Crowd-funding platforms that raise money for small businesses could get a massive shot in the arm in April under plans by the Treasury to enable them to offer greater tax efficiency.
Representatives of the crowd-funding industry have begun talks over enabling savers to hold investments made through the platforms within tax-free individual savings accounts. If agreement can be reached ahead of the Budget in March, crowd-funding investments could become permissible ISA holdings from the beginning of the 2014-15 tax year.
The concession represents a huge opportunity for the crowd-funding industry, which thinks ISA status would massively increase demand from investors. The benefit would partly come from the increased returns savers would be able to earn from such platforms – income and gains are currently taxable – but also because it would effectively represent an official seal of approval for what remains a relative innovation in financial services.
From the Treasury's perspective, extending ISA status to crowd-funding sites would be another plank in its strategy to boost the availability of funding to small businesses that continue to find it difficult to raise finance from the banking system. It would also send a clear signal to the banks that ministers' frustration is mounting.
That concern will have been amplified by last week's figures from the Bank of England, which revealed a larger-than-expected fall in bank lending to small businesses during December. Ministers have also been stung by criticism from the Public Accounts Committee, which warned that government efforts to boost small business funding have been frustrated by a lack of departmental co-ordination.
Nevertheless, some important barriers remain to giving crowd-funding sites ISA status. Not least, the Financial Conduct Authority is still working on the final detail of how it intends to regulate the sector, amid concerns some savers and investors do not understand how the platforms work.
It is also unclear whether all crowd-funding platforms would be eligible for ISAs. Another issue is the lack of liquidity on some crowd-funding platforms. Savers on loan and equity platforms can find it difficult to cash in their investments if they need access to their money.
Still, these barriers are relatively easy to overcome and the relaxation of the ISA rules to allow savers to hold shares in Alternative Investment market-listed companies in the shelters provides a template to follow.
One final thought. Giving crowd-funding platforms access to millions of ISA investors would further burnish their credentials as genuine competitors to the banks. Expect to see some evidence of "if you can't beat them, join them". Rumours of a collaboration between market leader Funding Circle and Santander persist. Other deals are likely.