The Forum of Private Business (FPB) wants the Chancellor to use the Budget to boost incentives for private lenders to businesses.
The FPB believes that lower tax bills would encourage more high net worth individuals to lend to small businesses, providing an alternative to the banks.
The business group has called on the Government to extend existing Enterprise Investment Scheme (EIS) rules, which offer equity investors tax breaks, to private lenders paying the top rate of tax.
According to the FPB, the scheme could work by giving 20 per cent income tax relief on loans. This would mean that a business loan of £100,000 would effectively cost a lender, subject to the top rate of tax, £80,000.
Other measures would see the reduction to 20 per cent of the tax payable on the interest received during the lifetime of a loan, providing the loan is outstanding after three years.
If a business fails before the loan is repaid, the Government should provide an additional tax break, allowing the lender to reclaim up to 50 per cent of income tax relief (at the top rate) on money lost, in addition to the tax saved when the loan was issued.
Phil Orford, the FPB’s chief executive, said: “Private lenders are themselves entrepreneurs who are taking the real risks when they step into the breach to fund businesses, often treading where traditional banks are not prepared to venture.
“These lenders should be valued and nurtured, not taxed at a much higher rate, which is the situation we have at present. Ideally, we would like to see these types of lending arrangements with small businesses made completely tax-free, or at least tapered depending upon the sums of money involved.
“As part of a ‘big society for business’ agenda, tax relief of this nature would be a significant incentive for private lenders to provide better, more cost effective funding for small businesses than we are seeing now.
“We need a tax system that is fit for purpose, one that is simpler and more proportional rather than benefiting large companies at the expense of small firms. It is tax policies like the one we are lobbying for that will get Britain trading profitably once again.”