Big Society Capital is calling for the government to broaden the scope of its social investment tax relief proposal.

As a response to the consultation document launched by Prime Minister David Cameron on 6 June, BSC has today written an open letter to HM Treasury’s Enterprise and Property Tax Team.

The consultation - which ends on Friday 6 September - includes questions about whether a definition of social enterprise for tax purposes should comprise community interest companies, community benefit societies and registered charities or an alternative, and if a cap of £1m in investments per investor is the right amount.

In Big Society Capital's letter, the co-authors describe the main design features of the relief as “sensible”, highlighting the focus on individual investors and risk capital, and describe the idea on the whole as “an extremely timely initiative with the potential to transform the social investment market”.

But they also lay out four issues that they say need to be dealt with.

Increase eligible sum and broaden permitted schemes

Big Society Capital recommends that the government increase the size of eligible investment into social sector organisations from the proposed €200,000 over three years, saying that this size limit will “severely restrict” the effectiveness of the tax relief.

The letter’s co-authors – Nick O’Donohoe (CEO), Matt Robinson (head of strategy and market development) and Simon Rowell (strategy and market development director) – also call for an extension to the range of permitted indirect investment schemes, such as including venture capital trust (VCT) schemes.

By this they mean that although the proposal aims to encourage new individual investors, it restricts investors to doing so only through "nominee funds" (sometimes called Enterprise Investment Schemes). Including VCT schemes as well would broaden the pool of investors, they claim.

Include simple products and allow for impact bonds

Big Society Capital also wants the government to ensure that simple investment products are eligible, including unsecured loans. The letter’s authors say they disagree with the need for a specific link between the return to the social investor and the financial performance of the social sector organisation.

Such a stipulation, they say, limits the range of social sector organisations that the relief would apply to because it means relief can only be provided for ‘quasi-equity’ investment (such as revenue participation agreements), which is primarily used by larger organisations due to the complexity and cost involved.

Finally, Big Society Capital wishes social impact bonds to be included within the scope of the proposed tax relief, by way of a separate registration scheme conducted by HMRC to assess eligibility.

O'Donohoe: £480m could be invested over five years

In a statement accompanying the letter, O’Donohoe said: “With the right incentives, individual investors could invest up to £480m in social sector organisations over the next five years.

“However, getting the terms of the tax relief right will be essential and there are some critical issues that still need to be addressed if it is to be effective.”