Big Society Capital s Response to the Consultation on Social Investment Tax Relief: Enlarging the Scheme

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1 Social Investment Tax Relief Consultation Enterprise and Property Tax Team HM Treasury 1 Horse Guards Road London SW1A 2HQ By and post 18 th September 2014 Dear Sir/Madam Big Society Capital s Response to the Consultation on Social Investment Tax Relief: Enlarging the Scheme Big Society Capital welcomes the Government s commitment to the social investment tax relief and to enlarge the scheme. We believe that the launch of the social investment tax relief has been an important milestone in the development of the social investment market and BSC is committed to helping ensure the relief is used. The consultation document released on 10 July asks questions on how the relief can be expanded to reach a broader range of individual investors and social sector investees. The relief however will only be effective if two priority issues are addressed: 1. The investment size limit should be raised to 5m consistent with other venture capital schemes; and 2. Both a pure social investment VCT, with certain relief adjustments, and a hybrid VCT should be provided to promote maximum take-up. Please find enclosed the detailed response of Big Society Capital to the consultation, highlighting the above priority issues as well as responses to many other specific consultation questions. If we can expand on these points, or provide more information, please do not hesitate to contact us. Yours sincerely Simon Rowell Strategy & Market Development Director Big Society Capital Big Society Capital Ltd registered in England and Wales. Registered No Authorised and regulated by the Financial Conduct Authority No

2 BSC RESPONSE TO CONSULTATION ON SOCIAL INVESTMENT TAX RELIEF ENLARGING THE SCHEME Introduction This paper is the submission and response of Big Society Capital ( BSC ) to the HM Treasury Consultation on Social Investment Tax Relief: Enlarging the Scheme. This paper considers the key issue of the appropriate indirect investment structures in Part A, and then responds to specific questions in Part B. BSC has formed its views presented in the consultation response from engagement across a broad array of parties relevant to the consultation. In particular, BSC has had discussions with a number of social investment finance intermediaries ( SIFIs ), venture capital managers, legal and accounting advisers, as well as independent financial advisers and banks. This engagement has involved roundtables and individual meetings. The views in this paper represent BSC s own reflection and synthesis of these perspectives, in order to develop a policy that can be implemented and that can most effectively deliver enlargement of the social investment tax relief to further grow the social investment market. PART A - Indirect investment structures for social investment tax relief BSC support for new indirect investment structures Indirect investment structures (beyond just nominee schemes) are important to the scaling of the relief. Most importantly, structures such as VCTs can appeal to a broader range of potential investors increasing the capital available to social investment ( 4bn has already been raised through VCTs). Investors in VCT-like indirect investment structures may be attracted by the: - Opportunity for diversification of their investments in one vehicle; - Lower minimum investment size (approx. 3,000 for indirect VCT as against 25,000 for direct EIS investments); - Additional consumer protection offered through the listing process; and - The recommendations of key advisers, such as independent financial advisers, who also understand the structures and regime. In addition, such structures may also help create a more diverse social investment finance intermediary landscape, essential for a sustainable and competitive social investment market. They may encourage the private financial management industry to engage in social investment, bringing their fundraising skills and investment expertise. They also may provide the opportunity, in the right conditions, for BSC and other large investors to make cornerstone investments, which can help bring new funds profile and scale. 2

3 BSC therefore strongly supports this consultation and remains committed to promoting indirect investment structures in the relief to drive the development of the social investment market. Options for indirect investment structures: pure vs hybrid social investment VCT BSC agrees that any indirect investment structure should be based on the VCT model. This model has shown success in raising significant funds already, and is understood and recognised by investors and the advisory community. BSC also agrees with HMT that a new scheme should be created based on the existing VCT scheme if HMT consider it is easiest for legislative reasons. Two options for social investment VCT structures are suggested in the consultation: (i) (ii) Pure social investment VCT, which can only invest in social enterprises 1 ; and a Hybrid VCT, which can invest in both social enterprises and regular companies that are eligible for EIS or VCT reliefs. BSC suggests that both options are complementary in how they will attract investors and the broader investment community, and will be effective. Therefore both options (with suggested amendments) should apply to social investment tax relief. Both options are now discussed below with recommendations for implementation. Pure social investment VCT A pure social investment VCT would be a standalone VCT-like product that would invest only in social enterprises. It could closely follow the existing rules of VCTs with adaptations to take account of the unique properties of social investment and social enterprises. 2 The existing dividend income relief provisions may become particularly interesting and relevant for investors given that a significant proportion of the social investment VCT investment may be in unsecured lending. Adaptations of the existing scheme must include relaxation of the requirement for minimum 10% equity holding in investee companies and interpretation of requirement for 70% of investments to be in qualifying holdings to include all unsecured lending under SITR. Such a pure social investment VCT would be able to be clearly identified by investors and advisers. Consequently, this distinct identity would help with marketing to individual investors, and attracting investors genuinely interested in social investment. In discussions, both independent financial advisors and bank distribution platforms suggested that this would increase their ability to sell this as a product. Some managers suggested it would be straight-forward to run a pure social investment VCT alongside regular VCT products. The addition of new social investment VCT funds would also strengthen the social investment market landscape. It could increase the number and diversity of funds available to provide investment in the market, and create greater diversity of provision. These funds would also operate 1 As defined in the Social Investment Tax Relief to be registered charities, community interest companies and community benefit societies. From here on, social enterprises are referred to have this meaning. 2 See The Role of Tax Incentives in Encouraging Social Investment, Worthstone 2013 at Appendix, for a detailed list of the suggested key terms of such as pure social investment VCT 3

