Frequently Asked Questions about Foundation East's Community Investment Tax Relief (CITR) offer
Last week I explained to you the difference between tax avoidance, tax evasion and tax efficiency and introduced you to a few ways to be tax efficient, whilst helping the UK economy. One method was to invest in CITR shares, offered by some Responsible Finance companies, including Foundation East. In this blog, I answer some frequently asked questions about Foundation East’s CITR offer.
WHAT IS FOUNDATION EAST?
Foundation East is a Responsible Finance Provider (formerly known as a Community Development Finance Institution). We are a Registered Society authorised and regulated by the Financial Conduct Authority and recognised by HMRC as an exempt charity. Foundation East is accredited by the Department for Business, Energy and Industrial Strategy (BEIS) to offer Community Investment Tax Relief (CITR).
Our mission is to provide financial products and services to support job creation, job sustainability and to strengthen communities across the east of England.
A membership organisation, we are democratically run and controlled by our members, who share and support our values and mission.
We raise capital to lend to our customers by selling shares in the Registered Society. We use this capital to lend funds to SMEs who have been unable to raise all or some of the funds they need for their business growth from mainstream banks. We support customers located across the east of England.
WHAT IS CITR?
CITR is a UK tax relief that encourages investment in Responsible Finance providers, who in turn invest the funds raised into SMEs run by financially excluded people often located in less advantaged communities. The tax relief is equivalent to a minimum of 25% of the value of the investment over a 5year period. The investment must remain with the Responsible Finance Provider for 5 years to be eligible for CITR. Foundation East is accredited by HMRC to offer CITR to its investors.
WHO BENEFITS FROM CITR INVESTMENTS? WHAT’S IN IT FOR ME?
An investment in Foundation East’s CITR shares provides a financial return on your investment ...
Investing in Foundation East CITR shares is primarily a social investment however investing in CITR shares provides a financial return on your investment in the form of a 25% tax relief over a 5 year period. So, for example, a £25k investment would entitle the investor to offset their tax bill by £6,250 over a 5-year period. CITR equates to a pre-tax return of 6.41% for standard taxpayers, 7.14% for corporate taxpayers and 8.33% for higher rate taxpayers.
An investment in Foundation East’s CITR shares provides a social return on your investment ...
Responsible Finance providers, including Foundation East do valuable work in financing the owners of SMEs that have been excluded from mainstream finance, to set up and grow their businesses. This includes individuals from black and minority ethnic groups, women, people aged under 25 and over 50, people with disabilities and people living and working in less affluent areas. The supportive finance we provide helps excluded business owners to fulfil personal ambitions, change their lives and the lives of their family for the better and improve their life and business skills.
An investment in Foundation East’s CITR shares provides an economic return on your investment ...
Our work to provide supportive loans to financially excluded small businesses helps to create new jobs and makes existing jobs more secure. Having people in work and paying their way reduces the financial burden on the state. Less universal credit (replaces job-seekers allowance, housing benefit child tax credit, income support and other benefits) will therefore need be claimed.
WHY IS OFFERING A COMMUNITY INVESTMENT TAX RELIEF NECESSARY?
The UK Government appreciates that Responsible Finance providers such as Foundation East, who are driven by a social mission rather than for profit (like banks) are expensive to operate. Yet, without them, the enormous social and economic benefits realised by supporting less advantaged people and businesses (which in turn creates and secures local jobs and services) would not be possible. Historically, capital funding to plug this market gap and thereby enabling the supportive financial service to operate has been provided (in part) by the public sector, including funding from central, regional and local government as well as the European Union. Due, however, to public sector funding constraints, this financial support is no longer available, particularly in the eastern region of the UK. CITR offers an attractive incentive to those socially motivated investors who require a financial return as well as knowing that their investment has a social and economic benefit to the community.
WHERE ARE FUNDS RAISED THROUGH CITR INVESTED?
All Foundation East’s loans are made to businesses located across the East of England. Loans made using funds raised using CITR are invested in SMEs that have been excluded from mainstream finance and include individuals from black and minority ethnic groups, women, people aged under 25 and over 50, people with disabilities and people living and working in less affluent areas.
CAN I CHOOSE WHERE MY INVESTMENT IS LENT?
When you buy CITR shares in Foundation East, you are investing in us, not the businesses we invest in. We decide which SMEs we lend the money and this decision is based on viability of proposal and detailed qualitative and quantitative assessment. In this way we spread the CITR portfolio risk across a wide portfolio of clients.
HOW WILL LENDERS KNOW WHO HAS BENEFITTED FROM THEIR INVESTMENT?
We update all our investors regularly via a quarterly newsletter to let them know what their investment via Foundation East has funded. We publish regular blogs and case studies on our web site too.
IF THE GOVERNMENT IS OFFERING AN INCENTIVE AS ATTRACTIVE AS THIS, SURELY IT IS TO COMPENSATE FOR THE HIGH RISKS INVOLVED?
It is true that Foundation East borrowers have difficulties getting affordable finance for their projects from commercial banks, but this is not necessarily because they are inherently risky. There may be many different reasons why borrowing from a mainstream bank, or indeed a peer to peer lender is not possible, for example the SME may not have any security to offer, may have an insufficient business track record and may have a low or unacceptable business or personal credit record. All our lending decisions are made locally, by people, not by computers. We put a great deal of work into building and maintaining relationships with our clients and by so doing, we minimise the default rate that we incur.
BUT WHAT HAPPENS IF FOUNDATION EAST LOANS DO FAIL? IS MY CAPITAL AT RISK?
