The Government is being urged to cut taxes for private lenders and equity investors in a bid to increase the flow of credit to small firms.

The call came from the Forum of Private Business (FPB) and follows the Treasury’s latest plan to introduce a new ‘credit easing’ scheme to help small businesses gain access to finance.

Although the final details are yet to be published, the scheme is likely to involve creating bond markets from mixed SME debt packages.

However, the FPB is calling for further measures to allow alternative lenders to compete with mainstream banks, in addition to a plan to boost equity investment via tax breaks for venture capitalists.

‘We need to focus not just on incentivising equity investors but on giving private lenders the tax breaks they need to be able to compete in the finance markets dominated by big banks,’ said the Forum’s Chief Executive, Phil Orford.

‘That would be a definite step towards creating the credit conditions small firms need now if they are to create jobs and drive economic growth.’

The lobby group has also outlined proposals to reform the existing Enterprise Investment Scheme (EIS) to private lenders paying the top rate of income tax.

Its recommendations include giving a 20% income tax relief on loans. It claims this would mean a loan of £100,000 would effectively cost a lender paying the top rate of tax £80,000.

It also proposes reducing to 20% the tax on interest received during the lifetime of a loan, as well providing an additional tax relief if a business fails before the loan is repaid.