4 as permanent evergreen institutions that would be easily identifiable for investees and investors looking to enter the market. However, there are a number of barriers to setting up new VCTs that may make it challenging in practice for many new social investment VCTs to be established in any reasonable timeframe: Minimum fund size: A new VCT vehicle would need to raise 7m to 8m to be economical 3 because of the high up-front and ongoing listing costs required from the London Stock Exchange listing. This would mean the VCT manager would need to be able to secure this amount of investment up-front from investors as well as identify this amount of opportunities for investment of a new product up-front; Lack of manager experience: Currently there are few regular VCT managers with any social investment experience and few social investment finance intermediaries with any experience of raising funds from individual investors. Therefore, no new actors are easily able to develop this fund model and will either gradually engage with social investment or develop joint ventures, both of which could take substantial time; and Market perceptions: Anecdotal evidence suggests that there are very few new VCT funds being established and successfully fundraising and instead existing VCT funds are being topped up. It is unclear as to the precise reason for this; however it suggests that managers and investors are comfortable with existing funds and reluctant to embrace any new structures. 4 It would be valuable for the social investment market to encourage new social investment VCT funds to the market, however to do this needs both a reduction in cost and an increase in incentives for the individual investors to make the schemes more economical and attractive. The suggested adaptations to the structure and reliefs therefore are: Reduce costs by allowing listing on the Alternative Investment Market ( AIM ) in addition than London Stock Exchange; Improve individual investor incentives to invest in a pure social investment VCT by introducing new incentives: o Introduce Capital Gains Tax ( CGT ) deferral for capital gains (similar to EIS and SITR), as anecdotal evidence suggests this will be a powerful motivator; and o Make Business Property Relief ( BPR ) available on pure social investment VCTs by: (i) permitting listing on AIM (as above), and (ii) deeming pure social investment VCTs to be carrying on a business for BPR purposes; and Increase the amount an individual can invest in pure social investment VCT to be 1million (as it is for EIS or the current SITR) rather than 200,000 (as it currently stands for VCT). The additional individual investor incentives could be temporary if necessary to encourage new investors and managers to set up such unique funds. 3 As discussed with venture capital managers 4 There has been some discussion about whether the lack of new funds has been because of the regulatory changes that have restricted payment of dividends in the first three years of VCT funds life. See the reference in 4

