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Adviser Q&A: The consultation on social investment tax relief

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The government is now consulting on a potential new tax relief for investment in social enterprise, as was first announced at Budget 2013. The consultation covers the investees and types of investment eligible for the relief, and the tax reliefs themselves.

What is being proposed?

The consultation proposes a tax relief on investments into social enterprises, i.e. organisations which trade, but which have objectives that are primarily socially motivated.

The proposed relief is modelled, conceptually at least, on the existing enterprise investment scheme (EIS). It will offer investors income tax relief on the amount initially invested, the ability to defer CGT liabilities, and the prospect of tax-free gains in the longer term.

However, unlike EIS, relief may be available on investments not only in shares, but also in so-called quasi-equity, i.e. debt instruments which have a sufficiently high degree of risk, such as being unsecured and carrying no preferential rights to repayment.

Who will benefit, and what will be the wider impact?

Community interest companies, the trading arms of charities, and community benefit societies (a form of industrial and provident society) are all forms of organisation which are already subject to the jurisdiction of some form of regulator. But ultimately, it is society that will benefit, as many of the organisations that are likely to qualify for the relief are operating in areas where state funding and involvement is shrinking, but which have a big impact on the wider community, such as homelessness and crime reduction.

The new tax relief should mean an increase in the funding of this sector in an era when public funding is being cut, or removed altogether. Second, it increases the public’s awareness of the whole sector and the fact that potential investment opportunities exist. Third, it adds to the momentum already generated by other organisations, such as Big Society Capital and Social Finance, which have worked tirelessly to promote investments into this sector in a variety of forms.

It has been predicted that demand for socially motivated investment products could hit £1bn within three or four years. We are seeing increasing engagement in this sector by the investment community, and the new tax relief would be an important step towards reaching that target. Organisations such as Big Society Capital and Social Finance have worked hard to bang the drum for private investment in this space, and more and more imaginative funding ideas are coming out of that space, such as prison bonds.

In the longer term, it would be good to think that socially motivated investment had credibility with investors and formed part of many individuals’ investment portfolios. And if this new tax relief succeeds it will have played an important role in achieving that.

What are the points to watch?

  • The government will be keen to understand the extent to which this may hit charitable giving, although it is believed the new relief will be regarded as something quite separate from charitable giving, i.e. investors will be expecting a return.
  • HMRC will also be working to ensure that any relief does not create opportunities for abuse through tax avoidance schemes.
  • The relief needs to be publicised, both to social enterprises and to the investment community, to ensure a good and early take-up, which would also add to the momentum of increasing investment in this sector.
  • Work needs to be done with financial advisers to make sure they understand what some might regard as a new investment sector and are comfortable to recommend it to their more philanthropic clients.
  • The relief needs to be simple enough to implement – which also means some form of clearance process being offered by HMRC similar to EIS and seed EIS – to provide clarity and certainty to both social enterprises and investors alike.

What is the timeframe?

Comments on the consultation must be received by 6 September 2013. It is likely that final detail, together with draft legislation, will be published towards the end of the year as part of the chancellor’s pre-Budget review, with a view to that legislation forming part of the Finance Bill 2014. It is likely that the tax relief would then be available for investments made on or after the date the Finance Bill receives Royal Assent, which is likely to be in July 2014, although it may take effect from the start of the 2014/15 tax year on 6 April 2014.

One possible cause of delay may be Brussels. If the European Commission takes the view that this is anything more than de minimis state aid, the government may need the Commission’s approval before implementing the new relief, which could delay its introduction for up to a year.

Final thoughts?

The availability of the tax relief will, hopefully, open up new fundraising opportunities for social enterprises. In turn, it is inevitable that social enterprises will rely on their advisers for help in guiding them through the conditions required in order to ensure the relief is available for investors. Given that many investors are unlikely to invest unless and until they know the relief will be available, the role of the advisers in ensuring that a fundraising will qualify for the relief and, possibly, obtaining some form of advance assurance from HMRC will be key.

There is also an opportunity for the creation of funds, in which (rather like an EIS fund) investors can access the tax relief and spread their risk across a portfolio of investments. This would also help investors find investment opportunities, and create a potentially simpler route to funding for social enterprises.

Interview by Robert Matthews for LexisNexis UK legal news awareness