Investing in social enterprises, charities and other community organisations has for far too long been a discrete activity, the preserve of a small number of specialist intermediaries.
The opportunities for individuals to invest have been severely limited by a restrictive tax regime which has provided very little incentive for private social investment, when compared to more established enterprise investment schemes. However things could be about to change!
As part of the UK Government's recently announced Finance Bill 2014, there are a number of key changes to a planned tax relief for social investment.
These changes could have major implications for Scotland's third sector and ultimately, benefit the lives of more people in communities up and down the country. The measures are aimed at incentivising private individuals to invest in social enterprises - a move which could see £480m flow into the sector.
Investors will be offered income tax relief as a percentage of the amount invested and capital gains on investments in social enterprises will be free from tax.
Further detail will be announced in next year's Budget, but this looks similar to the Enterprise Investment Scheme ( EIS) and the Seed Enterprise Investment Scheme (SEIS) reliefs that private enterprise already enjoys. Taken as a whole, the new measures provide a welcome sign that social investment is finally beginning to break through into the mainstream fiscal agenda.
But what exactly do we mean by social investment? Social investment is an investment which generates both a financial and a social return. Financial returns are a repayment of the original investment with, more often than not, an interest return.
One of the most significant trends we've witnessed in the aftermath of the recession is the emergence of a more socially-conscious investor -one that wants to invest in social or environmental projects and knows that their money is being put towards creating positive social change. As the concept of social investment gains in traction and momentum, so has it attracted the attention of more mainstream investors.
The fact that an investor could get a greater degree of tax relief through investment in EIS or Venture Capital Trust schemes rather than in a social enterprise has long been an anomaly.
Others will point out that a social enterprise does not facilitate equity investment, because a social enterprise does not normally have share capital. However the new scheme helps to overcome some of these barriers.
Is there the demand for such capital? All evidence, including our own monitoring of investment enquiry volumes at Social Investment Scotland, suggests that demand is increasing quickly. Big Society Capital has suggested that the size of the social investment marketplace in the UK could reach £1bn by 2017.
This demand is being driven not only by new models of delivery in public services but also by entrepreneurs who see social enterprise as the ideal business model to achieve both financial and social objectives.
With the continued reduction in public spending, the financial system must create innovative models of delivery, connecting different kinds of capital with communities, not just grants or simple loans. The decision to provide tax relief on social investments is an excellent starting point which could establish a new model for new capital to flow into communities.
This connection between capital and communities is key. At Social Investment Scotland, we understand both the financial demands and challenges of Scotland's third sector and the demands of a more socially-conscious investment community.
If tax relief is going to make a difference in Scotland, it is vital that the supply of capital is channelled effectively through the right vehicles to meet the growing demand for investment by communities.
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