In yesterday’s budget, the Chancellor of the Exchequer, George Osborne, revealed that tax relief on social investment will be included in the finance bill in 2014. Nick O’Donohoe, chief executive of social investment wholesale institution, Big Society Capital, was understandably pleased. He blogged that: “Today is an important day in the development of the social investment market.”
He added that the announcement would: “be pivotal in encouraging greater numbers of individuals to provide funding to social sector organisations.”
And noted that: “Until now, the lack of appropriate tax incentive has been a barrier to unlocking the potential of these individuals to support social investment.”
This is the point where some of the more cynical voices in the social sectors tend to pipe with things along the lines of: “Is it really a bigger barrier than the fact that (many of) these individuals just don’t give a sh!t.”
While that kind of cynicism may be understandable, particularly at a time when many in the sector are either observing or on the receiving end of swinging cuts in essential services, it risks missing the point – which is a practical one rather than a moral one.
Rich people, like other people, have a wide range of different motivations and the challenge is to tip the balance so that those who are thinking they might take a punt on a social investment have every possible incentive to do so.
As discussed previously, significant tax relief is already available on investments in conventional ‘for-profit’* businesses. So, irrespective of social sector types’ passionate opinions about what rich people should and shouldn’t do with their hard earned cash, we’re still left with the cold hard fact that there’s 30% of an investment that’s at risk if you invest in a social venture but not at risk if you invest in ‘for-profit’ one.
As Pioneers Post reports: “Evidence shows that tax incentives are key to motivating and unlocking investment. A recent report by the City of London estimated that £480m could flow into the social sector over five years from more than 225,000 households.”
If I were asked to recommend a single measure to deliver rapid expansion of the social investment in the UK, I’d suggest that social investors spend a year applying a similarly optimistic level of due diligence to their investments as they and their supporters apply to claims about the potential growth of the social investment market. That would soon get the deals flowing.
That’s not to say that the report in question, The role of tax incentives in encouraging social investment, is rubbish. It’s an extremely valuable piece of research into the potential investment preferences of high net worth individuals but, like the majority of research into social investment so far, its headline figures ignore the fact that investments are deals involving at least two parties.
Unfortunately, despite being self-styled specialists in ‘social’, the vast majority of social investment intermediaries remain dismally unable to work out how to match the (ever-growing) supply of investment with demand for the kind of investment they’re supplying.
Those of us who lack either previous experience of working in financial services and/or a shameless track record of failing to invest in social ventures seem unlikely to be high on the Treasury’s list of people to consult with on the nature of their new tax relief, so it’s probably just as well for me to offer my thoughts now.
They are: (a) That if we end up with a tax relief that essentially replicates existing tax relief on ‘for-profit’ investments for the social sector(s) that will be both fair and correct – but seems unlikely to lead to the massive shift in investor behaviour that sector leaders expect
and (b) That hopefully some consideration will be given to how tax relief might be used to incentivise people whose net worth is not especially high to invest (particularly) local social ventures. I’m thinking about something along the lines of Gift Aid (but obviously taking into account that fact that the ‘donor’ may have the chance of getting their money back).
Hopefully this tax relief, when it arrives, in whatever form, will lead to more money being invested in social ventures. Even if it doesn’t, it will still be a good thing because – following on from the creation of Big Society Capital – it will remove one of the few remaining excuses the social investment sector has for their persistent failure to either understand or respond to market demand.
The only two plausible excuses that will remain are:
- There isn’t a demand for a specialist social investment market at the levels predicted
- Those social investors and intermediaries who continue to fail to make investments just don’t know what they’re doing
At this point, hopefully those who continue to blame a lack of ‘investment readiness’ 0n the part of their customers will stop receiving government handouts, and may therefore retreat to the mainstream financial services sector to resume their careers, and then whatever’s left of the social investment market will be able to get on with making the world a better place.
*I am aware of the problems around using the term ‘for-profit’ in this context as all businesses, and certainly all businesses planning to repay an investment, have to make a profit but, though not ideal, it’s the best way of explaining the situation in three syllables.