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‘(3) The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish and lay before the House of Commons a report setting out the predicted impact, over the next five years, of the changes introduced by Schedule 9 to this Act to ITA 2007 on the overall level of investment in social enterprises.
(4) This report must in particular set out the predicted impact of sections 257MQ and 257MS of ITA 2007, as inserted by paragraph 1 of Schedule 9, on the overall level of investment in renewable technologies over the next five years.’.
Clause 53 introduces schedules 9 and 10, dealing with a range of income and capital gains tax reliefs to encourage individuals to invest in qualifying social enterprises. Eligible investments can be through share purchase or through certain types of debt. A social enterprise is defined as a
“community interest company, community benefit society or charity”.
It also provides that the definition can be extended by the Treasury in future, with retrospective effect. I am sure that the Minister will want to explain the Government’s thinking on that and in what circumstances they envisage extending the definition.
The schedules cite some specific trades to be exempted from receiving social investment tax relief. They include any company in receipt of feed-in tariffs, such as renewables obligation certificates, for the generation of electricity. I want to come back to that point in a moment, but it is worth noting that qualifying investments must be in companies with fewer than 500 full-time equivalent employees and with no more than £15 million in gross assets immediately before the investment and £16 million immediately after.
As is our pattern when we wish to probe the Government for further information, we have tabled an amendment to the clause that asks the Chancellor to produce a report that sets out the predicted impact of the changes over the next five years, with specific work on the potential for overall investment in renewable technologies. I want to make some comments and ask the Minister some questions. He may be able to give me some reassurance.
We recognise the value of social enterprises as a means of attracting investment and providing much-needed services to local communities; their benefits are well documented. However, along with the community benefits, we understand the level of commitment and involvement required in local communities to ensure that social enterprises succeed. Their business models need to work.
We have some questions about the scope and ambition of the social investment tax relief outlined in the Bill. The maximum investment is limited to £282,904 over three years. Will too many enterprises be ruled out by overly prescriptive eligibility criteria? We are also concerned about the danger that the provisions may be of more benefit to wealthy investors than social enterprises. Investors who choose to loan money to social enterprises have the option to charge interest on such loans, which would mean that they would benefit from not only tax relief on the loan as a qualifying investment but interest on their loan in the normal way.
One scenario has been suggested to me. I apologise in advance for going through it in detail, but it is important that the Minister can respond. If a top rate taxpayer was to lend a charity £200,000 at 10% interest with all capital repayable at the end of the three-year period, they would collect £60,000 in tax relief from SITR. They then give £80,000 to the charity under gift aid and collect £25,000 in higher rate tax relief. The charity collects £20,000 in gift aid. The lender receives £60,000 in interest on the loan at £20,000 a year. In total, the lender puts £280,000 into the charity and receives back £345,000—the £200,000 loan, £60,000 in interest and £85,000 in tax relief, which will give them a potential profit of some £65,000, which means that they will be better off than if they had simply used SITR. The charity receives £300,000 in loan, gift and tax relief, then repays £260,000 in loan and interest. It therefore makes a £40,000 profit and receives interest-free use of the money for three years. It has effectively borrowed money for three years at an interest rate of 13%.
Given the scale of potential profit for investors, it is possible that they could use SITR as a means of avoiding tax on their investments in an enterprise at little risk to themselves and with limited value to the enterprise in question. That is why we want to probe this issue further. The tax impact and information note perhaps tacitly admits some of those points, as it states that investors in such schemes
“tend to be male, located in the south of England and have higher overall income levels”.
Will the Minister respond to that?
I have further questions on that point. The Charity Tax Group has raised concerns that SITRs will be quite expensive to arrange and are most likely to be used by charities with an income of £1 million to £2 million. According to that estimate, many small-scheme social enterprises will be excluded.
We also note that there have been concerns expressed by others in the social economy sector that thousands of legitimate social enterprises—companies limited by guarantee that are not charities—will also be excluded. As I have mentioned, of particular concern is the impact of the clause on investment in the renewable energy sector. Proposed section 257MS explicitly rules out enterprises that benefit from Government renewable subsidies, including feed-in tariffs, renewables obligation certificates and the heat incentive scheme. Given the well publicised need for alternative sources of energy, is the Minister able to explain the rationale for that? There have been concerns that it could make investment in the sector difficult, potentially jeopardising the chances of meeting the renewable energy and climate change targets.
