Consultation on Social Investment Tax Relief

Transcription

1 Consultation on Social Investment Tax Relief Comments by Francis Clark LLP in response to the H M Treasury and Department for Business Innovation and Skills consultation document on social investment tax relief published in June 2013 Contents Introduction Who we are General comments Responses to specific questions

2 INTRODUCTION 1. Francis Clark LLP welcomes the opportunity to comment on the consultation document on social investment tax relief published by H M Treasury and the Department for Business Innovation and Skills in June We should be happy to discuss any aspect of our comments and to take part in all further consultations on this area. Please contact Helen Lewis at Helen.Lewis@francisclark.co.uk. WHO WE ARE 3. Francis Clark LLP is the largest independent accountancy firm in the South West. We have seven offices across the region including 46 partners and more than 350 staff. This includes 10 tax partners and 16 tax consultants in our award-winning tax practice. 4. We are interested in the consultation document as we act for a growing number of social enterprises and have seen the sector developing over the last months in the region. Many of the clients we act for are starting to require investment in order to develop their businesses but are finding it hard to achieve this. We recently started discussed the same topic mentioned in this paper with a lawyer, the Chair of Plymouth Social Enterprise Network and a fund manager but clearly this is now on the Government s agenda to address and we welcome the opportunity to comment.. 2

3 GENERAL COMMENTS The social enterprise movement is growing and gaining pace. In their State of Social Enterprise Report 2013, SEUK state that there are 70,000 social enterprises employing 1 million people and contributing around 24 billion to the UK economy. These are businesses who by achieving either their social and/or environmental goals are giving entrepreneurs a place to thrive, consumers more choice around their buying decisions and philanthropists a new way to channel their funds. However, philanthropy will only presently go so far and with no tax incentives around social enterprise investment this can leave many individuals, who are otherwise looking for an investment vehicle to channel their funds, resorting to areas such as EIS and SEIS or charitable donation none of which helps the sector. With a boom in start ups in the sector many are now reaching the need for further investment in order to develop. SEUK s 2013 report also stated that in their findings the median amount of finance sought by social enterprises was 58,000 which falls below the minimum thresholds of many social investment vehicles presently available. This demonstrates a need from the market. Throughout the consultation document there are parallels drawn with EIS and SEIS and in our opinion the closer the social investment reliefs can be to these the easier it will be to understand, communicate and administer. We are pleased to see (in point 4.3) that the Government acknowledges the need for relief to be given on not just equity but also investment instruments. This will potentially stop the mass exodus of social enterprises into CICs limited by shares, ensure stability in their established ownership and operational structures and gives a relatively uncomplicated route to returning the investment to the individual. 3

4 RESPONSES TO SPECIFIC QUESTIONS Question 1 Yes all of the criteria set out in box 2.A are appropriate in our opinion in assessing the criteria for social enterprise tax relief. Question 2 In our view the inclusion of CICs, CIBs and Charities registered for tax purposes should ensure those organisations where tax relief should be possible are included and we do not believe any are intentionally excluded as a result. Question 3 Question 4 Question 5 One of the practical problems we would foresee would be educating the individuals in charge of the daily accounting and book keeping and gift aid claims ensuring they knew which were donations and which were investments. There is a chance that the individual passing the funds over may also claim the funds on their tax return in two places if they complete their own self assessment form. Question 6 The size requirement seems appropriate here. Question 7. Question 8 The excluded list for EIS and SEIS purposes should perhaps be reviewed when considering businesses operating as social enterprises and looking for social investment. In particular care homes. In a country with an ageing population this appears to be an area for increasing demand and one where specific tax incentives may assist ensure the need is met. Likewise house property developers may be considered exempt as the housing shortage needs of the UK may attract businesses to pursue this area. On the whole though the excluded activities list for EIS and SEIS would be appropriate to follow with perhaps those two exceptions. Question 9 We agree that the general principles are appropriate but would ask that the appropriately high risk investments area be considered in more depth and potentially excluded. 4

