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Changes to encourage more investment in disadvantaged communities announced

Changes to encourage more investment in disadvantaged communities announced

DEPARTMENT FOR BUSINESS, ENTERPRISE AND REGULATORY REFORM News Release (2008/032) issued by The Government News Network on 5 February 2008

New measures to boost the amount of finance raised and channelled into new and expanding businesses in disadvantaged areas have been announced by the government today.

The changes are designed to strengthen the ability of organisations, known as community development finance institutions (CDFIs), to attract private investment. In turn, these organisations provide access to finance for enterprises in disadvantaged communities that have been turned down by mainstream providers like banks.

Enterprise Minister Shriti Vadera said:

"By allowing more community development finance institutions to lend with the backing of government secured loans, we are improving the options available to small businesses looking for finance. Together, these changes will enable the community development finance sector to attract greater private investment, increase access to finance, and foster enterprise in the most disadvantaged communities in the UK."

Exchequer Secretary to the Treasury, Angela Eagle said:

"CDFIs' work in extending finance to economically disadvantaged areas is invaluable in helping our attempts to reduce the disparities in economic performance across the UK and draw on the full potential of everyone in our country. I am pleased to announce changes to the Community Investment Tax Relief that will make them work even better."

Phil Hope, Minister for the Third Sector, said:

"CDFIs can get into those places which mainstream finance can't or won't reach, financing thousands of enterprises, jobs and households in disadvantaged communities. We want to improve the way Community Investment Tax Relief works - because we're committed to supporting innovative social investment models in the long term. We know such models help social enterprise to thrive, thereby creating social and economic value."

Notes for Editors

1. The new measures include:

* Regulations relaxing the requirement for a CDFI to invest funds raised under the Community Investment Tax Relief (CITR) scheme for the fourth and subsequent years following accreditation and allowing CDFIs that fail to meet CITR's onward investment requirements to continue to be accredited if the failure was outside their control.

* Increasing the range of financial instruments included within the scheme to include certain Shari'a compliant arrangements.

* Changes in the Finance Bill 2008, removing a disincentive for banks to make CITR investments in CDFIs to which they provide banking services.

* Authorising three more CDFIs to lend under the Small Firms Loan Guarantee (Bradford Business Enterprise Fund, Foundation East, and the South West Investment Group), helping small businesses gain finance to grow their business with the backing of a government secured loan.

2. The Community Investment Tax Relief (CITR) scheme provides a tax incentive to both individuals and companies to invest in businesses and community projects within disadvantaged communities. The incentive is available for investments in accredited intermediary organisations, called Community Development Finance Institutions (CDFIs), which themselves invest in enterprises that operate within or for disadvantaged communities. The tax relief is worth up to 25% of the money invested spread over five years.

3. Changes to the operation of the CITR have been informed by the CITR Operational review, launched in November 2006 as part of the Social Enterprise Action Plan. This can be found here: http://www.cabinetoffice.gov.uk/third_sector/social_enterprise/action_plan.aspx .

4. CDFIs are accredited under the CITR scheme by the Department for Business, Enterprise and Regulatory Reform (BERR). Guidance on this process can be found on the BERR website: http://www.berr.gov.uk/bbf/small-business/info-business-owners/access-to-finance/CITR/page37528.html. More general guidance on the CITR rules can be found on the HMRC website: http://www.hmrc.gov.uk/manuals/citmanual/Index.htm.

5. The Community Development Finance Association (CDFA) is the trade association for CDFIs in the UK, and further information on CDFIs (including case studies) can be obtained from its website http://www.cdfa.org.uk or by telephoning 020 7430 0222.

6. Accredited CDFIs must, over time, onward invest a minimum proportion of the money raised under CITR in suitable enterprises. Any failure to do so results in loss of accreditation for the CDFI and the end of tax relief for its investors. Regulations will improve the operation of these rules by:

* implementing a Budget 2007 announcement to change the current requirement that at all times after the third anniversary of its accreditation a CDFI must maintain an onward investment level of at least 75% to one based on average onward investment over the course of the year, and

* allowing a CDFI that fails to meet their onward investment requirement to keep its accreditation if it can satisfy the Secretary of State that:
- the failure is due to factors outside its control
- it took reasonable steps to avoid the failure, and
- it took steps to rectify the failure as soon as possible.

7. CITR's anti-avoidance rules currently disincentivise any bank from investing in a CDFI for which it acts as banker. Deposits from the CDFI to the investing bank are likely to reduce or eliminate the value of the bank's tax relief. The proposed Finance Bill clause will exclude, with retrospective effect, such deposits from these anti-avoidance rules. This will avoid the distortion of choice in the banking market and the extra transaction costs of CDFIs having to establish new banking relationships in connection with a CITR investment.

8. Current CITR rules only recognise investments (whether inward investment into, or onward investment by, a CDFI) that take the form of loans, securities or shares. So financial arrangements, including many Shari'a compliant arrangements, that in substance are akin to such instruments but which take some other legal form do not fit within the scheme. New regulations will mean that the CITR rules will have effect as if references to "loan" included reference to certain Shari'a compliant financial arrangements that replicate the effect of investments or loans at interest.

9. The Small Firms Loan Guarantee (SFLG) facilitates access to debt finance for those young small businesses that have viable business propositions but lack the collateral with which to secure a loan. It provides a Government guarantee to the lender, covering 75% of a qualifying loan of up to £250,000. In return for the guarantee, the borrower pays the Department for Business, Enterprise and Regulatory Reform (BERR) an annual premium of 2 per cent of the outstanding balance of the loan, assessed and paid quarterly. One of the recommendations of the independent Graham Review of SFLG was to increase the range of institutions to be accredited, and CDFIs were specifically identified to help broaden the reach of SFLG across the SME community. Over 30 institutions in total, ranging from major high street banks to smaller specialist institutions are accredited to use SFLG.

10. This addresses the Graham Review recommendation that the Government should encourage CDFIs to use SFLG and is further recognition of the role played by the Community Development Finance sector in facilitating access to finance for small businesses.

11. The first SFLG Annual Report to Parliament was published on 25 July 2007 and details the impact of the scheme over the last year. It can be viewed on http://www.berr.gov.uk/files/file40539.pdf. In Financial Year 2006/07 over 2,700 businesses were enabled to borrow over £210 million through SFLG.

12. Information on the three CDFIs newly authorised to issue SFLG loans can be found on their websites:

* http://www.befund.org
* http://www.foundationeast.org
* http://www.southwestinvestmentgroup.co.uk

13. The Department for Business Enterprise and Regulatory Reform helps UK business succeed in an increasingly competitive world. It promotes business growth and a strong enterprise economy, leads the better regulation agenda and champions free and fair markets. It is the shareholder in a number of Government-owned assets and it works to secure, clean and competitively priced energy supplies

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