Up to £480m of new social investment could be generated from high-net-worth individuals over the next five years by adapting existing tax reliefs to encompass social investors, according to new research.
The Role of Tax Incentives in Encouraging Social Investment, was commissioned by the City of London Corporation and Big Society Capital. It says that adapting the Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT), which provide tax incentives to encourage individuals to provide venture capital to small businesses, could generate up to £165m in social investment over a three-year period and £480m over a five-year period.
Over £800m in investment for small enterprises was raised through EIS and VCT in 2010/11, but both schemes are difficult for charities and social enterprise to use due to both being share relief schemes, whilst the majority of social sector organisations are not limited by shares, but limited by guarantee.
The report estimates that there are about 225,000 households with more than £100,000 that would be interested in social investment if tax incentives were available. Of these, 48,000 households are likely to make an average investment of £10,000 each over the next five years, it says.
Elsewhere, the report calls for reforms to community investment tax relief which generates investment in deprived communities through community development finance institutions. This relief is rarely used because of bureaucratic barriers.
The report also notes that definitional issues will be important if a distinctive social enterprise tax relief is established.
“An investee organisation will need to demonstrate the key characteristics and governance structures of a social enterprise,” the report says.
But while the report notes that the "guiding principle" for any tax relief should be regulated social sector organisations, it adds this approach potentially misses a number of organisations set up as private companies that are socially-motivated. It suggests rigorous reporting obligations for such organisations.
Commenting on the report, which was written by investment consultancy Worthstone and the law firm Wragge & Co, Nick O’Donohoe, CEO of Big Society Capital, said:
“The government has already actively supported the development of the social investment market in the UK. By a simple change, which would give social investments a similar tax treatment to that which venture capital enjoys, the government can stimulate a significant amount of extra investment that will help social enterprises across the UK.”
Bates Wells and Braithwaite has also made a similar recent call for tax reliefs for social investments in its report Ten Reforms to Grow the Social Investment Market.