The Cabinet Office will consult on how to make community investment tax relief more effective, in response to a new report from NCVO on tax incentives for social investment.
The report says the social investment market would develop if equity or equity-like investments made directly into charities or community interest companies were eligible for community investment tax relief (CITR).
The government uses CITR as a tax incentive for investors into community development finance institutions (CDFIs) – financial organisations which invest in enterprises that operate within or for disadvantaged communities in the UK. The tax relief on the CITR scheme is worth up to 25 per cent of the money invested, spread over five years.
The NCVO Commission on Tax Incentives for Social Investment says making the scheme more attractive would help develop the social investment market, along with considering how to make CITR eligible for investors into enterprises established for community or social benefit, such as charities.
The two recommendations are included in its first report on growing the investment market.
In the report, NCVO also recommends simplification of the Enterprise Investment Scheme, Venture Capital Trust and Seed Enterprise Investment Scheme to ensure they work for social ventures, and urges a longer-term, strategic review of the tax code to ensure its suitability for encouraging growth of investment in social ventures.
Sir Stuart Etherington, chief executive of NCVO, said: "In these challenging economic times, social investment can form part of the solution by supporting civil society organisations to become more innovative, effective and financially secure. Government has a real opportunity to capitalise on this potential as it seeks to build a strong and sustainable economy."
A Cabinet Office spokesperson said: "We welcome this report and its clear recommendations on how fiscal incentives can support the social investment market. Social ventures are already a sizeable chunk of the economy with a turnover the equivalent to 1.5 per cent of GDP and we want see them becoming a larger part of the economy in the future.
"We will be looking into how gaps and inconsistencies in the tax system limits the growth of the social investment market and will be consulting the sector ahead of the budget on how to make Community Investment Tax Relief (CITR) more effective."
The Commission’s recommendations are:
- Improve the attractiveness of the existing community investment tax relief (CITR) regime for investment into community development finance institutions.
- Consider how equity or equity-like investment made directly into enterprises established for community or social benefit (such as community interest companies, charities and community benefit societies) should be eligible for CITR.
- Amend and simplify the Enterprise Investment Scheme (EIS), Venture Capital Trust (VCT) and Seed Enterprise Investment Scheme (SEIS) to ensure they work for social ventures.
- Undertake a longer-term, strategic and more fundamental review of the tax code to ensure its suitability, simplicity and fairness for encouraging growth of investment in social ventures.