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Treasury’s ‘philanthropygate’ mess now hits social investment

20 April 2012
Photo of David Gauke MP

Time to strong-arm the Treasury: David Gauke, MP for South West Hertfordshire and Exchequer Secretary to the Treasury, pictured here playing the stooge in an exercise by Hertfordshire Constabulary’s armed response team. MPs have written to Gauke urging him to rethink the social investment tax relief cap.

The confirmation from the Treasury today that measures relating to social investment will also be included in the cap could do untold damage to the emerging social investment market.

Sir Stuart Etherington, CEO, National Council for Voluntary Organisations

A chorus of bafflement and disbelief came from charity and social enterprise leaders today as the Treasury confirmed it would be applying a damaging cap to tax relief on social investment.

The tax cap torpedo threatens to blow a hole in the side of Big Society Capital, the £600m social investment bank launched by David Cameron just days ago, before it has barely had a chance to set sail.

Chris White, the Conservative MP responsible for social value legislation supporting social enterprises and charities that became law earlier this year, has joined the calls against his government’s decision, and called for a rethink.

Sir Stuart Etherington, CEO of the National Council for Voluntary Organisations, said: ‘The cap on tax relief is already damaging philanthropy. The confirmation from the Treasury today that measures relating to social investment will also be included in the cap could do untold damage to the emerging social investment market.

‘This runs contrary to the establishment of Big Society Capital and all of the Government’s aspirations to promote social enterprise.’

Social Enterprise UK CEO Peter Holbrook said it would be ‘impossible’ for Big Society Capital to achieve its plans if the Treasury pushed ahead.

‘The news of the cap on social investment has baffled the social enterprise sector,’ Holbrook said. ‘Earlier this month we saw the Prime Minister launch Big Society Capital – which has pumped an impressive £600m into the social investment market. Now it seems the government has seriously undermined its commitment to growing the market by creating more barriers to social investment before it’s properly off the ground.’

Holbrook said social enterprises were not yet even on a level playing field with private businesses when it came to tax relief. ‘Tax relief for traditional investment in private sector small and medium size enterprises has been left untouched – while relief on social investment is being unfairly targeted,’ he said. ‘When everyone wants to see more socially-motivated businesses succeed in our economy, the timing is just plain awful. If the cap goes ahead, much of what Big Society Capital plans will be impossible to achieve.’  

Holbrook said weak tax incentives would do little to help efforts to attract more investors. ‘The government should be doing everything it can to encourage philanthropic investment instead of turning investors away with more tax caps. An increasing number of private investors are asking us can we recommend a social enterprise they should invest in. But this trend will be jeopardised by this fresh attack on philanthropy and social investment.’ 

The measures relate to the Community Investment Tax Relief scheme introduced in 2002 to support investments in local communities and social enterprises. It gives 25% tax relief (income or corporation tax) to investors who invest in accredited intermediaries such as Community Development Finance Institutions (CDFIs), allowing social sector organisations to find investment that they may find difficult to secure elsewhere. Since its introduction in 2002, only £63m has been raised. 

Chris White, MP for Warwick and Leamington, who was the author of the Public Services (Social Value) Act 2012 that passed through Parliament with cross-party support earlier this year, said: ‘I am concerned about reports that Community Investment Tax Relief will be included within the cap on unlimited income tax reliefs. This is a scheme which is specifically targeted at our most deprived communities and has been an important part of growing the nascent social investment market.

‘There is a real danger that this change could undermine the Government’s work to support social enterprises, charities and voluntary organisations and send out a confusing message to investors and social entrepreneurs about the government’s intentions towards social investment.

‘I hope that through the upcoming formal consultation we can ensure that this targeted relief is kept in place and that we find more ways to incentivise social investment.’

White and several fellow MPs have signed a letter to David Gauke MP, Exchequer Secretary to the Treasury, warning of the confusion and asking for a meeting.

‘We believe that as a consequence of this decision, there is a real danger that confusion will be created amongst potential investors into the social enterprise sector about the Government’s intentions and the strength of the Government’s support for its development,’ the letter states. ‘We hope that you will reconsider.’

NCVO recently wrote a report on social investment in which further details can be found about CITR.

At the time a Cabinet Office Spokesperson (24 January) said: ‘We welcome this report and its clear recommendations on how fiscal incentives can support the social investment market. Social ventures are already a sizeable chunk of the economy with a turnover the equivalent to 1.5 per cent of GDP and we want see them becoming a larger part of the economy in the future.

‘We will be looking into how gaps and inconsistencies in the tax system limits the growth of the social investment market and will be consulting the sector ahead of the budget on how to make Community Investment Tax Relief (CITR) more effective.’