27 March 2017
Allia calls for HMRC to dismantle barrier to retail bond market
Following the publication of Stronger charities for a stronger society by the House of Lords Select Committee on Charities, Allia is calling for HMRC to take action to improve accessibility for charities to the retail bond market.
Allia was pleased to give evidence to the House of Lords Select Committee on Charities and we welcome the final report with its acknowledgement of the many opportunities and challenges for the charity sector regarding alternative forms of finance.
We agree with the Committee that, for charities with a viable revenue-generating business model, social investment has the potential to improve the range of financial options. We also agree that there is still much work to be done, and that “as the market grows and matures there needs to be a continued focus on improving its accessibility to investors and charities alike” [point 393].
One way in which Allia has already improved accessibility is through the creation of Retail Charity Bonds. Our platform reduces the transactions costs to make it possible for charities to raise unsecured loan finance through the mainstream retail bond market in amounts that would be considered relatively small compared with typical capital markets deals. To date four bonds have been successfully issued, from £11m for Golden Lane Housing – the smallest ever listed retail bond – to £33m raised this month for Greensleeves Care.
Retail Charity Bonds are also providing accessibility for investors to investments which will generate positive social impact. Since the bonds are listed on London Stock Exchange they can be considered suitable by a wide range of investors. Unlike many social investment deals, which have relied heavily on charitable foundations and dedicated social funds, Retail Charity Bonds are attracting investment from mainstream institutional investors, pension funds and individuals, who can invest as little as £500 through their broker. The level of demand from investors is such that all four bonds have closed early, with the most recent bond for Greensleeves Care raising £33m in just one week.
However, access to this market currently remains limited to those charities that are able to borrow £10m or more.
The platform is based on a special purpose vehicle, Retail Charity Bonds PLC, which issues the bonds and lends the proceeds on to the charity. This structure works because the issuer is recognised by HMRC as a securitisation vehicle, which allows it to match the interest received on loans to the interest paid to borrowers, so that no taxable profit arises. The regulations concerning this tax treatment require companies to have ‘capital market arrangements’ of at least £10m.
This arbitrary figure may be designed to prevent companies being inadvertently treated as securitisation vehicles when they shouldn’t be, but it also blocks those that should be treated this way from issuing amounts below the £10m threshold. There seems to be no logic to this amount, except that nobody could imagine anyone wanting to take smaller deals to the capital markets.
Allia is however committed to helping charities raise the finance they need to deliver their mission. We are therefore calling on HMRC to allow companies to opt-in as securitisation vehicles regardless of deal sizes. There is no cost to the Exchequer from this change, no potential negative impact to be weighed up. It’s merely a simple finesse of legislation to dismantle an unnecessary barrier and provide more charities with access to the bond market.