Community Investment Tax Relief — expansion
Published 11 May 2023
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Who is likely to be affected
Corporate and individual investors seeking Community Investment Tax Relief (CITR), Community Development Finance Institutions (CDFIs) and the businesses and enterprises they invest in.
General description of the measure
This measure increases the limits that apply to the amounts of capital that accredited CDFIs can raise from corporate and individual investors, and on which those investors can claim CITR. It also increases the limits on the amounts that these CDFIs can on-lend to businesses and enterprises.
Policy objective
Introduced in 2003, CITR stimulates private investment in disadvantaged communities by providing a tax incentive to individuals and companies that invest in accredited CDFIs which in turn invest in enterprises located in or serving those communities.
The existing limits on the raising and deployment of funds by CDFIs have been constraining growth of the sector, restricting CDFIs from scaling up to meet demand from institutional investors and reducing the ability of CDFIs to effectively service the need of targeted businesses.
These changes will enable CDFIs to meet the increasing demand for larger loans from socially impactful enterprises, reduce the cost of capital for them and unlock investment for a larger pool of businesses and social enterprises.
Background to the measure
The limits on investments raised by a CDFI that can qualify for CITR and on the amounts for on-lending by CDFIs have not changed since the introduction of CITR in 2003.
Following informal consultation with both accredited and unaccredited CDFIs and their representative body in late 2022 covering the effectiveness of the CITR scheme and barriers to CDFI scale-up, these changes to the schemes were announced at Spring Budget 2023.
Detailed proposal
Operative date
For investments made by CDFIs the changes will have effect from 2 June 2023, the date the Statutory Instrument comes into force, and for investments raised by CDFIs the changes will have effect in relation to accreditation periods ending on or after that date.
Current law
The relevant current law is included in Parts 7 of the Income Tax Act 2007 (ITA 07) and Corporation Tax Act 2010 (CTA 10) and the Community Investment Tax Relief (Accreditation) Regulations 2003 (SI2003/96) as amended.
SI2003/96 requires that, as a condition of accreditation, a CDFI must deploy specified proportions of its investment fund in ‘relevant investments’ in qualifying enterprises and defines relevant investments in respect of loans to both profit-distributing and non-profit-distributing enterprises. To qualify as relevant investments, loans to profit-distributing enterprise must not exceed £100,000 and are required to be at or over a defined market rate. Loans to non-profit-distributing investments must not exceed £250,000.
Chapters 3 of Part 7 ITA 07 and Chapter 2 of Part 7 CTA 10 define the conditions for ‘qualifying investments’ on which CITR may be claimed by investors. These include the requirement that an investor must have received a valid tax relief certificate from the CDFI in which the investment has been made. Limits are set on the total amount of ‘tax relief certificates’ a CDFI can issue in any three year ‘accreditation period’. The existing limit for retail CDFIs (those investing directly into qualifying enterprises) is £10 million and for wholesale CDFIs (providing finance to other CDFIs) the limit is £20 million.
Proposed revisions
This measure increases the limits on the amounts that accredited CDFIs can raise, during each three-year period of accreditation, to £25m for retail CDFIs and to £100m for wholesale CDFIs.
The limits that apply to relevant investments made by CDFIs will be increased to £250,000 for investments in profit-distributing enterprise and £375,000 for non-profit distributing enterprises.
Additionally, the Statutory Instrument will also amend the existing regulations to update a cross reference to the location of published market rates for the purpose of determining whether loans to profit-distributing enterprise are relevant investments.
Summary of impacts
Exchequer impact (£ million)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
| 0 | negligible | -5 | -5 | -10 | -15 |
These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2023.
Economic impact
This measure is not expected to have any significant macroeconomic impact.
A behavioural adjustment has been made to the costing to account for additional investment into CDFIs in response to the new limits.
Impact on individuals, households and families
This measure is expected to impact around 585 individuals who invest in CDFIs. The changes will increase the amounts that CDFIs can raise from them, creating further opportunity for investment and increasing the amounts on which tax reliefs can be claimed. Customer experience is expected to remain the same as this measure does not change how individuals interact with HMRC or claim CITR.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not expected that there will be adverse effects on any group sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on approximately 30 businesses that invest in accredited CDFIs.
The measure will positively impact businesses and their advisers using or associated with CITR by expanding the investment and deployment limits of CDFIs so increasing both the amounts available for lending overall and the amounts that businesses can receive, thereby widening the overall usage of the scheme.
Transitional one-off cost include familiarisation with the change. There are not expected to be any continuing costs. Customer experience is expected to remain broadly the same as this measure does not change how businesses interact with HMRC or the Department for Business and Trade. There are not expected to be any impacts on civil society organisations.
Operational impact (£ million) (HMRC or other)
Operational impacts for this change are anticipated to be negligible.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The impact of this measure will be monitored by review of Corporation Tax and Income Tax self-assessment returns and the annual returns that CDFIs are required to make to the Department for Business and Trade.
Further advice
If you have any questions about this change, please contact Alex Buckley: venturecapitalschemes.policy@hmrc.gov.uk
Declaration
Victoria Atkins MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.