There are no guarantees that our borrowers will pay back their loans within the agreed terms. Foundation East is in the same position as any other lending institution in this respect. All investment raised through the sale of CITR shares in Foundation East as an entity is pooled and the risk spread across a portfolio of clients. The risk to Investors is in Foundation East failing as an entity - not individual borrowing entities. All eligible loans are underwritten by the British Business Bank’s Enterprise Finance Guarantee Scheme, (EFG) which provides a guarantee on all outstanding amounts owed by borrowing customers. So, whilst there is always a level of risk, the overall risk from a CITR Investment in a Responsible Finance Provider with a strong balance sheet, such as Foundation East, could be considered better than alternative tax efficient investment choices, such as SITR, SEIS and EIS.
Investing in Foundation East CITR shares is a social investment, not a financial investment. Investors should regard any investment as made primarily to assist the furtherance of Foundation East’s objectives. It is not suitable for those who require a guaranteed income or ready access to capital. The value of your shares will not increase. The value of your shares may fall. There may be other risks involved in taking up an investment in Foundation East shares and some risks may be dependent upon your individual circumstances. If you have a concern, we recommend that you consult your Independent Financial Advisor, Tax Advisor or Accountant.
HOW DO I INVEST IN FOUNDATION EAST?
Thanks to our new online investment portal, investing in us couldn’t be quicker or easier. The portal guides an investor through the process including undertaking on-line identity checks using the independent credit agency, Credit Safe. On occasions, the portal may need you to provide additional information, such as your passport or drivers licence number if it is unable to identify you from the information you have provided (name, address, date of birth). Investment can be made using a debit or a credit card. 100% of your investment is loaned to eligible enterprises located in the East of England.
Once you have paid, the portal will email you a link where you can download your share and tax certificates.
Our website has comprehensive information for investors and we recommend that all potential investors read these before investing.
IS THERE A MINIMUM OR MAXIMUM AMOUNT THAT I CAN INVEST?
The minimum you can invest in Foundation East CITR shares is £50. The maximum you can invest is £100,000. Corporate investors that are also Registered Societies or Community and Co-Operative Benefit Societies are not restricted in the amount they can invest in Foundation East shares.
For individuals, an investment in Foundation East would reduce the investor’s income tax liability for:
For companies, an investment in Foundation East would reduce the investor’s corporation tax liability for:
- The accounting period in which the date of the loan falls
- Each of the accounting periods in which the subsequent four anniversaries of that date fall
- Providing the company has sufficient taxable income to use it all, the amount of relief available for each of those accounting periods is 5% of the funds lent. So, for example,
For both individuals and corporate investors, if the investor has insufficient tax liability to make full use of the relief, unused relief can be carried over.
HOW LONG DO I NEED TO KEEP MY MONEY IN FOUNDATION EAST CITR SHARES?
HMRC stipulates that to obtain maximum tax relief under the CITR Scheme, investors must keep their investment in the accredited institution for a minimum of five years.
For further details, please refer to HMRC Guidance.
HOW DO I CLAIM MY TAX RELIEF?
A tax relief certificate relating to the investment is automatically issued and emailed to you once you have successfully applied and paid for your shares online through our portal . Only one tax relief certificate is issued in respect of each investment. Individual investors can claim the relief on their self-assessment tax return for the tax year for which relief is due. A separate claim must be made for each of the years for which relief is sought. A company wishing to claim relief must make its claim as part of its company tax return for each relevant accounting period.
WHEN CAN I MAKE A CLAIM?
Tax relief cannot be claimed until the end of the tax year or accounting period to which it relates. See HMRC HS237 Community Investment Tax Relief Assessment Help-sheet for more information.
HOW DO I MAKE WITHDRAWALS?
Withdrawals are not permitted during the 5 years. At the end of 5 years we will contact you to inform you that your investment period is coming to an end and to invite you to re-invest for a further 5year period. If you chose to withdraw your funds we will pay them to the account they were originally debited from.
WHAT IF MY TAX, OR OTHER CIRCUMSTANCES, CHANGE?
If you cease to have sufficient tax liability to make full use of the relief, any unused relief can be carried forward. If you have any doubts or questions you should consult an independent financial advisor, tax advisor or accountant. It is your responsibility, to take appropriate investment advice to judge your or your organisation’s individual circumstances in relation to an investment in Foundation East.
WHAT HAPPENS IF FOUNDATION EAST CEASES TO BE ACCREDITED?
Relief could be lost if Foundation East were to lose its accreditation. In a case where an accredited Responsible Finance Provider did lose its accreditation, the number of tax years for which relief may be claimed is reduced. HMRC Guidance gives further details on how this is calculated. However, accreditation would only be withdrawn by the BEIS if the Responsible Finance Provider breached the conditions on which its accreditation was granted. Foundation East strives to abide by these conditions. In the unlikely event of accreditation being withdrawn, Foundation East will not accept any liability for any relief lost by any CITR investor.
WHAT HAPPENS IF THE CITR SCHEME RULES CHANGE?
As is the case of any tax relief, a change to applicable rules (including the discontinuance of relevant schemes) and the consequences arising from any such change are a matter for government. Foundation East will not accept any liability for any consequence of any change to the CITR Scheme.
HMRC has published Guidance notes on the CITR Scheme and a CITR Self Assessment help sheet which can be accessed from HMRC website
The Department for Business, Energy & Industrial Strategy published material concerning the accreditation of CDFIs.
This is the membership body for Responsible Finance Providers. Foundation East is a member of Responsible Finance. email@example.com; Tel: 020 7430 0222.