 

Focusing on more traditional lenders, the chancellor’s statement also covered the one-year extension of the funding for lending (FLS) scheme to 29 January 2016 by the Treasury and the Bank of England, announced yesterday (2 December). The statement said that the scheme would be focused on incentivising SME lending and tapered to remove use of the facility for large corporate lending. This will be achieved by allowing banks to borrow £5 for every £1 lent to a qualifying business.

The government has also extended two other SME lending schemes, the Enterprise Finance Guarantee and Enterprise Capital Funds. Both are British Business Bank schemes and the chancellor’s statement claimed the moves will result in up to £1 billion ($1.57 billion; €1.27 billion) in finance for SMEs.

The reaction to the funding for lending and British Business Bank schemes was sceptical.

“With much of ‘buy-to-let’ being classified as business lending, much of the FLS lending has in reality gone into housing, even when it has been earmarked for businesses. It is likely this trend continues, and true small businesses remain unable to obtain credit,” said Christopher Mahon, investment manager and director of asset allocation research at Baring Asset Management.

UK-based alternative lender Fleximize released research claiming that £1.44 billion ($2.26 billion; €1.84 billion) in SME bank loan and overdraft applications were rejected in the third quarter. The lender said that the government schemes are not large enough and do not address the underlying problem: that banks do not want to lend to small businesses.