5 Hybrid social investment VCT (or hybrid VCT ) A hybrid VCT could invest in both social enterprises and regular companies that are eligible for VCT in a flexible proportion. This model would need to closely follow the rules of the existing VCT schemes with the same relaxation of overall portfolio requirements as in the pure social investment VCT to ensure that social investments are permitted. The relief available however should also replicate the relief available to regular VCT investments in order to ensure that such investments can t gain a greater relief than they would normally be entitled to under regular VCT (to prevent gaming the system). The hybrid VCT model is attractive because it works within the existing established framework and provides greater comfort to investment managers to make social investments. They would not need to raise separate pools of funds but could dip their toe in the water through making a few social investments in a fund that otherwise makes regular venture capital investments. This would increase confidence of fund managers and limit their perception of reputational risk of fund failure. This structure also promotes flexibility, which is valuable for a type of investment that is still relatively new. Flexibility may be possible around the proportion of social versus regular investment, as well as the themes of each fund (some funds may intend to combine green and social investments; others might want to target healthcare organisations across the private and social sectors). BSC already invests in funds that conduct investments into a mix of social enterprise and private companies that seek to address particular social issues. 5 However, the hybrid VCT may not build as strong a brand as the pure social investment VCT any may be less easy for investors to identify. It may also not result in a number of new pure social investment and finance intermediaries focussed only on the social sector to bring diversity to the market, however it may also encourage new types of intermediaries. Therefore, BSC suggests that a hybrid VCT is also a valuable vehicle for social investment tax relief and particularly for engaging new managers to try social investment. It is envisaged that after successful early social investments, many may feel able to develop a pure social investment VCT and the additional package of reliefs suggested above will incentivise them to do this. Conclusion of analysis of indirect investment structures Social investment tax relief has only just formally passed into law in July Whilst there are promising conversations ongoing about investees and investors using SITR, we expect the early years to experience a gradual take-up of direct SITR investments. Establishing operational indirect investment vehicles that use SITR will take even more time as there are current barriers to the development of pure social investment VCT funds, and traditionally fund vehicles develop slower than direct investment in any event. 6 Therefore, to encourage greatest take-up of the relief, we suggest that both models are made available to investors and fund managers to choose from: pure social investment VCTs offer the greatest chance of creating sustainable funds but need additional incentives to get kick-started, and hybrid VCTs offer greatest chance of engaging new managers (and investors) to try social investment. 5 Note that funds that BSC invest in may invest in companies outside the regulated social sector provided that such investees abide by the terms of the BSC Governance Agreement. 6 Fundraising for VCTs started increasing 2 years after EIS 5

6 It is hoped that both models could be developed together in new VCT-like legislation, as the vast majority of provisions are similar. In the event that additional package of adjustments to the new pure social investment VCT is not possible, the hybrid VCT model appears to be the best starting point for legislation for its ability to provide for a flexible range of fund options (including a version of the social investment VCT that has all social investment, in effect the pure social investment VCT) within the one fund model. Recommendation on indirect investment structures 1. Create new pure social investment VCTs with package of key adjustments to reduce the cost and increase investor incentives. These are: a. Social investment VCTs able to list on AIM; b. Deferral ofcapital gains tax on CGT disposal; and c. Social investment VCTs deemed to be carrying on a business for BPR purposes; AND 7 2. Permit hybrid VCTs modelled on the existing VCT scheme 7 Note that pure social impact VCTs do need greater incentives and lower costs in order to ensure that there is relative merits to establish operations. If these additional incentives and adjustments are not possible, the hybrid VCT vehicle is the preferred policy option. 6

7 PART B - Specific Responses Below are BSC s responses to the specific questions asked in the consultation. Note that in some cases, we have relied on the expert analysis of the City of London and Social Finance responses. We also believe that there is significant consistency with the responses of the Social Investment Forum, for which we are a member, and the British Private Equity and Venture Capital Associaton (BVCA). Responses have deliberately been kept brief, where possible. Question 1: Do you agree with the proposed criteria for assessing options for the social enterprise tax relief? Please provide comments as appropriate. Yes. Question 2: What would be a suitable investment limit per investee organisation for an expanded SITR? Please give reasons and evidence if possible. 5m. SITR should be consistent with existing venture capital schemes (EIS and VCT) as much as possible because this will address the market failure of investment in social enterprises and also ensure greater investor and intermediary understanding of the relief. The gap in high risk finance for social enterprises is substantial, notwithstanding the efforts of BSC and SIFIs to make more finance available: Interviews conducted for internal research suggest that there is a market failure for lending to social enterprises for amounts up to 5m of investment, and a total absence of mainstream finance for investments below 2m. 8 Even then, they largely provide secured lending, not high risk financing. Many social enterprises that will require finance with be mutual, recently spin-off from Government. 56% of mutuals who are looking for funding are seeking investment at the sustainability and growth stage are at levels greater than 1m. 9 Social enterprises are themselves also SMEs and therefore face the same financing barriers identified and addressed through larger caps. The social sector is typically under-capitalised and organisations hold free reserves to the value of less than six months expenditure, on average. 10 We would also refer to the substantial portfolio of evidence about the current market failure and social investment market needs that City of London has collected and referred to in their consultation response. We also understand that there are moves led by the European Commission to amend the existing limits in the EIS and VCT schemes, in particular to remove the annual allocation restriction and impose an investment cap. If this occurs, BSC would accept this change provided that the total investment cap is set appropriately high to cover the multiple rounds of funding that the 8 From interviews with mainstream banks, as provided in Internal Report for BSC on State of Secured Lending Market, Management Consultant, Soft finance, hard choices, BCG,

