April 2014 saw the introduction of the Social Investment Tax Relief (SITR), an income and capital gains tax relief for investors in social enterprises. Jack Stewart takes a look at what investors should know about this incentive.
1.What is a social investment?
A social investment is an investment made with the expectation of both financial and social returns. Social investments allow charities and social enterprises to grow their business, deliver on larger contracts or purchase long-term assets. They also provide an opportunity for investors to re-use capital for onward investment.
2.What is SITR?
Social Investment Tax Relief (SITR) is a tax incentive that provides tax relief to individuals who make investments to qualifying organisations, introduced by the Government in April 2014. It mirrors the relief offered by the Enterprise Investment Scheme (EIS).
The Government estimated that SITR could unlock up to £0.5bn in new finance for social enterprises in the UK over the first five years.
SITR allows investors to reduce their income tax liability by an amount equal to 30% of their investments in social enterprises. The maximum a taxpayer can invest is £1m, which equates to a relief of £300,000. Investments made through the SITR are also exempt from capital gains tax as long as the investment has been held for the full three-year period.
There is no minimum investment limit.
3.Can SITR be claimed on all investments?
No. To qualify for SITR the social enterprise must be:
- A community interest company
- A community benefit society
- A charity
- Any other body the Treasury decides to include.
This means that investments made in co-operatives, non-charitable companies limited by guarantee or companies limited by shares would not be eligible for SITR.
The social enterprise must also:
- Have fewer than 500 employees
- Have gross assets of £15m or less
- Be independent (not a subsidiary or under the control of another company)
- The investment must be used for a ‘qualifying business activity’ and must be used by the social enterprise within 28 months of being provided
A ‘qualifying business activity’ must be made with a view to making a profit but must not be:
- Dealing in land, commodities, futures, shares, securities or other financial instruments
- Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities
- Property development
- Fishery and aquaculture activities
- The subsidised generation of export of electricity
- Road freight transport for hire or reward
- Providing services to another business whose business consists substantially of one of the above activities
4.Can anyone claim SITR?
SITR can be claimed by UK taxpayer who makes a social investment either directly or through a nominee.
The investor (or an associate of the investor) must not:
- Be a partner or trustee of the social enterprise or a subsidiary of the social enterprise
- Be a paid director or employee of the social enterprise or a subsidiary
During the period from 1 year before the investment to the third anniversary of the investment, own more than 30% of the social enterprise’s:
- Ordinary share capital
- Loan capital
- Voting rights
Contra investments deals are ineligible.
This list has been taken from the full guidance document supplied by the Treasury.
5.Has SITR worked to increase investments in social enterprises?
It is early days as SITR has only been available to funders for 18 months. However there has been some interest and uptake with a few success stories.
Big Society Capital is working to grow the social investment market in the UK. Their Financial Relationships Director Evita Zanuso says: “Since SITR was introduced, we’ve seen five deals and the launch of two funds, which is reasonable for a new scheme and a new type of investment. What is very interesting is the different types of investments that have been made, from loan notes to social impact bonds, and the range of different social issues that are being addressed, from tackling youth homelessness to reducing reoffending.”
To date there have been five projects funded through more than £500,000 worth of SITR investments.
A common criticism of SITR is that eligible social enterprises can only receive a maximum of £280,000 (€344,827) of funding over three years. The current limit means that the relief can be offered without the Government having to seek approval from the European Commission.
The Government indicated its intention to seek approval for a larger relief scheme which would allow social enterprises to raise up to £15m over three years.
“We believe that once the size limit is increased to £5m, so that it looks and feels like EIS, we’ll see an increase in the number as well as size of deals. With this increase, it’s conceivable that we can open up £0.5bn worth of funding over five years as predicted,” explained Zanusso.
“The potential removal of the EU cap on investments is going to be a game changer that would allow social enterprises to access all the capital they need and, in due course, help replicate this further. Europe remains a big issue following the recent general election and an impending in-out referendum, and this is an early test for the new government to see if they can make our relationship with Europe work better for Britain.” explained Daniel Brewer, Managing Director of Resonance who have established an ‘off the peg’ solution for SITR investors (see below).
SITR eligible funds:
Whilst donors can claim SITR on any qualifying investments to social enterprises there have been two SITR specific funds set up.
The two funds are:
Social Investment Scotland’s ‘Community Capital Fund’ (launched in May 2015) will provide organisations, based in Scotland, with more affordable investment capital to support their growth. SIS aims to attract £500,000 worth of investment from UK based investors which will then be used to support between five and 10 social enterprises. Investors will receive a pre-tax return of 1.5% as well as the 30% tax relief.
Resonance Bristol Social Investment Tax Relief Fund. Sponsored by UBS Wealth Management and developed and run by ‘impact investment specialists’ Resonance, the fund aims to invest in about a dozen social enterprises in and around Bristol. Resonance has targeted a post-tax Internal Rate of Return of approximately 8% (overall rates may vary depending on individuals tax circumstances). This fund is a pilot for Resonance, who plan to grow over £30m worth of SITR funds across the UK over the next 2-3 years. This expansion is dependent on the removal of the EU cap which would enable bigger donations and bigger funds.
Social Investment Tax Relief: A brief guide – by Social Investment Scotland, Scott-Moncrieff & Morton Fraser
An essential guide to Social Investment Tax Relief – Big Society Capital
A Social Investment Fund for Bristol by Resonance