New rules on tax relief and crowdfunding
What this could mean for community energy projects
26 March 2014
CSE's Rachel Coxcoon explains the implications
This month, two financial regulatory announcements were made which could affect the ability of community energy projects to raise income and offer an attractive return to their investors. Firstly, the Chancellor announced in the budget that the Enterprise Investment Scheme (EIS) tax relief currently available to renewable energy projects will be removed from projects qualifying for ROCs and RHI.
Secondly, the Financial Conduct Authority published a new document, snappily entitled “The FCA’s regulatory approach to crowdfunding over the internet, and the promotion of non-readily realisable securities by other media”. Both things sound like they might make for very dull reading. But make no mistake about it, both things are important news.
The FCA’s new rules are the result of a consultation and investigation into the use of crowdfunding and other collective-investment vehicles, which have exploded in popularity across all sectors in the last few years. Such investments are known as ‘unlisted securities (i.e. shares that aren’t listed on the stock exchange or AIM). The new rules mean that companies that want to raise money through selling such securities will need to show that they are promoting their investment to those who really understand investment and the risks involved.
As such, investors in such schemes must be categorised as ‘sophisticated’ (i.e. there’s lots of evidence that they have a portfolio of multiple other investments and some serious disposable income), or they must be investing not more than 10% of their ‘realisable wealth’ in such securities (so their money outside of their home, pension etc). And that’s 10% into all such investments of this nature, not just the particular project that you want them to invest in.
Some in the community energy field think that this is unnecessary regulation and could seriously damage the ability of community energy projects to raise funds, since crowdfunding is an increasingly common way of doing so. But community energy projects are a very small niche in the crowdfunding ecosystem, and these regulations need to be viewed in the context of crowdfunding as a whole; there is no doubt that the explosion in popularity of this method of raising investment across a whole range of industries and project types has led to large numbers of people investing in projects where there is little hope of them seeing any return on their investment (or indeed, recouping their initial investment at all).
So what now for community energy projects? Well, first and foremost, it’s important to note that the regulations do not cover Industrial and Provident Societies for the Benefit of the Community (IPS BenCom). If this is the legal structure your organisation has adopted, then you are free to continue to operate as before (and you can learn more about how to choose an appropriate structure through our video and exercises).
Essentially, Industrial and Provident Societies are recognised through the act of Parliament that defines them in law as ‘organisations that will act in good faith’. As such the legislation governing them has always been less onerous than that for companies, and this is one of the reasons many community energy groups choose this structure. But be warned; there is already some concern that some IPS share offers are too light on the representation of risk and it has long been noted that the legal instruments that define what an IPS is are much in need of updating. If these changes to crowdfunding regulation result in more organisations (not just in community energy) choosing the IPS structure in order to continue to operate this way, it won’t be long before the regulatory lens is more closely focused on IPSs as well. Properly understanding and communicating the risks inherent in your project should be taken seriously, whatever legal structure or fundraising platform you are using.
EIS tax relief
And what about the withdrawal of EIS/SEIS tax relief on projects that qualify for ROCs and/or RHI payments? In a nutshell, shares in companies benefitting from ROC’s or RHI subsidies issued on or after the date of Royal Assent of the 2014 Finance Bill will not qualify for EIS/SEIS tax relief (which will probably happen in July). To illustrate their potential value to community energy schemes, SEIS allows a taxpayer who has invested in an eligible scheme to claim back up to 50% of their investment in tax relief, and has been used by some community energy schemes to offer considerably increased returns overall to investors who can benefit from this.
As with the FCA ruling, the removal of EIS/SEIS relief for ROC/RHI eligible projects is not something aimed at community energy projects per se, but they will certainly be caught up in it. The rationale is that Treasury wants to ensure that these mechanisms are used for their intended purpose, and that is to stimulate investment in high-risk projects and industries. An industry benefitting from a government-backed income stream such as ROC and RHI does not, in the main, fit the high-risk description.
High-risk or low-risk?
Therein lies something of a contradiction, which was handily summarised for me by Karl Harder of Abundance Generation earlier this week. If the Treasury believes renewable energy projects benefiting from government-backed income streams such as ROCs and RHI to be so low-risk as to feel the need to remove EIS tax relief from them, how can they also be caught in the FCA’s net that is supposed to protect unwary investors from high-risk investment?
The real issue here is that community energy projects are only a sub-set of the much bigger renewable energy field, and are only a tiny sub-set of the wider crowdfunding field. They may indeed represent a much higher risk investment than a standard commercial renewable energy project, and therefore there could perhaps be a case made that EIS relief should remain where the project is clearly a community operation? On the other hand, where a crowdfunding platform is being used to raise investment in a community renewables project that has already secured planning permission and will qualify for FiT/ROC or RHI income, then there is a guaranteed, government backed income stream that would give even the most unsophisticated investor good reason for confidence. Surely then the FCA could consider a relaxation in the rules for such projects?
But these seem to be mutually exclusive positions. It seems unlikely that community energy projects can simultaneously convince Treasury and FCA that they are both high-risk enough for tax relief and low-risk enough for a relaxation of the crowdfunding rules. The question therefore becomes about which is the most valuable campaign to wage?
These are all questions for the DECC/Cabinet Office Community Energy Finance Roundtable, chaired by CSE’s Simon Roberts, whose working group on investment product design and regulatory frameworks is being led by Karl Harder from Abundance Generation. Answers please!
For more information on the Community Energy Finance Roundtable, here are the terms of reference and notes of its two meetings, one describing the issues identified and one detailing the four workstreams being pursued. The Roundtable was tasked by the Community Energy Strategy to make recommendations to Energy Secretary Ed Davey and Minister for Civil Society Nick Hurd in the summer.
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