Making an investment
Relief under the CITR scheme is available to individuals and companies who invest in accredited CDFIs. To qualify for relief the investment must be:
- Loans which can be investments from banks, corporations and individuals.
- Equity investment raised through the sale of shares. Accredited CDFIs that have a co-operative and community benefit legal structure can raise equity through the issue of shares. Individuals and corporations can purchase shares and benefit from CITR.
- Deposit accounts Accredited CDFIs that offer bank accounts can offer CITR. These deposit accounts are insured by the Finance Service Compensation Scheme (FSCS) up to £85,000.
- Securities Investors can purchase securities offered by accredited CDFIs. The rules around securities are similar to those which govern the issue of shares.
There is no limit to the amount of investment on which a single investor may claim relief under the CITR scheme. However, there are rules on the amount of investment that can be raised by any single CDFI.
CITR regulations state that accredited retail CDFIs can raise investment of £10 million in a three-year accreditation period (and are allowed to raise 125% of their accreditation level, so up to £12.5m). However there is the option to seek new accreditations from BEIS in cases where they wish to raise above this investment limit. Therefore the investment limit should not be seen as a barrier to investing large amounts.
Although there is no minimum investment size in the CITR regulations, some accredited CDFIs may choose to implement a minimum size to avoid transaction costs on low value investments.
Claiming the relief
CITR provides a tax relief which reduces the investor’s income tax or corporation tax liability. The relief is worth up to 25% of the money invested, spread over five years. To obtain maximum tax relief under the scheme investors must hold the investment for at least five years. But there is scope for investors to receive some return on their investment over the course of those five years without sacrificing all of the relief that the scheme provides.
For both the individual and corporate investor, claiming tax relief is a straightforward process.
There is a specific box on the Company Tax Return and Income Tax Return into which the amount of relief can be added. However, as the relief is based on the average of the invested amount, this can vary in each of the 5 years of the investment period (if the investment takes the form of a loan). As such, establishing the amount of relief to be claimed in each accounting period can be more complex.
The relief is spread over five tax years (for individual investors) or five accounting periods (for investors that are companies).
In straightforward cases the relief available for each of those years or accounting periods is 5% of the amount invested. So the total amount of relief available is 25% of the amount of the investment.
The tax relief reduces the investor’s liability to income tax (for an individual investor) or corporation tax (for a corporate investor). If, for any year or accounting period, the investor has insufficient tax liability to make full use of the relief any unused relief is lost.
For investments made by individual investors on or after 6 April 2013 or corporate investors on or after 1 April 2013 there is a measure of carry forward of unused excess relief. Such relief can be carried forward and used in a later period within the five year period if the investor has sufficient tax capacity. Any unused excess relief at the end of the five year period is lost.
Individual investors should claim relief on their self-assessment tax return for tax year for which relief is due. There is a Help Sheet, IR237, available on the HMRC website to help individuals fill in the relevant part of the return.
A company wishing to claim relief should claim as part of its company tax return for each appropriate accounting period.
A single investment will result in an investor becoming eligible for relief in up to five tax years or accounting periods; a separate claim must be made for each of the years or periods for which relief is sought.
Individual investors who have received a tax relief certificate and who wish to obtain the benefit of relief for an investment for the current year without waiting for the year to end can effectively do so by
- writing to their tax office requesting a change to their current year’s PAYE code number, or
- by claiming a reduction their self-assessment (SA) payments on account.
Where an individual obtains the benefit of relief through an adjustment of their current year PAYE code number they will need to include a formal claim to relief within his SA tax return for the relevant year.
Return
The tax relief provides the equivalent of up to 5% of their total investment off of their annual tax bill. For individual investors the effective annual return ranges from 6.2% to 9.1% based on the individual’s tax rate. For corporates the effective annual return is 6.2%.
Some accredited CDFIs provide an additional return on top of the tax relief; others do not. The relief has multiple benefits. Some investors will be motivated by the additional return that the 5% relief provides on their investment. For some investors this additional return will be the tipping point for making the investment and compensate them for the risk they are taking with the investment.
Other investors will claim partial relief and reduce the cost of capital charged to the accredited CDFI. For example if the investor normally expects a 7% rate of return, given that 5% is returned through CITR they may choose to rebate 3% of the relief to the responsible finance provider. This means the responsible finance provider effectively pays 2%.
State Aid
State aid is the amount provided from Government resources. In the case of CITR this is the tax relief given to corporate investors (not individual). CITR operates under the State Aid de minimis regulations. As such, aid (at investor or investee level) will need to fall within the de minimis limits of €200,000 over a three-year period.
CITR is a relief of 5% per annum of the amount invested for a period of 5 years. The de minimis aid will therefore equate to the tax foregone over the period of the loan provided. If the loan is repayable throughout the term this may be calculated on the reducing balance basis.
Given the interest rates which are paid on most CITR investments the calculation finds that there is no state aid, therefore in most cases, State Aid should not hinder attracting investment under CITR.
CITR and other tax reliefs
For more information on how CITR compares to other tax reliefs available, please download:
CITR Comparisons
July 2018
Download – 205.95 KB
More information for investors can be found here.