With the Man Booker Prize shortlist having just been announced, it feels appropriate to talk about a page turner I’ve been reading, called Social Investment Tax Relief: Enlarging the Scheme.
It’s a consultation on the proposed expansion of the recently-announced Social Investment Tax Relief (SITR) regime, and is one of those documents that sneaks out as an arcane tax law amendment but actually has quite far reaching consequences for the future of social investment (which we see as an exciting and rapidly evolving asset class, and one which many of our clients are interested in).
The consultation closed on the 19th September and we’re very interested to see where things go next. In the meantime, I thought it may be useful to summarise the key points of the proposed changes, plus our own response to the Treasury.
So, firstly, why these changes so soon after the introduction of SITR? I think it’s fair to say that the structure of SITR, which was outlined within this year’s Finance Bill, was always considered a work in progress. The initial limit on the funding which each eligible enterprise could raise was small, at around £290,000 over three years.
This was a means of getting something agreed without recourse to the EU (I imagine they have a really, really long form for stuff like this). That limit is in line with the EU cap on government subsidised investment, i.e. the inconveniently un-round figure of €344,827.
But it has been clear that this limit is too small and will limit the growth of the sector too much, so the proposal is to increase it to £5 million a year, in line with the Enterprise Investment Scheme (EIS) regime. Which is good.
The paper also includes proposals for widening SITR to include indirect investment through collective investments that look and feel a bit like Venture Capital Trusts (VCTs). This is also good, because, for the social investment market to develop, it needs a diverse range of investment vehicles. All the better if this includes options which offer the advantages applying to collective investments, like diversification and the spreading of risk.
What’s not so good, in my opinion, is the proposal to remove renewable energy schemes from the list of qualifying investees. The Treasury are clearly twitchy about the prospect of the SITR market being muddied by product providers marketing schemes which are intended to lock in tax relief while guaranteeing cashflows. The VCT market became rife with products of this ilk, such as Feed-In Tariff-backed renewable energy funds.
While it could be argued that there are social investment sectors more starved of funding than renewable energy projects, I’m personally in favour of the marketplace being as diverse as possible while it gets off the ground, to help it gain some critical mass among investors.
On an anecdotal basis, we have seen a large overlap between investor interest in sustainability and social investment projects. To remove companies receiving energy subsidies from the list of allowable investees would reduce the diversity of the market and make it more difficult to find solutions for social investors about which they are enthusiastic.
I would also have particular concerns about the community energy sector becoming a victim of the change, as this is an area which is of great interest to the many social investors we advise.
Finally, there is a question of whether the sector should include “hybrid VCTs” which have the power to invest in commercial and social enterprises. I’m slightly torn on this issue because on the one hand I’m in favour of more choice for investors, but on the other I’m naturally wary about the prospect of overcomplicated products which try and tell you that you can have your cake and eat it.
My view is that while social investment is a really exciting third way between philanthropy on the one hand and investing for financial returns on the other, it should not be relied on to support your core financial planning goals. The risk and returns are simply too unknowable at this point. For this reason, we still see it as a separate asset class, which should not be relied on for financial returns, and the motivation for investing should be the cause first and the investment prospects second.
In this context, the idea of hybrid VCTs strikes me as a green light for the launch of products which downplay the inherent risk of investing in enterprises that don’t see profit as their primary purpose, whilst making it harder to analyse which bit does what in your portfolio, which is essential for a coherent investment strategy.
That’s my 2p worth but we’d be very interested in hearing from our clients if you are interested in this area and you have any further thoughts or inputs which we can pass along.
For more details follow this link to the paper itself:
RMT Ref 78/09.14/SL