Caroline Julian is Head of Research at ResPublica, and manages the think tank’s research programme and strategy.
The Social Investment Tax Relief announced by the Chancellor in last week’s Autumn Statement is a welcome move for many working hard to deliver social returns in communities across the country. Tax relief on charitable donations has nudged millions to give, and incentivised many high net worth individuals to channel their capital toward good causes. Significant social value and community benefit can be achieved through private enterprise too, and so it makes sense for investment in such initiatives to be incentivised. Crowd-funded projects and partners in social impact bonds, amongst others, will now benefit from the additional investment.
But many will miss out, and this will be a huge growth opportunity missed – both in terms of the economic and social returns. In the full Autumn Statement paper released by the Treasury the following morning, organisations listed as eligible for social investment tax relief include charities, community interest companies and community benefit societies, while companies limited by guarantee, industrial and provident societies and others were omitted. This decision will exclude many enterprises with a strong social purpose and a strong potential to grow. But more importantly, it will exclude those with a strong capability to enable communities and individuals to enter into key markets.
Take the UK’s energy market, for example, where the Big Six constitute 98 percent of all supply and 70 percent of generation. This is a market which small and medium-sized businesses, never mind communities, struggle to break into. Despite this, community energy – where communities own and invest in local energy generation – has grown significantly in the past decade, and has delivered substantial economic and social returns. However, 47 per cent of UK community energy capacity is generated by energy co-operatives, many of which take the legal form of an Industrial and Provident Society (IPS) – a model excluded from the tax relief. The remainder capacity is constituted by joint venture arrangements, which tend to include a given “community” and a private partner, which usually takes the legal form of an IPS or a Company Limited by Guarantee respectively – both excluded from the tax relief.
The Resilience Centre, which serves to broker such joint ventures, has recently been awarded the “Best Community Energy Initiative” for its Resilient Energy Great Dunkilns project, recognised by Government “as one of the most scaleable and beneficial local Energy Initiatives in the UK”. As a crowd-funded venture, which invited investments from the community to support a local wind turbine from as little as £5, it will now deliver target returns of 6.75 per cent. As a joint venture established by a Company Limited by Guarantee, however, this would be one example of a project not eligible for the tax break.
This is disappointing, as a recent ResPublica report revealed that the community energy sector could grow 89 times its current size if Government offered further support for such joint ventures. The Chancellor is missing a huge growth opportunity.
Demand for finance in the social enterprise sector remains high, and this is particularly felt by those initiating community energy projects. A project with a total budget of £1m might require £100,000 of money in advance of the planning application. Given the rejection rates, this money is entirely at risk, therefore commercial bank loans and even community shares are either very difficult to obtain or achieve.
These costs have traditionally been funded through grant schemes but, as of 2010, grants have become less flexible due to EU-enforced regulations over the provision of state aid for capital costs. Added to this are the costs of development, installation and maintenance, which often require upfront investment; and for community projects in particular, a lack of legal, financial and technical expertise further prevents new businesses from entering into the local market. The social and economic opportunity is there – Government needs to recognise it and we need to seize it.