Last month we held our third and final Solutions Collective for 2022. The overarching theme of the sessions has been how we can harness concessionary capital to achieve the diversity and reach lending goals which we have set ourselves for 2025. Tax is another important tool in our toolbox.
Why is tax an important lever to scale social lending?
Sarah Macfarlane, Senior Investor Relationships Manager at Big Society Capital, led the first part of the session which focused on the range of tax incentives that exist for the use of mainstream small and medium enterprises (SMEs) alongside specialised tax reliefs designed for social enterprises and charities. Sarah explored:
- Success stories - 1.6 billion of Enterprise Investment Scheme (EIS)
- Challenges - Community Investment Tax Relief (CITR) had raised 17.1 million for investment through Community Development Finance Institutions in 2021 but is still relatively unknown
- Opportunities that tax reliefs could bring, for example extending Social Investment Tax Relief (SITR) to community energy could help address sustainability and improve equity with regards to the current energy crisis.
This was brought to life through the case study of Wellington Orbit, a Community Arts Centre who have used tax relief to raise both debt and equity investment to bring their project to life.
Fit for purpose?
One of the overriding topics was how to strike the balance between creating a tax relief that works for both investors and social enterprises and charities. For the tax relief to be successful, it must enable capital to flow in a way which meets the criteria of investors, as well as match the business model of social enterprises and charities. These organisations require patient and affordable capital which works alongside HMRC processes.
Social Investment Tax Relief (SITR) was described as being ‘a round peg in a square hole’ which attempted to shape the current Enterprise Investment Scheme (EIS) practices to the extent that it is handcuffed and unable to fulfil its potential.
Are we asking the wrong question?
James Dickens, Director and Chartered Financial Planner at Dickens Grierson, is a passionate advocate of using capital to unlock impact, however he noted there can be challenges prior to investment. Many of his clients don’t have a huge income liability, often due to owning assets rather than generating income, as well as considerable philanthropic giving. The challenge comes when lack of awareness, understanding and then complexity are hurdles that need to be overcome. The one thing that really stuck with me from James’ learned experience is the need for SIMPLICITY and SCALE over and above RETURN (interest rate) often the most compelling driver is connection to social issue or place.
Social Impact Investment - the best kept secret?
A 2022 survey of UBS client global family offices found that almost one quarter (24%) make impact investments and expect this proportion of their portfolios to grow by more than half (to 14%) by 2025. However, it is still quite likely that many of these investors probably do not officially recognise the term 'social impact investing'. A google trends search on the terms easily reinforces this point. It is clear we still have more to do to raise the profile and possibilities that social impact investing presents.
In it for the long haul
The Enterprise Investment Scheme (EIS) and The Seed Investment Scheme (SEIS) have taken almost 30 years to become established tax products with which advisors across the country are now familiar with. Yet still, many advisors struggle to obtain professional indemnity when advising on new products - a challenge faced when Social Investment Tax Relief (SITR) was introduced. Interestingly, the Enterprise Investment Scheme (EIS) Association was actually established four years before the introduction of the relief, further emphasising the need for building an ecosystem of support and highlighting that tax incentives need to be long term commitments if they are ever to reach their potential. There was genuine concern in particular for communities raising investment using community shares who will be left empty handed and unable to access any tax relief should Social Investment Tax Relief (SITR) lapse in April 2023. Chopping, changing and general uncertainty undermine the opportunity for success.
The discussion drew out three key learnings:
- Complexity is the enemy of the flow of capital - for ‘advised investors’ the space is fragmented in terms of financial products and social issues. Knowing where to go and recognising impact above purely financial return. There has been some headway in the introduction of the Schroders and Big Society Capital Impact Trust (SBSI), but this is a baby step
- Simplicity is possible - if gift aid makes giving at the click of a button, we must be able to make this work within the social impact investment space (in particular for the mass of non-advised retail investors)
- Product perfect - whilst there are increasing amounts of ESG products and Green Bonds, we need to replicate them to volumise the channel for capital
This final point really captured my imagination (although I take no credit as the idea was proposed by James) imagine a National Savings and Investment Social Impact Bond where your capital is safe, but the return is risk adjusted. Perhaps accessible, recognisable, and safe is one avenue we have yet to fully explore.
To ensure we are making the most out of sessions, we are committed to sharing key takeaways and any resulting updates and progress in insights papers for this and previous sessions which you can find below.
What comes next?
We are currently planning our Solutions Collective programme for next year and on the topic of diversity and reach of investment our first session will be on sharia compliant lending. You can register your interest for future sessions and suggest discussion material to inform our social lending work here.