New social investment tax breaks could be ‘win-win’ for charities

Charities have cautiously welcomed the coalition’s social investment tax relief, which should help organisations attract more investors

As the election looms closer, the photo opportunities are coming thick and fast. Earlier this month cabinet minister Francis Maude showed up at a Scottish whisky refinery to launch a global campaign to promote the UK social economy.

Maude said Britain was “fast becoming the centre for social enterprise globally”, and trumpeted the coalition’s support for the sector. Among other steps taken, he highlighted the introduction of social investment tax relief (SITR), a 30% tax break for investors in shares or unsecured debt issued by certain types of charities and social enterprises.

The government first announced SITR in last year’s budget. In its original form, organisations could receive investment of up to £290,000 over three years that benefitted from the tax break. There are strict rules around which kind of organisations are eligible: energy schemes that benefit their communities (bencoms), for example, are in but co-operatives, which make money only for their members, are out.

Those restrictions have meant the scheme has been slow in starting. Laurence Field, head of tax at accountancy firm Crowe Clark Whitehill , says: “I don’t think there’s been an enormous take-up of it, partly because the amounts were relatively low that could be raised by charities. As with all tax investment schemes, there is a certain amount of bureaucracy both for the institution and the investors; there is a threshold below which it might not be worth anyone’s trouble to do.”

In last year’s autumn statement, the government said those limits would be increased to £5m per year, with an overall cap of £15m over an organisation’s lifetime . But Field says there is some uncertainty over when that will happen. “The autumn statement isn’t law yet; equally we don’t really know what the next government will look like or what it will do. There’s a bit of a debate whether that £5m limit will come in.”

That said, the introduction of SITR was broadly welcomed. Previous forms of tax relief on social investment have only covered equity, which charities cannot issue. The SITR is unique in that it is also applicable for charities borrowing money on an unsecured basis. Field says that should help charities attract a new type of investor. “It opens up an opportunity to people who might be reluctant to make an outright gift, but could loan money. In that respect it’s excellent. Charities are always looking to increase their fundraising base.”

With a wider pool of potential investors and another means with which to raise money, charities should be able to lower their cost of funding. Whitni Thomas, investor relations manager at Triodos Bank, says: “They should be able to access debt at a lower rate than otherwise. It should be a win-win.”

Last month Triodos announced the issue of the first social impact bonds to benefit from SITR. Social impact bonds work when charities have agreed to be paid by results. So, in the case of the Triodos bonds, the government has agreed to pay four homeless charities if they meet their targets for housing and supporting vulnerable young people into education, employment and training. These bonds mean the charities can raise £910,000 of working capital to deploy the necessary programmes to achieve those results, and pay it back when the government fulfils its side of the bargain.

This new revenue stream will be invaluable for charities struggling in the current climate, says Thomas, although it will add to, rather than replace, their current lines of funding. “It’s never going to displace grants. Some charities are always going to need non-repayable finance.” There are, however, concerns that it will cut into regular charitable donations. Field says: “There is a danger of cannibalising gifts that could be given.” In straitened times, potential donors weighing up whether to give or loan the money may well opt for the latter, he says.

Charities may also be wary of reputational risk, particularly if they campaign on tax avoidance. Field says: “Charities probably need to be quite careful. Taken at one level, somebody could lend them some money; the charity gets an interest-free loan, the person lending gets the return because they get a tax break. Given the debate around tax avoidance there may be some charities that might not feel comfortable by raising money where the return on it is effectively funded by the taxpayer.”

Back in Banffshire, Maude talked of “combining financial hard-headedness with altruism and social concern”. “Allied together these can be an incredibly powerful and effective force,” he said. Those working closely with charities and social enterprises remain a little more cautious. Thomas says: “[SITR] is not going to transform the funding landscape for charities and social enterprises. The next couple years are going to continue to be tough for everybody as more government cuts start to trickle through. This is just one part of the social investment bit, and social investment is only one part of the funding picture.”