Extending existing tax reliefs to encompass social investment could generate up to £480m of new investment for the sector over the next five years, according to new research commissioned by the City of London Corporation and Big Society Capital.
The Role of Tax Incentives in Encouraging Social Investment – prepared by Worthstone with assistance from Wragge & Co LLP – finds that adapting existing tax reliefs that cover venture capital and philanthropy to also encompass social investment would help to meet the current gap between supply and demand of appropriate capital for the sector.
Specifically, such an incentive could encourage individuals to invest in the equity, equity-like or unsecured debt instruments required by social enterprises as the market matures. Key principles that would need to underpin such a tax relief include: a tight definition of eligibility, a focus on riskbearing capital, and a focus on individuals as investors.
Nick O’Donohoe, CEO of Big Society Capital, said:
“The Government has already actively supported the development of the social investment market in the UK. By a simple change, which would give social investments a similar tax treatment to that which venture capital enjoys, the Government can stimulate a significant amount of extra investment that will help social enterprises across the UK.”
Mark Boleat, Policy Chairman at the City of London Corporation, said:
“As the social sector develops, there is a clear need to create an investment climate conducive to meeting fast-increasing demand for risk and growth capital. Tax reliefs have helped attract considerable amounts of mainstream venture capital and could prove similarly effective if adapted to apply to social investment. The estimated impact of opening up social investment to existing reliefs would play a crucial role in underpinning the continued success of social enterprises.”
Recent evidence from social enterprise and business survey data shows social sector business delivering resilient performances in the tough economic environment and providing much needed support for more economic deprived areas of the UK. A recent report by the Boston Consulting Group (BCG) found that demand in the social investment market in England could reach £1bn by 2016, five times what it is today. In this first attempt to establish the future size of the social investment market, BCG found that more government contracts, private consumer spending, and corporate social investment will be directed toward charities and social and community enterprises than ever before, and as a result, the demand for capital in the social sector could grow at a rate of 38% per annum.
The City of London Corporation is committed to advancing the social investment agenda. It hosted the inaugural Social Investment Academy event at Guildhall last week (26 February) to inform and equip independent financial advisers interested in finding out about social investment. In recognising the undercapitalisation of the social investment sector, the Corporation has also recently established a £20m social investment fund. This fund will play its part in building a thriving social investment market by making both direct and indirect investment focusing principally in London, but also interested in opportunities across the UK and internationally.