1. Foreword

In 2014 the government will introduce a new social investment tax relief – one of the first of its kind in the world. This is the latest in a series of steps that the government has taken to create the right conditions for social enterprise to thrive in the UK – including the launch of Big Society Capital in 2012.

I recognise that there is more to do to make this tax relief work as effectively as possible. This roadmap sets out the government’s plans in this area for the coming months.

I am sure that the action outlined below will further enhance the environment for social enterprise in the UK, and help to accelerate our progress towards a social investment market measured in the billions rather than the millions.

The government is keen to draw on the expertise and experience of the social enterprise sector and I am looking forward to hearing your views as this work progresses.

David Gauke MP.

2. Introduction

Following a formal consultation on the social investment tax relief in summer 2013, draft legislation was published in December 2013 as part of Finance Bill 2014.

The consultation process raised a number of broader and more complex issues and this roadmap sets out a timeframe for addressing these concerns. It describes the government’s plans to:

  • seek approval from the European Commission to introduce a larger scheme
  • expand the options for indirect investment
  • establish a government-run accreditation scheme for Social Impact Bonds eligible for social investment tax relief
  • make changes to community interest companies’ regulations
  • promote the scheme to investors and social enterprises

The roadmap focuses on issues related to the tax relief and is separate from but complementary to the broader Growing the Social Investment Market strategy paper published by the Cabinet Office.

3. Current features of the tax relief

The design of the social investment tax relief is set out in draft legislation published on 10 December 2013. The relief includes the following features:

  • it will be available for private investment in charities, community interest companies and community benefit societies, and in social impact bonds where the special purpose vehicle is a company limited by shares
  • organisations with 500 or fewer employees and a maximum of £15 million gross assets will be eligible
  • a wider range of trading activities – for example, nursing and care homes – will be eligible than under the Enterprise Investment Scheme
  • investment in the form of simple debt will be eligible where the debt is unsecured and has certain other features
  • the minimum investment period is 3 years
  • income tax relief will be available in the form of a deduction from income tax liability
  • the capital gains tax reliefs will mirror those available for the Enterprise Investment Scheme
  • indirect investment can take place via a ‘nominee’ fund but not via a separate legal body
  • investments may not exceed a certain maximum amount per investee organisation

The full terms are published in the draft legislation together with explanatory notes. The consultation response summarises the policy decisions which underpin them.

The rate of income tax relief and the maximum amount of investment per investee organization will be announced at Budget 2014. The social investment tax relief legislation will be published shortly after this in Finance Bill 2014. The tax relief will be effective for investments from 6 April 2014.

4. State aid clearance for a larger scheme

The government decided initially to introduce a “de minimis” social investment tax relief scheme. By de minimis we mean a scheme that conforms with the European Commission’s rules on de minimis state aid – aid that provides a maximum of €200,000 per aid recipient over 3 years. As de minimis aid, the scheme does not need to be cleared by the Commission before it can be implemented.

To fulfill the government’s intention of introducing a larger scheme with a higher investment limit, the scheme must be cleared by the Commission through a process known as notification. We are in the process of making an initial approach to the Commission, and will aim to start the process for seeking approval by April 2014. The European Commission aims to make its determination within 18 months of the start of the formal process.

The government will be inviting the social enterprise sector to contribute to the evidence and analysis that it puts to the Commission in support of a larger scheme.

5. Accreditation scheme for Social Impact Bonds

The government announced in the Autumn Statement that social impact bonds (SIBs) would be eligible for SITR where the special purpose vehicle is a company limited by shares. SIBs wishing to use SITR will need to be accredited through a scheme administered by the Cabinet Office. The accreditation scheme will ensure that social impact bonds receiving investment under the relief fulfil the eligibility criteria in the legislation. The Government will be consulting the social enterprise sector informally about the criteria in early 2014.

The accreditation scheme will be established in Finance Bill 2014 and in secondary legislation laid in Parliament before summer. New social impact bonds that meet the criteria will be able to apply to be accredited in summer 2014 once legislation has been enacted.

6. Indirect investment

The Finance Bill 2014 will allow indirect investment via “nominee” arrangements, where an investment is made and held by a nominee acting on behalf of an investor. This is the approach used in the Enterprise Investment Scheme (EIS) and that Autumn Statement announced would be introduced for investments in Venture Capital Trusts in the future. Consultation responses suggested, however, that it would be helpful if investors could also make indirect investments via a separate legal entity.

The government will now look in detail at the options for providing for indirect investment via a separate legal entity – including the possibility of a scheme along the lines of the Venture Capital Trust scheme. The government intends to publish a consultation paper on the options in summer 2014. This would allow for legislation on a broadly similar timescale to the increase in the size of the scheme.

7. Promotion and helping investors and social enterprises use the scheme

The legislation covering the social investment tax relief is complex, partly due to the need to cover a large number of infrequently occurring events. HMRC will be producing on-line guidance for investors and social enterprises in spring 2014 which will focus on the core requirements, helping social enterprises understand the criteria and the process for registering a scheme and investors understand how to make an investment which will qualify for relief. More detailed guidance will published in autumn 2014. The Cabinet Office intends to provide guidance on the Social Impact Bond accreditation process on a similar timetable.

The Cabinet Office will also run a series of events with HM Treasury to raise awareness of the social investment tax relief to complement those run by the investment and social enterprise sectors.

8. Changes to community interest companies’ regulations

The consultation also included questions relating to the regulation of community interest companies (CICs). The Regulator of Community Interest Companies’s response to the consultation concluded that:

  • the maximum dividend per share cap should be removed, this would end the peg between dividend payments and the paid-up value of shares
  • the maximum aggregate dividend cap should be retained at 35%
  • the maximum interest rate for performance related interest should be increased from 10% to 20%

The Regulator has the power to make the changes to the aggregate cap and performance interest cap. The Secretary of State for Business, Innovation and Skills has the power to remove the dividend per share cap and has agreed to the Regulator’s recommendation to do so.

The Regulator is seeking Parliamentary time for these changes to be debated and approved by June 2014 and for the legislation to be laid thereafter, with a view to the changes becoming effective from 1 October 2014.

The Regulator will invite CICs most affected by the changes – community interest companies limited by shares – to a meeting with more information in February 2014.