The aim of the CITC is to encourage private sector investment in both commercial and not-for-profit enterprises in disadvantaged communities. The legislation will apply to investments made on or after 17 April 2002, through Community Development Finance Institutions ("CDFIs"). Normally, CDFIs have to be accredited by the Secretary of State for Trade and Industry before investments can be made, but special rules provide that CDFIs accredited by 5 April 2003 will be treated as accredited from 17 April 2002, so that tax relief will be available for any investment made in such an organisation in that period.
There are "wholesale" CDFIs (which invest in other CDFIs) and "retail" CDFIs (which deal directly with enterprises). Total investment in any single CDFI cannot exceed £20 million for a wholesale CDFI or £10 million for a retail CDFI in a three-year accreditation period. This period can be renewed.
The incentive is that individuals and companies, subject to receipt of a tax certificate, can claim 25% of the invested amount, spread evenly over five years, against their income or corporation tax liabilities. Partnership interests do not qualify, but the investment can be by way of subscription for shares or securities in the CDFI (fully paid up for cash) or by way of loan to the CDFI (fully drawn down within 18 months). There are detailed rules that mean that the relief is clawed back if either: shares or securities are sold or redeemed in some circumstances; or a loan is repaid, other than at the CDFI's discretion, faster than at the permitted rate (25% a year after the first two complete years it has been outstanding).
There are rules governing the accreditation of CDFIs (broadly, a body whose principal objective is to provide finance and business advice for enterprises in disadvantaged communities) and the qualification of investments for tax relief. A "five-year period" is defined, beginning with the investment date, in which shares or securities cannot be redeemed, and loss of accreditation by the CDFI restricts the tax relief. Also, loans cannot be "disposed of" other than in "permitted circumstances" (broadly, failure of the CDFI). Then, any tax relief given is withdrawn by a Schedule D Case VI assessment, which also applies to certain sales of shares or securities. Beyond the five-year period, the tax relief is retained. In addition, there are many conditions, not unlike those found in the Enterprise Investment Scheme legislation (e.g. control of the CDFI, protection from risk, receipt of value) that can disqualify the relief.
This is a brief summary of more than 60 pages of new legislation and regulations. The provisions are complex and it remains to be seen what the take-up is. This may depend on the effort put in by the Small Business Service, acting on behalf of the Secretary of State, to stimulate applications for accreditation.
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