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Xavier Rolet: Want economic growth? Incentivise equity investment in SMEs

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The CEO of London Stock Exchange says punitive taxation of equities must be addressed urgently

We’ve asked more than 30 of London’s business leaders how they think Britain can create economic growth, opportunity and innovation. Read the full publication online: Securing Britain’s Future

It is vital to ensure that we nurture our innovative and high-growth SMEs, the engine of our economic recovery, so that we can help create the corporate giants of tomorrow. To grow they need funding – but the right sort of funding. This means we need to look again at how equity funding is taxed.

London Stock Exchange Group has been a vocal advocate of the need for a fundamental rebalancing of our economy away from an excess of bank finance and debt and towards a more stable financing system for UK business. We think equity plays a vital role in funding growth in the next generation of SMEs. Equity capital is often the most suitable form of finance for fast-growing companies, and provides good, straightforward access to funding at every stage in a company’s development – from seed capital and business angels to venture capital and public markets. Equity capital allows companies to share risk and plan for and deliver long-term growth.

Barriers to equity funding

Earlier this year, London Stock Exchange announced plans to launch a new “High Growth Segment” on its Main Market to meet the needs of fast-growing companies. It will provide a greater choice for companies seeking capital and for investors seeking growth opportunities. Acting as a “launch pad”, this segment will help companies aspiring to seek a premium main market listing over time. The new segment recognises the clear link between IPOs, equity funding and job creation. It also increases the competitiveness of London’s financial markets, which have been founded on their capacity to embrace innovation, diversity and commerce. It is essential for the UK’s future prosperity that London continues to attract businesses to list, trade and operate here.

London Stock Exchange Group cannot act alone. Arguably the most significant barrier to efficient equity funding for companies of all sizes is the tax treatment of equity. Equities continue to be taxed at purchase, dividend and sale, in addition to the corporation tax paid on company profits.

We need a package of measures, including fiscal measures, which will incentivise equity investment in SMEs. The government’s recent proposals to abolish stamp duty for AIM companies, as well as making companies admitted to growth markets eligible for inclusion in stocks and shares ISAs, are welcome. We believe they will help mobilise a wider pool of capital dedicated to SMEs. But we mustn’t stop there.

Further tax reforms

Stamp duty should also be abolished for companies quoted on the above-mentioned High Growth Segment, as well as introducing a lower Capital Gains Tax rate of 10% for investment in growth companies. Analysis by Deloitte has shown that these measures could help significantly lower the cost of capital for high-growth UK companies by up to a quarter, remove a significant barrier to entry to public markets, and enable the creation of tens of thousands of new jobs.

It is vital that we all act together to help secure Britain’s future. SMEs are the lifeblood of our economy and we need to act to help them achieve their potential. Let us ensure that the start-ups in 2013 are able to become the global stars of tomorrow.

KEY POINTS

  • The sequential taxation of equities at purchase, dividend and sale is a disincentive which must be addressed
  • Stamp duty for London Stock Exchange’s new High Growth Segment must be axed, and CGT lowered
  • Deloitte calculates that reforms could create tens of thousands of jobs

We’ve asked more than 30 of London’s business leaders how they think Britain can create economic growth, opportunity and innovation. Read the full publication online: Securing Britain’s Future

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