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
Department for Business, Enterprise & Regulatory
Reform
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Public enquiries +44 (0)20 7215 5000
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