NEW £1 BILLION TAX CREDIT FOR COMMUNITY INVESTMENT

Chancellor Gordon Brown today launched the Government's consultation on a new tax credit for private investment in disadvantaged communities.

This groundbreaking proposal would be a major innovation. Unlike other aspects of the UK tax system, the tax credit would operate on a competitive basis, and be awarded to the best bids from community development finance providers.

The proposed rate of the new tax credit is 25 per cent of the value of an investment over 5 years. This new tax credit follows a proposal from the Social Investment Task Force, which stated that at this level the tax credit could create £1 billion of investment into the UK most deprived areas.

The Chancellor said:

?Business creation in our most disadvantaged communities lags far behind the rest of Britain. We need to build a stronger enterprise culture that opens up opportunities for all.

?To tackle the causes of unemployment and low economic activity, we need a radical new approach to encourage enterprise and stimulate business-led growth in our most challenged communities. We want to put in place the best possible incentive structure to open up enterprise and employment opportunities to all.

?This new tax credit aims to attract greater flows of private investment into new business creation in high unemployment areas. It would support the start up and growth of small for-profit enterprises in these communities, as well as social and community enterprises.

?I believe this proposal has the potential to unlock significant new flows of private investment where it is needed most - in our most disadvantaged communities.?

The Social Investment Task Force reported to the Chancellor in October 2000, with proposals to increase enterprise, investment and wealth creation in disadvantaged communities.

Sir Ronald Cohen, who led the Social Investment Task Force, said:

"I welcome this major step forward in implementing the recommendations of the Task Force. This is an area offering many opportunities for both investors and communities. The tax credit will play a key role in bringing about a new approach to regeneration."

NOTES TO EDITORS

1. The tax credit aims to expand the supply of near-commercial finance to enterprises that cannot at present attract fully commercial finance, for example from the banks. Crucially, it also aims to bring private sector expertise and skills to community development finance, which would help to build the enterprise capacity of disadvantaged communities.

2. The tax credit would be available to investors in community development finance institutions (CDFIs) - intermediary bodies that provide finance and support for enterprises in disadvantaged communities. CDFIs would be allocated tax credits on the basis of their business plans, which would be subject to a competitive allocation process.

3. The tax credit therefore brings together three key groups:

Investors - the tax credit is designed to attract private investment from individuals, companies, banks, charitable trusts or institutions, via intermediaries into enterprises that have financial returns or a mix of financial and social impacts.
Intermediaries - the investment generated by the tax credit would be channelled through community development finance institutions (CDFIs) into enterprises in disadvantaged communities.
Enterprises - the money raised from investors through the tax credit would deliver extra investment to enterprises such as micro-firms and start ups, social and community enterprises; and to small and medium enterprises, which could not otherwise get the finance they need.

4. The consultation document includes several examples of CDFIs. They are:

Aspire Micro Loans for Business Limited, Belfast
Contact: Naimh Goggin - 02890 246245

Launched in February 2000, Aspire provides access to finance for the self-employed and micro-businesses in Greater Belfast, at commercial interest rates. Aspire targets for-profit businesses that have been established for at least 6 months. In its first year, Aspire made 63 loans totalling £215,000.

Aston Reinvestment Trust, Birmingham
Contact: Steve Walker - 0121 359 2444

Launched in 1997, ART provides loans and business advice and support to projects that are unable to access full borrowing requirements from the banks. It is based in one of the most disadvantaged areas of the UK, and serves both for-profit and social enterprises. Since 1997, ART has made 65 loans totalling over £1.1 million - which has levered an additional £1.7 million of other funding. ART are one of the 15 projects to benefit from today's Phoenix Fund award - see below.

Hackney Business Venture, East London
Contact: Sally Agass - 07730 272726

Founded in 1984, HBV provides start-up and development grants and loans - as well as training, business advice and mentoring - to new and existing businesses in the London Borough of Hackney. HBV loans range from £500 to £25,000. Over the last 5 years, HBV has managed a total of £1.1 million in soft loans - which in turn has attracted a further £3.3 million from banks and private sponsors. Over 120 businesses have been helped in this way and more than 450 jobs either created or secured.

Merseyside Special Investment Fund
Contact: Susan Weir - 0151 236 4040

Set up in 1996, MSIF provides finance to viable, privately owned businesses on Merseyside whose funding needs cannot be fully met from other sources. By end-July 2000, the MSIF had made 441 investments totalling £22.9 million - which had leveraged an additional £57.1 million of other investment and created 2,346 jobs and preserved 2,294 further jobs.

5. The consultation document sets out how in practice the tax credit might work:

the Government would set in advance a maximum total for the amount of investment that could benefit from the tax credit;
CDFIs would bid for allocations from this total, submitting evidence of their capabilities and a business plan;
a body appointed by Government would then evaluate these bids, on the basis of published criteria (bidding rounds might be held annually or less often)
successful bidders would be given the right to raise a specified amount of tax-advantaged investment; and
once they had their allocation, CDFIs would be free to raise their tax-advantaged investment from investors.

6. The consultation document asks for views on a wide range of practical issues, including:

the most effective form of competitive allocation;
the form and selection criteria for CDFIs;
the best way of defining disadvantaged communities;
the range and type of enterprises that should benefit;
the level of the tax credit - the Task Force proposed 25 per cent over 5 years;
whether the tax credit should benefit both equity and debt investment;
whether it should provide for investment by individuals as well as companies;
whether relief on capital gains is relevant or justified;
the level of the cap on total amount of investment; and
the length of holding period required for the tax credit.

7. The Social Investment Task Force, led by Sir Ronald Cohen (Chair, Apax Partners & Co), reported to the Chancellor in October 2000. Its report ?Enterprising Communities: Wealth Beyond Welfare? included proposals for stimulating enterprise, investment and wealth creation in disadvantaged communities. The Government welcomed the SITF report in the November 2000 Pre-Budget Report.

8. The Small Business Service is today announcing £5.5 million of support for 15 CDFIs across England, through its Phoenix Fund for promoting enterprise in disadvantaged communities.

9. The consultation document ?Enterprising communities: A tax incentive for community investment? can be accessed by clicking on the link below. It is also available from:

The Public Enquiry Unit
HM Treasury
Parliament Street
London SW1P 3AG

Tel: 020 7270 4558

10. Responses to this consultation are requested by 2 July 2001. Subject to the outcome, the Government would expect to be able to bring forward legislation in the 2002 Finance Bill. Tax credit allocations are unlikely to occur before end 2002 or early 2003. The Government believes it is important that community development finance continues to grow in momentum between now and then.

11. The Chancellor made this announcement responding to an oral parliamentary question from Mr John McFall MP, Dumbarton.

Internal links

Enterprising Communities 2001