Investments in enterprise activity are an excellent way for individuals to reduce their income tax bill, with many Government backed schemes in place, such as the EIS (Enterprise Investment Scheme) and VCT (Venture Capital Trusts). However, the same range is not available to corporate taxpayers. That is not to say, though, that SMEs cannot reduce their tax bill through effective investments.
Perhaps the most readily accessible form of tax relief is CITR (Community Investment Tax Relief), though as it aims to encourage investment in disadvantaged communities, investment targets are less flexible. For a company to qualify for the relief, it must make an investment in a CDFI (Community Development Finance Institute) which has been accredited by the Department for Business, Energy and Industrial Strategy. The list of accredited CDFI’s is available here. A CDFI provides finance to enterprises in disadvantaged areas, either directly (‘retail’ CDFI’s) or indirectly (‘wholesale’ CDFI’s, which distribute funds to their ‘retail’ counterparts). Choosing to invest in a ‘retail’ CDFI over a ‘wholesale’ one, or vice versa, does not affect the level of tax relief available to the investor company.
How to Invest in a CDFI
Companies have two options if they decide to invest in a CDFI:
- They can decide to subscribe for shares, for which a minimum holding period of five years applies. If the shares are sold prior to this period, relief is withdrawn.
- They can make a loan to the CDFI. Under certain conditions, and if the CDFI is a bank, making a deposit could be considered a loan. Whether it is a bank or not, the company must make the loan available in full, though a drawdown option is available if it is made within 18 months of the initial investment. If only a proportion of the funds supplied by the company is needed immediately, this should not normally result in the investor company missing out on the available relief. A holding period of five years is also enforced if this option is chosen.
Companies should be aware that whichever option is chosen, any income from the investment is subject to corporation tax at the standard rate.
In order to qualify for relief, a company must be the sole beneficial owner of the investment and must not invest in order to avoid tax. Additionally, the company can neither be, nor control, a CDFI. If an individual with a connection to the company has control of the CDFI, or if arrangements are in place which allow for the company to gain control, either directly or via an associated individual, they will not be able to proceed with the investment.
A company can claim relief for the accounting period in which it made the investment, and for the following four periods in which the anniversary of the investment falls. It can claim the lower figure of 5% of the total investment, or the amount of corporation tax due. If the corporation tax which is owed is less than 5% of the value of the investment, unused relief can be carried forward for the next four accounting periods.
Companies can receive returns, including payment for goods, dividends, and payments for trading debts, without affecting relief. They can also receive investment returns within set limits, which vary, and depend upon how many years the investment has been held. If the return is higher than that permitted, relief will be withdrawn.