Clause 71

Finance Bill – in a Public Bill Committee am 2:45 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Community investment tax relief

Question proposed, That the clause stand part of the Bill.

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss that schedule 25 be the Twenty-fifth schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Community investment tax relief was introduced in 2002 under the previous Government to encourage investment in disadvantaged communities. In practice, individuals and companies that invest in  accredited community development finance institutions by way of equity or loan are able to claim income tax relief or corporation tax relief of 5% of the amount invested over five years, as long as the investment remains. There are detailed rules about when the investment may be withdrawn.

My understanding is that clause 71 will relax the current onward lending roles of community development finance institutions. At present, the onward lending limit requires them to re-invest at least 25% of the fund by the first anniversary of the accreditation date, 50% by the second anniversary and 75% by the third. With effect from April 2013, the annual dates for calculating whether the prescribed level of onward level has been obtained will be altered from the anniversary of the community development finance institution’s accreditation date. That is obviously a welcome move, as it enables more time for community development finance institutions to meet the required onward lending limits.

My understanding is that state aid approval for the scheme expired in October 2012 and that in order to continue with the relief, the Government have had to amend it to meet state aid requirements. What assessment has been made of the additional investment that is expected to be made from CDFIs as a result of the changes? The tax information and impact note states that the new limit on corporate investors will affect only a small number of companies, as around 120 companies have made an investment under the scheme, with fewer than 10 affected by the cap. How many CDFIs have those 10 companies invested in? How much have they invested to date? The number of companies alone does not give a full sense of the amount of investment that we are talking about.

What more can the Government do to persuade corporate investors to participate in the CDFI scheme, given that there have been only 120 investors out of a potential 3,100 since 2002? In assessing the changes to comply with state aid rules, have the Government also considered how to boost the scheme?

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 71 and schedule 25 will make changes to the community investment tax relief. The changes will provide greater flexibility for claimants of the reliefs and limit the relief for corporate investors in the scheme to ensure that the scheme is compatible with the de minimis limits for state aid. The relief plays an important role in bringing investment into businesses in disadvantaged areas, and has done for more than 10 years now.

Let me briefly provide hon. Members with some background to the clause and schedule. The tax relief for investment is currently restricted to a relief equivalent to 5% of the amount invested, which is allowed over a period of five years to give a total relief of 25%. There is no provision to allow unused relief to be claimed in any other period. The scheme was an approved state aid, but the approval expired in October 2012.

Following discussions with the European Commission, it was agreed that the scheme could be brought within the de minimis limit of €200,000 in any three-year period. The scheme remains a state aid, but not a notifiable one, as long as the limits are adhered to. It will affect only corporate investors; state aid rules do not apply here to individual investors.

The changes made by schedule 25 will allow an investor to carry forward and use in later years any unused relief within the overall five-year period. That will provide flexibility for investors to ensure that they obtain the maximum relief available. Individual investors might not be greatly affected, but corporate investors in difficult economic circumstances will welcome the opportunity created.

Further changes will restrict the overall amount of tax relief for corporate investors to the de minimis limit previously stated. Although that appears to be a substantial restriction, it is not anticipated that it will greatly affect corporate investors, who mainly invest by way of loans. To calculate the relief given, corporate investors will compare their interest return and tax relief obtained with the commercial rate to which they would have lent to community development finance institutions. HMRC has issued draft guidance to explain the calculation and will issue full guidance pending the successful passage of the Bill. Fewer than 10 corporate investors are potentially affected by the change.

I was asked how many CDFIs the 10 companies have invested in, but I cannot answer that question because HMRC does not track what individual investments the companies make. The question is fair, but the hon. Lady will understand why it is not possible to answer it. It is not expected that the changes will significantly alter the level of investment, and they are likely to have an impact on only a small number of companies.

I was also asked what more could be done to encourage investors to use this relief. It is right to say that it has not been as well used as was the intention when it was introduced in 2002. We think that the changes that we are making will help to make the scheme more appealing. It is well established, so I am not sure that a lack of awareness is a problem affecting the take-up of community investment tax relief, which has been in place for 11 years. None the less, the measures represent a constructive change to the current regime, and I welcome the hon. Lady’s support for them.

Question put and agreed to.

Clause 71 accordingly ordered to stand part of the Bill.

Schedule 25 agreed to.