8 organisations would need to finance the various growth stages of their business. BSC agrees with City of London that this amount would need to be at least 15m. Whilst no term limits would be preferred, a period of 5 years would be the minimum period this should apply for to account for the period of time needed to finance the growth stage of the business. Ultimately however, this would however need to remain consistent with the rules of other venture capital schemes. Question 3: Would any of these features interfere with the operation of the relief with a higher investment limit than the current 275,000 over three years? No. Question 4: Do you think community farms and similar enterprises that have less than the threshold amount of land for CAP payments should be eligible for SITR? Please give reasons. Do they have the same difficulties in raising finance as other social enterprises? Please provide evidence to support your answer. Yes. If such community farms face difficulties accessing finance, they should also be eligible for SITR. Question 5: What impact, if any, would the absence of SITR for investment in companies receiving energy subsidies together with removal of tax relief under EIS and VCT, have on community energy schemes? Negative impact. The market for financing community energy schemes has not yet fully matured. If tax relief for companies receiving energy subsidies under EIS and VCT are removed, social enterprises receiving energy subsidies (such as Community Benefit Societies) should continue to be included to take account of their social purpose. The recent social impact investment taskforce, chaired by Sir Ronald Cohen, reported that the social benefits from social impact investment are often overlapping and complementary with the environmental benefits, and therefore a broad approach to encompass both benefits is necessary in the definition. 11 Continuing to ensure community energy organisations can benefit from SITR would be consistent with this broad approach. Reviews of the status of market failure in community energy may be needed to update this assessment. See the response of Social Finance for evidence on the state of finance for community energy organisations. Question 6: What are the benefits and risks of including a wider range of SIBs in SITR? Strong benefits. Social impact bonds ( SIBs ) are still a relatively new development and at an early stage of innovation. Although we have already seen at least 16 SIBs already launched in the UK, innovation in SIB structuring is ongoing and increasing, making it desirable to include a wide range of SIB options at the outset of SITR. Government has committed to driving greater innovation the development of SIB structures, through its initiatives such as the Centre for SIBs, through encouraging SIB elements in the outcome payments within the Transforming Rehabilitation program, as well as the two new innovation funds announced, the Youth Engagement Fund and the Fair Chance Fund. 12 Government s current approach to encouraging SIB innovation is right and will ensure that a diversity of mechanisms develop to address varied social needs and adapt to distinct Government processes. Providing broad authority to the Cabinet Office to develop an accreditation scheme is right and provides the flexibility necessary to encourage innovation of SIBs. 11 Report of the social impact investment taskforce established under the UK presidency of the G8, September See 8

9 Question 7: a) How does the funding cycle differ for spot purchased SIBs and how does this affect the ability of SIB investors to gain SITR? b) How should the accreditation scheme treat multiple contracts with multiple commissioners? c) Can the accreditation process be streamlined so only one contract needs to be fully accredited and the other contracts with new commissioners go through a shortened accreditation process? Expand to include spot purchased SIBs. Whilst we understand that there is only one spot-purchased SIB currently in operation, the Adoption SIB launched by Baker Tilly, we believe this spot purchased model could apply to other social outcomes and we are already aware of potential SIBs in the investment pipeline that may use this model. Question 8: a) How would the legislation need to be changed to allow for these sub-contracted structures? b) What is the risk that this could be misused and what protections would be needed? c) To what extent could the tax relief and accreditation process encourage fair sharing of risk throughout the supply chain? Expand to include sub-contracted structures. The accreditation process could be used effectively to ensure certain standards of supply chains are met through providing reference to a best practice supply chain principles of credible third parties or by asking prime contractors to sign some form of undertaking that the risk-return sharing inherent in the prime contract is not substantially different to the sub-contract. Question 9: Would any of these areas around the structure and approval of VCTs, or any others not mentioned, cause problems in a social investment VCT? If so, which? No. Question 10: Do you agree that these conditions would be appropriate for a social investment VCT? If not, please give reasons. Are there any other rules on the operation of the VCT which would not be appropriate for investment in social enterprises via a social investment VCT? Not all. As in Part A, for the pure social investment VCT, it would be important to amend the listing requirement to also permit listing on AIM in order to reduce costs. For both the pure and hybrid social investment VCT models, the definition qualifying holdings would need to be amended to account for the difference in products eligible for SITR so that each of the equity and debt products currently eligible under SITR is deemed to be qualifying holdings. Question 11: Do you agree that these conditions would be appropriate for a social investment VCT? If not, please give reasons. Yes. Question 12: Do you agree that a social investment VCT should allow investment in equity and in unsecured debt that meets the criteria for SITR? Yes. Question 13: Should the requirement for a 10% minimum equity holding in each investee company be omitted from a Social Investment VCT? Please give reasons. 9

