Social Finance welcomes the report “The Role of Tax Incentives in Encouraging Social Investment” published today by Worthstone with the assistance of Wragge & Co for the benefit of the City of London and Big Society Capital.
One of the main recommendations of the report relates to an expansion of existing tax reliefs (e.g. Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)) to apply to registered social sector organisations such as charities, Industrial and Provident Societies and community interest companies. Such expansion would involve accepting debt and quasi-equity instruments as qualifying investments for EIS/VCT purposes.
Expansion of tax reliefs would be a welcome measure as it would create a level playing field between social and commercial entrepreneurs. At the moment, commercial entrepreneurs with attractive investment propositions can offer individuals investing in their businesses a 30% tax income relief up-front – either by way of a direct EIS investment or by way of a diversified pool of money (VCT). In addition, and depending on the tax incentive, the individual investor will receive other benefits such as tax free dividends and loss relief.
The Worthstone report highlights the importance of making these types of tax reliefs also available to social ventures that have a dual purpose: ventures that create both a financial and social return. After all – what is more natural than, if private individuals invest for the benefit of society and thereby create a social good, they also receive a tax relief as a quid pro quo? Additionally, the tax reliefs afforded to the investors are augmenting the financial return of the underlying investment, and providing an additional “financial” fillip to making the social investment. In 2010-11 tax year, tax reliefs were a highly effective policy lever for the Treasury as these helped mainstream venture capital raise close to £800 million. A similar incentive would be very helpful for social sector organisations going forward.
The EIS and VCT regimes were originally created to enable economic impact by creating another pool of risk capital available to SMEs. By expanding the EIS and VCT regimes to social sector organisations, these tax incentives will create both economic and social impact.
Social Finance, together with the FSE Group, launched Social Impact VCT in November 2012, a new type of VCT aiming to create, on the one, a pool of capital available to social enterprises and socially-motivated companies, and on the other, an investment vehicle available to individual investors. The minimum subscription amount for the Social Impact VCT is only £2,000 – considerably less than the five- or six-figure numbers required for an investment in other social impact funds. Social Impact VCT is part of the democratisation of impact investment: individuals whose financial needs have been taken care of (but who are not plutocrats!) can invest for impact through a portfolio and a tried and tested tax wrapper.
In the Social Impact VCT we can through structuring enable risk capital to be deployed in supporting the activities of a charity which does not have share capital. However, should the recommendations of the Worthstone report be implemented, investments in social ventures would become more straight-forward, requiring less structuring and the universe of potential investments would be greatly expanded. As such, VCT funds could most likely be deployed faster and at a lower cost to the investee ventures.
If society expects more from social ventures and social entrepreneurs in addressing the ills of society, then surely access to capital to scale up and expand should be done on a level playing field with commercial ventures. It should be a priority to enable social enterprises that receive investment from social investors to play a larger part in supplying services under government contracts. A low cost of risk-adjusted capital for social enterprises should enable them to deliver cost effective services to government and that this saving to government will over time more than compensate for the cost of extending tax reliefs to individual social investors.
By Annika Tverin, Director at Social Finance