With the usual caveat firmly in place, that social investment is never likely to be appropriate for all (probably most) of the organisations in our sector, the concept of a tax relief for investment into social enterprises sounds great – five easy steps to a win-win-win situation:
Step 1: As a keen supporter of charities I hear about social investment, and decide to discuss it with my financial advisor.
Step 2: They tell me they don’t know much about social investment, but the limited options available seem quite risky. However, they also say the Government will offer me a substantial tax relief (possibly 30% of my investment) in return for me taking this risk (my investment may well be unsecured and possibly at a low interest rate) to support a positive social change - this persuades me to go ahead and make a loan.
Step 3: The loan successfully enables the charity to scale up its income-generating operations (e.g. purchase new accommodation for letting), try something new (e.g. open new charity shops) or develop infrastructure to bid for bigger government contracts (e.g. spread geographically).
Step 4: The charity uses some of its new income to pay back the loan to me over the next few years (with an interest payment on top), and keeps me updated on the social good my investment is enabling (my ‘social return’).
Step 5: Once my money is returned in full, it is freed up for investment into another charity, and I can start the whole process again…
…but it currently seems unlikely to live up to the hype…
However, the criteria set out for an investment to qualify for the relief are highly restrictive, and seem likely to severely undermine what could otherwise be a potentially valuable initiative.
- The simple loan which looked so (relatively) easy for me, my advisor and the charity to understand turns out to not qualify for the relief (as the return wouldn’t be dependent on the ‘financial performance’ of the charity), and my investment might instead have to take the form of ‘quasi-equity’ (where repayment depends on changes in the charity’s income) – much more complicated for all involved, and maybe not worth the effort.
- The charity I might want to invest into (perhaps a well-known charity I support has just issued a bond) turns out to have more than 250 employees - so wouldn’t qualify for the relief.
- The charity’s been growing fast recently – but in doing so has used up its €200k State Aid limit for this three year period (maybe it received a grant from the Investment and Contract Readiness Fund to help it prepare for this investment) – again, the Government won’t give me a relief for my investment.
- I’m keen to support a charity that provides residential care, but this is among a list of excluded activities, so the charity isn’t eligible for the relief here either.
- I only want to make a loan lasting three years – under current proposals only investments lasting five years are more will qualify for the relief, but both the charity and I would prefer investment over a shorter time than this.
…so what is CFG doing about it?
We’ve submitted a response to Government explaining why we think the relief has exciting potential for some charities, but also highlighting our concerns with the proposed criteria - and we’ve written a letter to George Osborne putting across our views too. We’ve been encouraged to see that many of our key concerns are being repeated by a wide range of other organsiations – from other charity umbrella bodies such as NCVO and IoF, to social investment experts such as Big Society Capital and Social Finance. With a fairly united response on some of the key issues we’re hopeful of achieving some valuable changes – but as ever, we’re playing the waiting game…
Edited August 2018
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