10 Yes. Charities take the legal form of companies limited by guarantee, and do not have any equity structures, therefore it would be impossible for them to use this relief. As charities comprise approximately 160,000 out of the 175,000 organisations within scope of this relief, 13 omission of this requirement is vital. Question 14: What would be the impact on existing VCTs if this type of change were made? Boost existing VCTs activities by offering new type of product. Given that SITR investments are specific to certain social legal forms (charity, BenCom and CIC), SITR may be viewed as a new opportunity for VCT managers to develop new products to complement their existing portfolio. For the proportion of the hybrid VCT that is invested in regular SMEs, the 10% requirement could continue to apply if that was deemed necessary and able to be implemented. Question 15: Do you agree that a social investment VCT should be required to invest in charities, community benefit societies or community interest companies with up to 15 million gross assets and fewer than 500 employees? Yes. The same limits established in SITR should apply to the social investment VCTs. Question 16: Do you agree that these conditions could be applied to investment in social enterprises via a social investment VCT? If not, please give reasons. Yes to the first three and last points, with qualifications on the fourth point relating to subsidiary control. Requiring all subsidiaries of a qualifying investee to be qualifying investees themselves would present challenges for the growing social enterprises that SITR is trying to target. For example, HCT Group is a large charity parent that has a number of different subsidiaries, which comprise companies limited by guarantee, companies limited by shares, CIC, charity and joint ventures. 14 We understand HMT s concern about not seeing SITR-incentivised investment flow into subsidiaries that are not qualifying investees themselves (although we still don t completely agree on this point), but that should not prohibit the organisations being members of a broader group. Question 17: Do you think a social investment VCT should use the shorter list of excluded trading activities used in SITR, or the longer list used in VCT? Yes. The same list of excluded trading activities used in SITR should be used in social investment VCTs. Question 18: Which approach to employee numbers do you think is preferable for a social investment VCT fewer than 250 or fewer than 500 employees? Fewer than 500 employees. The same requirements of employees used in SITR should be applied. Question 19: Do you think the tax relief should be introduced by setting up a new tax relief scheme or by amending the existing VCT scheme? Please give reasons. 13 See the statistics about the number of regulated social sector organisations statistics provided in The Social Business Frontier, Big Society Capital, September This assumes that BenComs comprise half of the IPSs. 14 See structure chart of the HCT group companies: 10

11 New scheme. We suggest that a new tax relief scheme may be the easiest to legislate because it will not involve changes to the existing VCT scheme that would require further European Commission approvals and create the need for additional consultation with those working within existing VCT schemes. However, we remain flexible to the option of amending the existing VCT scheme if that is deemed easier. Question 20: Do you think it is desirable in principle to allow hybrid VCTs, including both social and commercial investments? Please give reasons. Yes, desirable in principle. See Part A for further detail on the reasons why and the circumstances in which hybrid VCTs would be useful. Question 21: Could a hybrid VCT work by offering investments under the present VCT regime and investments under a new social investment VCT in one trust? Would there be particular problems in using a social investment VCT to achieve that? If so, please describe. Yes, a hybrid VCT could work in this way. See Part A for further detail. The new social investment VCT regime could be used to capture both a pure social investment VCT as well as the hybrid VCT. The hybrid VCT could include investments in both social enterprise, under the established rules of SITR and the private company investments, under the rules of VCT, in one trust. The proportion of private company investment would remain subject to the same terms of minimum equity component as well as level of qualifying investments, whereas the proportion of social investments made would be subject to relaxed restrictions referred to in response to questions 10 and 13. It is important to note that the rules on treatment of private companies within the hybrid VCT model should not make it more advantageous to make regular SME investments as that would effectively serve to alter the existing VCT schemes, which SITR is not designed to do. Question 22: If you are a VCT provider, would you anticipate adding social investment via an independent intermediary to your existing product offering? Please give reasons. BSC is not a VCT provider. We have had a number of positive discussions with VCT providers that suggested that social investment products, either pure social investment VCT or hybrid VCT, could be added to their portfolios in time. VCT managers would need to weigh up the marketing benefits of a separate fund as against the ease of introducing a mix of regular and social investments through a hybrid VCT. Question 23: Do you think the cost of a listings process, including for example issuing a prospectus, would affect the take-up of social investment via an intermediary? Yes. The cost of listing on the London Stock Exchange is disproportionately high at the outset but also on an ongoing basis. This high cost means that more funds need to be raised before a fund can be launched to ensure that the fund can be profitable. The minimum suggested fund size is 7 to 8m. This relative high minimum amount to be raised means that many VCT funds will fail to raise the full amount and not launch a fund or decide not to try to launch a fund until demand has been already identified. As in Part A, we recommend enabling other exchanges to also be used to list social investment VCT funds, such as AIM. This would reduce the cost of listing and mean that the minimum investor size for a fund would be lower, making launching funds more straight-forward. This was also a recommendation of the original research into tax relief, The Role of Tax Incentives in Encouraging 11