Can the Minister reassure us? For example, if funds had already been invested in renewable energy projects, would they have to be returned? Particular concern has been raised in relation to anaerobic digestion systems. More than £130 million of potential investment has been raised so far, but could that be lost? It will help if the Minister can respond to that. Can he give us a full explanation of the rationale behind excluding the enterprises in receipt of renewable subsidies, and how does he respond to those concerns regarding the potential impact of the clause on investment in the renewables sector and the ability to meet the climate change targets? Will he specifically address the concerns raised by the charitable organisations and social enterprises on the point that I have made about SITR being more likely to benefit wealthy investors than the organisations that they are investing in?
Finally, will the Minister tell us what efforts are being made to simplify SITR, given the concern that has been expressed that it can be overly complicated and expensive to arrange? If the Minister is able to reassure us on those points, I will be able to assess whether it is necessary to press the amendment to a vote.
Clause 53 introduces schedules 9 and 10, which provide for a new social investment tax relief. The scheme offers income tax and capital gains tax reliefs on sums invested by individuals in social enterprises. Many social enterprises currently have difficulty raising capital from investors and commercial lenders. The reliefs will support social enterprises seeking external finance by incentivising private individuals who invest in them.
I will provide a little background for the Committee. The Chancellor announced these reliefs in his 2013 Budget and consulted on them over the summer. Nearly 80 organisations and interested individuals responded. Taking on board their comments, we have modelled the reliefs on the existing enterprise investment scheme reliefs, but with significant differences to make them attractive to social enterprises and investors. An innovative feature of the new reliefs is that they will be available on investments that take the form of debt where the debt is unsecured. This will allow enterprises that are unable to issue shares to raise capital more readily.
I will set out the changes being made in schedules 9 and 10 respectively. Schedule 9 introduces a relief from income tax for individuals who make qualifying investments in qualifying social enterprises that are carrying on a trade with a social motivation. The relief takes the form of a deduction from income tax liability at a rate of 30% of the amount invested. Schedule 9 also defines what is meant by a social enterprise—community interest companies, certain community benefit societies and charities—and lists other conditions relating to size, structure and the activities to be carried on by the enterprise.
Schedule 10 introduces a relief and an exemption from capital gains tax, which complement the income tax relief in schedule 9 and closely resemble the capital gains tax reliefs available under the enterprise investment scheme. The chargeable gain on the disposal of any asset may be held over if an amount equal to the gain is invested in a social enterprise and the investment is eligible for the income tax relief. Tax will not be payable on the gain until the social enterprise investment is sold or repaid, or unless it ceases to qualify for the income tax relief. Even then, if there is a new eligible investment in a social enterprise, the gain may be held over once more.
As an extra incentive to investors, any gains on the social investment itself will not be charged to capital gains tax, where losses would be allowable losses. They will still be allowable, less or subject to restriction by the amount of tax relief previously given. The number of community interest companies has increased by 20% to 9,000 since the tax relief was announced in the Budget last year. The social enterprise sector estimates that the tax relief could lead to new capital of £480 million flowing into the sector over the next five years. We expect that figure to be slightly lower, to take into account the limit on the amount of tax-advantaged investment that each organisation can receive under EU state aid rules.
Amendment 20 would require the Exchequer to publish a report, within six months of Royal Assent, on the predicted impact over the next five years of the changes introduced by schedule 9. That is unnecessary. Until the tax relief is well established and investments are approved, we will have no better prediction than that provided by the sector. In the 2014 Budget, we announced that we would evaluate the impact of the relief in two years’ time to see whether it is having a transformative effect. In the next six months we will concentrate on promoting the relief and expanding the scheme so that it can make a difference. Surely, that is the right focus at the moment. We will be consulting stakeholders on how to expand the scheme, in particular by extending it to new forms of indirect investment, in the summer.
I appreciate that amendment 20 was tabled to elicit a debate, but I will attempt to address the concerns raised by the hon. Member for Kilmarnock and Loudoun. On the limits that are set out, the hon. Lady focused on gross assets but there is also a limit on employee numbers. We are in a fiscally constrained environment, and we want to encourage investment in organisations with the greatest market failure. Those are the smallest organisations. That is consistent with the EU approach and will help our application for a wider scheme. The presumption in the European Commission is that state aid is directed at small organisations most in need of assistance, and it will be looking for limits such as those, which are in place for venture capital tax reliefs.
