Wanted: wealthy, tax-savvy lefties ? ? The Foundation East Blog

N.B. Nothing in the piece is intended as financial advice. Individuals? own tax circumstances will vary.

This week saw the launch of a type of financial investment product new to the social finance sector. Promoted jointly by Social Finance (a not-for-profit organisation that aims to help social enterprises and charities with their financing needs) and the FSE Group (a private sector finance house specialising in the SME sector,) the ?Social Impact VCT? aims to raise up to ?20 million from retail investors for onward investment in social enterprises and socially-motivated businesses. Funds with similar aims do exist in the UK but this is, I think, the first one structured in such a way as to take advantage of the tax incentives available under HMRC?s Venture Capital Trust (VCT) scheme.

The VCT scheme, which has been much used in the private sector since its launch in 1995, aims to encourage enterprise by favouring with certain tax reliefs equity investment in early stage businesses. Broadly speaking, the investor gets three tax benefits: the VCT investment itself is free of income tax on dividends; it is also free of capital gains tax on disposal and finally the investment attracts a tax credit of 30% of the money invested which can be set off against other income tax liabilities in the year it is made. The main restriction for the investor is that the investment must be held for at least five years. For the fund to qualify as a VCT it must of course onward-invest only in certain types of company that meet the relevant HMRC criteria: for example the company must be unlisted, it must have assets less than ?15m, it must be an independent enterprise and certain sectors such as agriculture are excluded.

Since 2007 the Revenue has also maintained a separate but kind of parallel (albeit less generous) programme broadly within the social enterprise sector ? the Community Interest Tax Relief (CITR) scheme. Under this arrangement investments in qualifying Community Development Finance Institutions (CDFIs), which will onward invest in enterprises that operate within or for disadvantaged communities, attract a 5% per annum income tax relief for the investor for five years. Again there are naturally criteria about the destination of the onward investments and indeed a CDFI must be specifically accredited by HMRC under the scheme, a process which will include having demonstrated that its lending activities meet these criteria.

Foundation East is itself a CITR-accredited CDFI but we have been slightly surprised over the years by the relative lack of interest that investors and potential investors have shown in the tax relief that is available to them. This is particularly surprising in the current interest rate environment when you consider the value of the tax relief to a higher rate tax payer. It is equivalent to receiving a gross rate of 8.33% p.a. on your investment! Perhaps we have not marketed the availability of the scheme as well as we might have and certainly it is a scheme that is not well-known generally (even among market professionals such as IFAs) but feedback we receive seems more to suggest that this is not the issue ? rather it seems more the case that individuals and companies interested in investing in Foundation East are driven almost exclusively by non-financial factors, to the extent that they are almost uninterested in such financial incentives.

We are not alone in our sector in experiencing this: although the scheme has been, I think, a qualified success, the cumulative total of money raised under it to date amounts to less than ?100m. I have struggled to find accurate or up-to-date figures for the VCT scheme but I will confidently assert that the per annum amount invested under that scheme would dwarf this total.

It will be interesting to see how this innovative new fund progresses in its money raising efforts ? whether the more generous tax reliefs of the VCT scheme overcome the apparent shortage of investors who are both tax-savvy and socially motivated. Of course, if it raises the ?20m it is aiming for, the Social Impact VCT then faces the very significant challenge of identifying suitable investment-ready social enterprises in which to put the money to work, but that will be a whole ?nother story..

To confirm:

Members buy shares in Foundation East, each share costs ?1. There are two classes of shares: ordinary withdrawable shares and CITR ordinary shares. These shares rank equally and the only difference between them is in the rules relating to withdrawing your investment and the Community Interest Tax Relief (CITR) available for CITR shares.
As an accredited Community Development Finance Institution (CDFI) your investment will qualify for Community Interest Tax Relief (CITR) of up to 25% (5% per year over 5 years) if you invest in the CITR ordinary shares.

For more information on membership of Foundation East call 01284 757771 or visit www.foundationeast.org

David Bell, Director

Source: http://blog.foundationeast.org/?p=569

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