In the 2013 Budget, the Chancellor announced that the Government would introduce a new tax incentive to encourage private investment in social enterprise in April 2014. Research in 2011 estimated that about £165 million of social investments were made in 2010 in the UK. The Government’s aspiration is to grow the social investment market so that its size is measured in billions. The social enterprise tax relief aims to encourage more investment in social enterprise, it is based on the premise that lack of access to capital holds social enterprises back at various stages in their development.
The Government operates 3 tax advantage venture capital schemes currently. Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). These schemes incentivise investment into smaller, higher risk companies. The Government’s initial discussions with stakeholders suggests that the broad structure of these schemes would be sustainable for the social investment tax relief.
Read the full consultation document
Criteria for the social investment tax relief
The proposal is based on the following criteria:
• Simple and straightforward to administer
• Sustainable and not open to abuse
• Compliant with State Aid rules
Eligible Investee organisations means defining Social Enterprise
The aim is to ensure that tax relief is effectively targeted at organisations that genuinely operate for a social purpose and need additional investment. The Governments strong preference is that this definition should comprise of existing regulated structures, and would be limited to:
• Community Interest Companies
• Community Benefit Societies (bencoms)
The 3 existing tax incentive schemes impose certain requirements relating to size. These ensure that the tax relief benefits companies which are most in need of help to raise funds, and comply with the European Union’s State Aid rules. In line with an intention to mirror EIS, the proposal is to limit this to organisations with less than 250 full time equivalent employees, and potentially to organisations with gross assets of less than £16m.
It is proposed that the initial investment cannot be secured against assets or subject to a guarantee, nor does the Government propose to offer tax relief on investments with preferential rights of access to the original investment in the event of a winding-up.
The proposal restricts the investment instrument to ensure that any dividend or interest payments cannot be repaid at a rate that substantially differs from a commercial return.
The Government proposes a cap of £1m per year on the amount that an individual investor can invest via the tax relief scheme. The same investment cannot qualify under more than 1 tax relief scheme.
The Government suggests that an investment period of a minimum of 5 years is appropriate.
The tax relief
The Government intends to offer income tax relief on qualifying investments. The rate will be set out in the 2014 Budget. The Government will also offer capital gains tax investment relief.
The tax relief can only be claimed when an individual is not connected with the social enterprise. An investor will be connected if they have a 30% or more stake in the company. Someone would also be defined as connected if they, a business partner or close relative are a partner, director or employee. There will be an exception for directors who are new investors in the business.
The Government recognises that allowing investments of more than 200,000 Euros per investee organisation over 3 years would be likely to require State Aid approval from the European Commission. In order to avoid delays in launching the scheme it is proposed that this cap will be applied, whilst the case is made for an exemption.
The proposal does not include tax relief on dividends. The Government is considering offering a tax relief on gains on disposal of qualifying social investments, and introducing a tax relief designed to encourage serial investors in social enterprises.
The Government recognises that social enterprise investment may be attractive to individuals who are willing to provide funding but do not want to make investment decisions personally, instead preferring decisions to be made by a fund manager operating a collective investment fund. The Government will use nominee arrangements to allow indirect investments to qualify for this scheme.
VONNE’s initial view
We welcome the initiative that is aimed at increasing investments in social enterprises. Having met officials from Treasury and HMRC; discussed the proposals with advisors on the 3 existing tax advantage venture capital schemes; and considered a traditional philanthropy perspective, we have reached the following views, but we are interested in views from our members.
It is important to expand the pool of those that invest in social enterprise. Whilst philanthropy is commonplace in Britain there is great scope to expand Social investment. The factors that motivate people to donate their wealth have been explored many times. They include the influences of faith, friends and family; early experience of giving and getting into the giving habit. People are often motivated by the belief in a cause, the wish to support change, the personal satisfaction that it brings or simply because they are asked.
The Governments desire to create a real buzz around social investment is welcomed and there is a real opportunity to make investing in social enterprise a cultural norm. We do not anticipate that this will be at the expense of donations to Charity. This should however be monitored and kept under review as the fundamental issue for the vast majority of Charities in the North East is not lack of access to finance but lack of an income.
Any investment must be based upon a sensible business plan with a credible income stream that will cover the debt. We urge the Government not to lose sight of this, to promote grants and to open up the market for public service delivery to this sector.
We see the sense in aligning the Social investment tax relief with existing social investment tax relief schemes for ease of understanding and application for advisers and investors.
In the North East of England, the gap in social investment is centred on high risk investments, in which the concept is pioneering and therefore not entirely proven but where the results could be truly transformational.
We are pleased that Charities are included in the legal form that can take advantage of this scheme. The critical issues are an asset lock and a proven public benefit. Simplicity in administration suggest that the regulated forms that are proposed are the right ones.
We think that this proposed tax relief has the potential to change the behaviour of would be investors and so we are happy to support it. The anti tax avoidance measures must be strict. This is a fledging attempt at promoting the culture of social investment, adverse publicity around tax avoidance scams would have the opposite effect and be extremely damaging to the sector.
Submissions directly to HM Treasury by 6th September 2013. Socialinvestmenttaxreliefconsultation@hmtreasury.gsi.gov.uk
VONNE will make a formal response to this consultation and we are keen to understand your views and perspective on this. Jo.email@example.com