12 Social Investment, Worthstone, Whilst there is a slightly different level of investor protection offered in an AIM as against a LSE listing, offering flexibility would ensure that VCT managers marketing these products would target the investors willing and able to bear differing levels of risk and at differing levels of sophistication. Question 24: If you are an investor, would you be more likely to invest in a social investment VCT rather than a fund that can invest in both social and commercial enterprises (i.e. a hybrid VCT)? Please give reasons. BSC is not an individual investor and cannot receive the tax benefits in SITR. However, we would be interested in the development of both VCT fund options, and would consider investment in structures that support both fund options. BSC expects there to be demand for both pure and hybrid social investment VCT products from individual investors because we have already seen these develop in the market and BSC has invested in similar products. BSC has already invested in multiple social investment funds that make investments into only social enterprises. For example, we understand that the Community Energy Fund run by Pure Leapfrog makes investment into only charities and IPS (including BenComs) and individuals have made donations alongside BSC s investment. BSC has also invested in other funds that invest proportions in both social enterprises and private companies that embed certain social governance characteristics within their company structures. 15 For example, BSC has invested in Impact Ventures UK, managed by LGT Venture Philanthropy and Berenberg Bank that has already made investments in both social enterprises and private companies, and was invested in by at least one private individual. Question 25: How much SITR investment do you think there will be via crowdfunding in the next three years? Please give reasons. Reasonable amount. BSC expects that SITR will be popular will investors who already want to invest via crowdfunding. This will particularly appeal for investors looking to invest smaller amounts and perhaps with less prior investment experience. These would represent a different type of investor to those who would invest through a social investment VCT, who would want to invest larger amounts of funding and likely have more professional investment experience. Certain social enterprises may also prefer reaching investors this way. It could be considered as another distribution channel for the direct version of SITR rather than a competitor to a social investment VCT product. Crowdfunding is therefore important and should be encouraged in SITR policy. Question 26: If you are an investor, would you be more likely to invest via a crowdfunding provider or in a VCT-like arrangement? Please give reasons. BSC is not an individual investor. As above, we would see real value in providing access for investors through a fund vehicle that provides a permanent structure and enables diversification of investments within a portfolio. Crowdfunding provides an important distribution channel for direct investments. Question 27: What types of investor do you think would invest in crowd funding, and what types might not? 15 See BSC Governance Agreement 12

13 Different to indirect investors. As above, BSC expects that crowdfunding investors will be different to investors through indirect investment structures. Individuals investing through crowdfunding still make an investment decision themselves, whereas in VCTs, the fund manager makes the decisions on behalf of the individual investor. Question 28: What are the advantages and disadvantages of the partnership vehicle versus the limited company vehicle? Please describe what the partnership structure would typically look like; and what sorts of restrictions might be necessary (for example on how the partnership used its funds, or on the level of management fees). BSC has previously argued that partnership vehicles are less attractive to a broad range of individual investors interested in indirect investment than limited company vehicles. We understand that limited partnerships are designed to target the largest investors, such as institutions and pension funds, not those that are the target of SITR See BSC response to the consultation on social investment tax relief, August

14 Conclusion Big Society Capital believes that the results of this consultation could help SITR reach the social enterprises and investors that could provide real scale. To make this happen, HMT should: 1. Set the investment size limit as 5m, consistent with existing venture capital schemes; and 2. Provide for both the pure social investment VCT, with certain relief adjustments, and the hybrid VCT. We reiterate our commitment to SITR and to working with HMT, HMRC, SIFIs and the venture capital investment community to help ensure that this relief works in principle and practice, and has a truly transformative effect on the UK social investment market. Big Society Capital, September