Community Finance Tax Credit (Hansard, 11 January 2000)

§ Mr. Tony Colman (Putney)

I beg to move, That leave be given to bring in a Bill to introduce a tax credit to encourage investment in community finance institutions to enable development of social enterprise in areas of deprivation. I dedicate the Bill to the memory of my mother, Beattie Colman, who died last Thursday and who inspired me.

I believe that, over the past two years, there has been growing recognition of the fact that our markets are not serving the most deprived communities in this country by providing the access to credit that they need. That has meant that not enough capital flows into projects that can offer the greatest social return.

Several initiatives are working to address the problem by being lenders where it matters, in areas suffering a capital famine. Community reinvestment—the subject of my previous 10-minute Bill—is one such initiative, and community finance institutions lend to enterprises that are regarded as being unbankable. Borrowers frequently graduate from community finance initiatives to mainstream lenders: community finance initiatives serve as a vital stepping stone. However, current needs outstrip both projects and the financing for those projects. There is a clear need for far greater investment in the initiatives, to enable them to achieve true potential.

The problem was highlighted by the report of the social exclusion unit's policy action team on enterprise and social exclusion, which makes excellent recommendations, some of which have been speedily acted on. In his pre-Budget statement, my right hon. Friend the Chancellor of the Exchequer announced a £30 million programme to promote better access to finance and business support, so as to stimulate enterprise in deprived areas. I warmly welcome that programme, which is now being developed by the Department of Trade and Industry, as it has the potential to kick start the growth of the community finance sector. However, a community finance tax credit will help to build a community finance sector that is sustainable in the long term.

The Bill acts on another recommendation of the enterprise and social exclusion report, which argued that the Treasury and the Inland Revenue should examine a tax relief for individual investors in community finance. Such a tax relief would encourage people to invest in addressing the needs of deprived communities. Gaining the support of private investors will be critical to building a sustainable funding base for community finance projects, so that they are not dependent on Government funding rounds. In addition, attracting individual investors brings people involvement, which is a vital ingredient in community initiatives.

The establishment of a thriving community finance sector would be a major step toward creating an enterprise society for all. By establishing a tax credit, the Bill would encourage investment in community finance by giving it recognition. We currently offer tax relief to those who invest in enterprise for personal profit and enable tax-efficient giving to charitable causes; but, as yet, we give no tax relief to investors for social purposes. That may be because the thinking on lending to help others is less well understood, but by encouraging such investing we can potentially free up large volumes of new money for our deprived communities.

148 In seeking support for the Bill, I have spoken to the Treasury, the Inland Revenue and members of the Social Investment Forum of the UK—banks and community finance institutions working to promote new lending in the community.

For example, CityLife, an industrial and provident society, has pioneered the concept of social investment bonds. Its first bond was issued last year to address unemployment in Sheffield. Investors lent their money for five years at zero interest. The bond issue raised £787,000, primarily from the Sheffield public and leading Sheffield figures, including my right hon. Friend the Secretary of State for Education and Employment and my right hon. Friend the Minister for Trade. With matching funds from various sources, that releases a total of almost £2 million to the city.

By asking people to lend rather than to give money, the bond released more money over a shorter time for an unpopular cause—the unemployed. Investors said that they had lent 10 times more than they would have donated. CityLife believes that that is new money, which is drawn from people's savings rather than from their income. Most of the investors in the Sheffield bond are drawn from the wealthier areas of the city. CityLife is planning community bonds in 30 more cities across the UK, but it and others believe that the impact of such work could increase with the recognition and incentive of a tax credit.

Investors in community finance are giving up the use of their capital for spending or for more lucrative investing. They are forgoing the interest of the capital and in many cases are seeing their capital depreciate. Market research commissioned by NatWest showed that 18 per cent. of the general public would be interested in investing in a product such as the bank's community bond, but that figure would rise to 31 per cent. if a tax incentive were involved. Investors in the NatWest community bond save between £500 and £250,000 for one or three years.

There are cases abroad of tax relief levering in considerable funds to particular types of investment vehicles. In the Netherlands, a new tax relief for green funds was introduced in January 1995, following campaigning by the Triodos bank. Since then, six banks have introduced green funds, with a combined fund volume adding up to about 1 billion euros. The funds offer tax exemption for private investors on interest or dividends from green investment funds. That enables the funds to offer loans to green projects at favourable rates. The Dutch Government view the initiative as a great success, as it fulfils its objective by reducing the financial burden for green projects, while attracting a large public to the field of green investment.

However, the Dutch initiative cannot be directly translated to the UK context of community finance. Community finance initiatives are at an early stage in their development, and a tax credit must recognise that. Following my discussions with the Inland Revenue and the Treasury, I believe that at this stage we need a tax relief that goes direct to the community finance institutions.

I therefore propose a model suggested to me by the Charities Aid Foundation, which runs a loan fund called Investors in Society. That was launched in 1996 with £500,000 seed capital. The fund has now grown to £4.5 million. It has approved loans or credit facilities for 85 initiatives.

149 The model that I propose would give tax credit to the CFI on money invested by private individuals, companies or other tax-paying bodies. To be eligible for the tax credit, the money would be lent at below market or zero interest to a community finance initiative registered with the Inland Revenue. The tax credit would be available to the CFI if it used the money for on-lending or for investing in micro-enterprise or small business for the relief of poverty or unemployment; community-based regeneration where the ultimate benefit was not personal profit; organisations or activities whose purposes were recognised as charitable by the Charity Commission or the Inland Revenue; the issue of charity or community bonds such as the Sheffield employment bond; and any of these purposes for overseas beneficiaries, as well as in the UK.

By targeting the tax credit at the CFI, it is hoped that the model would give maximum benefit to the community finance sector. It is arguable that a tax relief to corporate or individual taxpayers would free up greater volumes, but from my discussions with the Treasury and the Inland Revenue, I believe that at this stage we are looking for a simple mechanism to boost the development of community finance. However, over time it would be worth examining the potential impact of other tax relief for community finance.

The Government are showing their commitment to community finance. My hon. Friend the Financial Secretary is launching a new fund at the Aston Reinvestment Trust tomorrow. Aston Reinvestment Trust is piloting a new £400,000 fund with the support of the European Union. It will make loans of between £2,000 and £40,000 to community enterprises and voluntary organisations unable to access finance from conventional sources.

The Department of Trade and Industry with the Phoenix fund now offers challenge fund and guarantee fund money to community finance initiatives. However, as yet we do not have an additional incentive to get individuals and corporate investment to make the significant impact that is possible through investing in our deprived communities. The Bill offers the opportunity to make that impact by tackling tax relief for investors in community finance, and I commend it to the House.

Question put and agreed to.

Bill ordered to be brought in by Mr. Tony Colman, Mr. Peter Bottomley, Mr. Gareth R. Thomas, and Mr. Tom Brake.