5 Question 10 The criteria set out in box 4.A do appear to meet the requirements of ensuring that the debt is suitably risky to the investor. Certainly any lending which is guaranteed either by the business or by third parties should not qualify. Question 11 See question 10. We feel that the rule requiring the lending to be unsecured and not subject to guarantee should ensure the relief is well targeted to individuals looking to invest and to businesses looking to raise finance. Question 12 If a social enterprise is able to successfully monitor their social return on investment (SROI) then we feel that a lower than commercial rate of interest may be acceptable to the investor. This should help to ensure that the investor profile matches the business profile in terms of their desire to help make social and/or environmental change by committing an element of their return to the business. A broadly commercial rate could be established using the P11D benefit in kind interest rate applied to directors loans (currently 4%). Anything above this is acceptable anything below is not. Question 13 Question 14 Question 15 Given that the current median funding needed by social investments is 58,000 (SEUK 2013 report) the 200,000 limit should match the social enterprise needs. It is hard to comment on which social enterprises are likely to benefit but certainly those needing to invest in staff, premises or other infrastructure are in most need presently. Question 16 Yes, this cap is appropriate. Question 17 Yes, the same criteria should be used. Question 18 The cap is somewhat burdensome on investors, however at present, the main discouragement to investment is not the rate of dividend return it is the lack of a tax incentive. Where EIS or SEIS is available this is far more attractive to an investor in our opinion. For some social enterprises that are limited by shares but have say 1 x 1 share only, the cap at 20% of share capital leaves them really unable to pay much out at all. 5

6 Question 19 The share capital cap/peg could be removed leaving the ability to pay out 35% of the profits as the only restriction. This should be payable in cash and a restriction could be placed on the company not being able to sell assets to pay dividends. Question 20 The CIC 34 submission form should be used as a method of each CIC documenting how the assets within the business are put to good use with a reconciliation of assets held last year and this year with details of movements. Removal of the share capital peg could potentially give rise to some form of misuse of the community assets in so far as they are encashed in order to pay profits out of the business to shareholders. Question 21 The 10% interest rate cap seems an appropriate level on which to base the level of debt. It is hard to assess whether the changing of this figure would impact on the protection of community assets. Question 22 The connected party rules and the fact that they mirror EIS should be an easier set of rules to apply. This may create issues for social enterprise but only the same ones as for other businesses seeking investment. We do not propose to respond on how the Government should capture all types of investment instrument. Question 23 We feel that an investment period between three and five years is appropriate for the minimum investment period. Three years may allow smaller finance instruments (< 50K) to still qualify but be repaid by the business; five years for larger loans (> 50K). Question 24 The nature of the preference will depend heavily on the investor and their requirements. We feel there may be a mix of those looking for relief on gains as well as the ability to roll gains into a future investment. To attract serial investment we anticipate that relief for gains with no requirement for reinvestment would be most appealing. Question 25 Mirroring the EIS rules as closely as possible is favourable in our opinion. Having spoken to two fund managers they both felt that having the ability to invest in social enterprises posed a good option for some of their clients seeking ethical or alternative investments. Question 26 Question 27 6

7 Question 28 The Heart of the SW LEP has released some Social Enterprise Killer Facts from which the following information is taken: The West of England LEP has identified 600 social enterprises employing 10,000 people with 400m turnover. Cumbria LEP has identified 750 social enterprises employing 4,500 people with 300m contribution to the local economy. Black Country LEP has identified 1,400 social enterprises employing 34,000 people with 460m contribution to the local economy. We have no further information in terms of number and size of CICs but would refer you to the CIC regulator who should be able to assist. We have no information on the breakdown of capital but would believe that relatively little is equity. Question 29 Question 30 Question 31 In our opinion investors are put off from investing because there are no income tax or capital gains tax reliefs available to them on either debt or equity investments. Most social enterprises are not set up with share capital making it hard to structure an equity investment and if one is made the dividend cap and share capital pegs are off-putting to an investor. Moreover, there is no readily available market to trade or exchange the shares should they invest. Questions No responses given. 7

8 Francis Clark LLP 4 September 2013 This document may be reproduced, in whole or part, as long as it is appropriately attributed to Francis Clark LLP, replicated accurately and not used in a misleading context. 8