The government must improve tax incentives for social investment if it wants private investors to replace public money, an NCVO report published today recommends.
The report was written by the NCVO Commission on Tax Incentives for Social Investment, a group of third sector social investment experts chaired by John Kingston, chair of the investment committee of the Big Society Investment Fund.
It says the main specialist tax incentive for social enterprise, community investment tax relief, is too restrictive for investors.
The report recommends increasing the amount of tax relief available through CITR from 5 per cent to 6 per cent a year. It suggests several other changes to make it more generous, and says community development finance institutions should have longer to make investments.
It says general tax reliefs for investors, such as the enterprise investment scheme, have been designed for investment in share capital and are therefore not suitable for charities and most social enterprises.
It also recommends that equivalent reliefs should be available for similar structures used by charities, community interest companies and community benefit societies, and that several other changes be made to allow third sector organisations to use the enterprise investment scheme, and two similar schemes, as easily as commercial organisations.
The report recommends that the government carries out a long-term, strategic review of the tax code to make sure it is fair for social investment.
It says government evidence shows tax reliefs create a significant benefit to the state, and that the government has already accepted tax incentives as one of its six areas of action to improve the social investment market.
"The evidence suggests that where fiscal mechanisms to incentivise social investment are available, the balance of net costs and benefits can be significantly to the advantage of the Exchequer," the report says.
"While it is true that there are also gaps in supply and demand in what is a nascent market, the absence of a fair, equitable and well-understood tax regime for investment in social ventures hinders this development and holds back growth."
A Cabinet Office spokesman said: "We welcome this report and its clear recommendations on how fiscal incentives can support the social investment market.
"We will be looking into how gaps and inconsistencies in the tax system limit the growth of the social investment market and will be consulting the sector ahead of the Budget on how to make community investment tax relief more effective."