Treasury has confirmed that community interest tax relief (CITR) will be included in its proposed cap on tax relief.
NCVO has warned this could cause "untold damage" to the social investment market, while Big Society Capital chief executive Nick O'Donohoe says it is not hugely relevant as CITR is not an effective tool to stimulate social investment in its current form anyway.
The CITR scheme encourages investment in disadvantaged communities by giving tax relief of 25 per cent over five years to investors who invest in community development finance institutions, which provide loans to businesses and social enterprises.
This week Treasury confirmed that CITR will be included its proposed cap on tax relief.
Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations, said: "The cap on tax relief is already damaging philanthropy. The confirmation from the Treasury that measures relating to social investment will also be included in the cap could do untold damage to the emerging social investment market. This runs contrary to the establishment of Big Society Capital and all of the government's aspirations to promote social enterprise."
However, Nick O'Donohoe, chief executive of Big Society Capital, told civilsociety.co.uk that he was not especially worried about it.
"It is used very narrowly," he said. "I don't think it is hugely relevant. CITR has a lot of different issues that need to be addressed for it to be effective and stimulate social investment.
"The debate around the charitable cap on donations is a much bigger issue and hugely relevant. But including CITR as a part of that is not a huge difference."
Before last month's Budget the sector had called for CITR to be reformed to allow indirect investments via community development finance institutions to charities and social enterprise, to be eligible for CITR. However, the only mention of social investment in the Budget was an internal review within Treasury on the barriers to social enterprise.
Nigel Kershaw, chief executive of Big Issue Invest, said the announcement from the Treasury this week sends out a "confusing message" from government: "CITR is the only tax relief in the social investment sector. We need to expand it or have a review," he said.
A spokesman from the Community Development Finance Association said it could not give a definitive response as the Treasury had said that the exact terms and conditions of how the cap will apply will not be sorted out until summer.
"But in principle we are not happy," he said. "We are perplexed and surprised that CITR has been captured within this charitable giving tax relief cap. CITR is categorically different to philanthropic giving to charity. It's an investment which investors get back after five years, not a donation, and therefore should not be subject to the same rules."
The proposed cap will limit the amount of tax relief individuals can claim to a quarter of their income or £50,000, whichever is higher.