Community Investment Tax Relief (CITR)

Underpinning some schemes is the desire of the Government to see more investment going into under-resourced communities throughout the UK. So it has introduced a new Community Investment Tax Relief (CITR) Scheme, set up under the Finance Act 2002, which offers a tax incentive to investors in accredited community development finance institutions (CDFIs).

CDFIs are financial institutions providing for social, economic and physical renewal in under-invested communities. They lend and invest in deprived areas and markets that cannot access mainstream finance. They provide financial services with the aim of generating both financial returns and beneficial social outcomes. CDFIs offer two primary products - equity and debt - and most specialise in one of these. They serve four types of enterprise market - micro-enterprise, small, medium and social enterprises. Some CDFIs also provide finance for individuals. This tends to be divided between lending for consumption and lending for home improvements. These CDFIs are often called "personal lending CDFIs".

The tax incentive with this scheme is available to individuals and companies. It comes in the form of a tax relief, which reduces the investor's income tax (or corporation tax) liability. The Scheme is run jointly by HM Revenue & Customs and the Small Business Service of the Department for Trade and Industry.

In June 2005, the Government announced a stakeholder consultation within the CDFI sector and the investment community on the case for, and practicalities of, extending a CITR type scheme to investments in CDFIs for personal lending activities. Personal lending CDFIs are organisations that provide lending and investment facilities at competitive rates to individuals in disadvantaged communities. They lend to people who are unable to access credit in the mainstream sector and therefore provide a viable alternative to high-cost options, such as home collected credit.

What is the CITR Scheme?

The introduction of a Community Investment Tax Credit (as it was previously described) was one of the recommendations made by the Social Investment Task Force to the Chancellor of the Exchequer in 2000. After clearance as a State Aid by the European Commission, the necessary legislation was enacted within the Finance Act 2002 and the first CDFI was accredited for the CITR scheme in March 2003.

The key defining features of a CDFI for the purposes of being accredited for CITR are as follows:

• It must be set up with the intention of carrying on its activities for at least five years, and demonstrate this by explaining its chosen structure and by submitting a detailed business plan including details of its lending practices, revenue funding arrangements and plans for use of CITR to facilitate the raising of capital;

• It must intend throughout the period for which it seeks accreditation, that not less than 75% of its activities are directed at the provision of finance, or the provision of finance and business advice for small or medium-sized enterprises (SMEs), for disadvantaged communities;

• It must only provide finance to enterprises that have been unable to obtain funding from other sources, primarily mainstream providers of finance, and must offer a range of products applicable to the needs of its customer base; and

• It will only provide finance to SMEs that are located in specific geographic areas of disadvantage or are operated by, or for the benefit of, certain disadvantaged groups.

Accreditation is granted for a three-year period after which it must be renewed if existing investors are to continue to receive tax relief or if the CDFI wishes to raise further funds under the Scheme. In order to comply successfully with the terms of accreditation CDFIs must also onward-invest within a certain time. By the end of the first year of their accreditation, 25% of the capital raised by the CDFI must be invested, 50% by the end of the second year and 75% by the end of the third year, with the 75% limit maintained subsequently.

What are the requirements of CITR?

CITR is available to any individual or company with a UK tax liability investing in an accredited CDFI where the investment is held for at least five years. The taxpayer, who can either be an individual or a company, receives a relief to offset against their income tax or corporation tax liability of 5% of the amount invested in the year the investment is made and a further 5% in each of the subsequent four years.

The total relief is worth up to 25% of the value of the investment. This tax relief is in addition to any interest or dividend paid by the CDFI. It should be noted that those without a UK tax liability such as overseas investors and pensions funds would not be able to receive support from the government for any investment in a CDFI.

How to find out more

The Community Development Finance Association has a dedicated investment section on its website where you can find out more about investment opportunities in CDFIs and read stories direct from investors and the projects their investments have helped.