In the autumn statement, we doubled the size of organisations that will be eligible for SITR, from fewer than 250 employees to fewer than 500. The vast majority of voluntary organisations will be eligible. The employee limit of 500 is, in particular, more generous than for the EIS, which has an employee limit of 250. The Government recognise that the employment intensity and funding challenges of the social enterprise sector are different from those of commercial organisations and that a higher employee limit is more appropriate for the social enterprise sector.
On the question of whether SITR is too complicated, HMRC will publish guidance and explanatory notes for organisations and offer an advance assurance scheme. We have learnt from the experience of EIS, on which the relief is modelled, that it needs to include tax avoidance clauses. We recognise that issue.
The hon. Member for Kilmarnock and Loudoun raised the point that, somehow, wealthy individuals will benefit, rather than charities and similar organisations. Social investment is a nascent market. The relief is designed to kick-start that market and bring in new investors, just as EIS has for risky commercial companies—hence our setting a similar rate of return. There will be no minimum investment, so the tax relief will be available for any size of investment. We expect crowdfunding to be a growing part of future social investment, so thousands of retail investors will potentially benefit. Charities and social enterprises will benefit from being able to borrow money more cheaply than would be possible otherwise. They will get a lower rate of interest than from a commercial lender—they would not seek SITR investment otherwise.
The hon. Lady gave the example of an investor using SITR and gift aid, but unless I missed this detail, she appears to have overlooked the fact that the investor in the scenario she described will be subject to higher rate tax on the interest received. Clearly that needs to be part of the equation.
The data in the impact assessment on who will invest and make use of the relief are pulled from historical data on the enterprise investment scheme and so are somewhat speculative. The Government will continue to monitor the take-up of social investment tax relief with a view to ensuring that it brings in genuine new sources of investment.
The hon. Lady highlighted the issue of changes to extend the scope with retrospective effect. The power to extend the scope exists to ensure that the legislation complies with our EU obligations, which do not allow member states to restrict the free movement of capital by restricting the scope of the measures to UK-only enterprises. Should the Government wish to extend the scope in future to overseas equivalents of community interest companies or community benefit societies, they can do so.
We have no intention of expanding the definition of those companies or organisations that can benefit. We acknowledge that a company limited by guarantee is a long-standing and common form for social enterprises, but do not wish to include other organisations that are not regulated by a body checking for a social purpose, as that would open up the scheme to the risk of abuse, which I know is a concern that all Members of the Committee will share. Setting up a new regulatory process for those organisations would duplicate the one already carried out by the regulator of community interest companies, which would not be good value for money for the taxpayer. Companies limited by guarantee that wish to take advantage of the relief can convert into community interest companies or community benefit societies for a nominal cost. As with other features of the relief, the Government will keep the situation under review to ensure that the relief is operating effectively.
On community energy schemes, it is worth pointing out that renewable energy schemes will receive £7.6 billion in subsidies in 2020, and in 2015-16 up to £430 million of taxpayers’ money will be used to subsidise renewable heating through the renewable heat incentive. Those figures include significant support for community energy schemes. Most such schemes will be too large to qualify for the social investment tax relief, but the Government will consider whether they should be eligible for the larger social investment tax relief, which requires notification to the EU. Part of the summer consultation exercise will be on how to provide a more consistently easy-to-follow approach. Some community schemes are eligible for tax relief under other tax-advantaged social capital schemes, such as SEIS, EIS and VCTs, including where they benefit from feed-in tariffs.
The Government are committed to ensuring that tax relief schemes are effective. The new social investment tax relief is not aimed at any specific social or community sector, and as part of its overall effectiveness it is important that it is not skewed towards one sector to the possible detriment of others.
This new relief on income tax and on capital gains tax will promote the growth and activity of the social enterprise sector by allowing qualifying businesses to access new sources of capital. It is the first tax relief of this kind or on this scale in the world. With these measures, the UK leads the way in supporting social enterprises as an effective and efficient way of delivering services and facilities for the benefit of us all. I therefore hope that the clause and schedules 9 and 10 stand part of the Bill, and that I have provided sufficient information to persuade the hon. Lady to withdraw her amendment.
I thank the Minister for his response to the issues I raised. Of course, we welcome the support that will be given to the social enterprise sector and I have said how valuable that is to communities across the UK. I understand what he says in relation to the scope of our amendment and the point at which it would be reasonable and feasible to report back. I still have some concerns about the renewable energy sector and how that will impact on community energy schemes. However, it would be entirely possible to pursue those by other means rather than press the amendment at this point. I therefore beg to ask leave to withdraw the amendment.