Think tank says smaller UK firms need support to break the ‘doom loop’

Britain's smaller listed companies can be freed from a "doom loop" driven by plummeting valuations and higher costs and regulation, a think tank said on Thursday, with help from broader tax exemptions and incentives.

According to New Financial, smaller firms account for only 8 per cent of Britain's stock exchange value. However, they account for over 80 per cent of listed UK companies, provide key jobs and investment, and can become tomorrow's stock market darlings with support from the government, regulators, and industry.

The think tank proposed two weeks before Finance Minister Rachel Reeves delivers her first budget on Oct. 30 to extend exemptions from stamp duty, a tax on share trading, to include the smallest 250 listed companies and differential rates on capital gains or dividends on British firms.

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"Making recommendations on tax and incentives a few weeks before a budget ... is perhaps a foolish exercise.

"But there is an opportunity for a new government focused on growth to adjust incentives for investment in smaller companies," it said in an analysis of the decline in smaller listed companies.

Reeves, whose party swept to power in July on a promise to boost Britain's economic growth, has ruled out raising the rates of income tax, national insurance, and value-added tax. But she said she must fill a 22 billion pound ($29 billion) gap in the public finances.

Institutional and retail investors' demand collapse has fallen mostly on the smaller listed companies. The number of smaller company market debuts plunged by 80 per cent to just 22 over the past decade, while the value raised by new issues has dropped by 90 per cent, New Financial said.

Meanwhile, UK smaller company funds have experienced their 36th straight month of outflows, while the number of local authority pension schemes with a reserved allocation to the sector has dwindled from 18 to just one over the past decade.

But Australia, Canada, and Sweden, where smaller companies have been thriving, are offering hope. "A concerted effort by government, regulators, and the industry can set smaller companies back on track," the think tank said.

This article includes reporting from Reuters.