Governance, legal and compliance Investment

It takes two to tango with the social investment tax relief

With social investment recently hailed by the prime minster as ‘a great force for social change on the planet’ you’d be forgiven for thinking there was rather more of it going on.

Nonetheless, the deals do appear to be slowly catching up with the rhetoric – recent research suggests that social investment was up 22% to £202m in 2011/12, and several early guinea pigs have shown signs of success – reoffending is down at Peterborough Prison and Mencap’s £10m bond recently sold out sooner than anticipated. Following the launch of Big Society Capital, the Social Stock Exchange and Social Impact Bonds, the government’s latest initiative to catalyse social investment – a tax relief for investment by private individuals into social enterprises – has significant potential to increase the appeal of social enterprises to investors and bring investment into the charity sector. But will it live up to its potential?

  • Social enterprises often struggle to obtain repayable finance as a result of a lack of assets and an inability to issue shares. The relief aims to incentivise investment into social enterprises (defined in the consultation document as registered charities, Community Interest Companies and IPS ‘Bencoms’) by compensating investors for the increased risk of their investment.
  • The terms of the proposed relief are based largely on those in the Enterprise Investment Scheme and Venture Capital Trusts, which aim to incentivise private investment into small commercial enterprises. However, the stated policy aim here is ‘to complement other Government initiatives in encouraging private investment in social enterprise and helping it to become self-sustaining in the long term’.
  • Unlike Gift Aid, investee organisations would not receive any of the relief – all of this will go to the investor, offset from their income tax bill. The rate of relief has not been announced, but it is likely to be around 30%, so for a £10,000 investment, the investor could see their tax bill reduced by £3,000.

1. Only organisations with 250 employees or fewer may be eligible for the relief

It takes two to tango with social investment – an investor and an investee – and by excluding the 560 or so largest charities that fall outside this threshold, uptake of the relief is likely to be severely limited, regardless of how many well-meaning wealthy individuals may be queuing up to invest. Many large charities have relatively few assets and struggle to obtain mainstream loans, so could benefit significantly from social investment. What’s more, exploring social investment can be a costly business (to continue the metaphor above, a third wheel is typically required in the form of an advisor/intermediary), and it is large charities which are likely to have the resources to do this - excluding them would be a missed opportunity for the government to maximise the impact of the relief and stimulate the social investment market.

2. Only €200k of investment per organisation every three years may qualify for relief

Even medium sized charities, never mind the high street names, are likely to seek more investment than this, if they’re seeking investment at all, so we’re hoping to have this limit raised. The Scope, Mencap and Framework bonds have all been in the £10m-£20m range. The limit is due to EU State Aid rules, but the Enterprise Investment Scheme has an exemption – we’re lobbying for a similar exemption for this.

3. Could the tax relief hurt donations?

This is a tricky one, and gives rise to a whole range of questions about donor motivations. If a comparable tax relief was available there’s a worrying possibility that a high income donor may choose to switch their donation, on which the charity receives basic Gift Aid and the donor receives higher rate relief, to an investment availing of this relief, with either the same or a different charity. Switching would be particularly appealing if the rate of relief was higher for an investment than for a donation, which seems likely at this stage. Set the rate too low, though, and social investment may become less appealing than, for example, the Enterprise Investment Scheme, at 30%.

4. Clarification needed on rate of return, trading subsidiaries, accounting and more…

The consultation is complex and there are many other important areas we’ll be working with HMT to clarify over the coming months…

  • Will the thresholds apply to the group as a whole, or to a subsidiary?
  • Could a rate of return ‘dependent on financial performance’ of the organisation exclude a simple loan or bond, and what about a social return?
  • How do charities account for social investment (particularly pertinent in light of the current SORP consultation opened this week)?

Plenty of food for thought then, and we’d encourage all interested charities to get involved. Bearing in mind the usual caveat that social investment will work well for some, but is not for everyone, overall a tax relief for social investment is a welcome concept and it offers great potential to bring new funds into the charity sector.

Edited August 2018, consultation is now closed

This post was last reviewed on 16 August 2018 at 14:33
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