Social Investment Tax Relief: what is it for, how does it work, and what does the future hold?

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Social Investment Tax Relief (or SITR) is a valuable but, at present, underused relief, which can help charities and other forms of social enterprises raise more affordable, longer term funding to support and grow their trading activities.

What is SITR?

Introduced in 2014, and expanded in 2017, SITR encourages individuals to invest in social enterprises by offering a tax relief on investments.

SITR works like this:

  • An individual invests money into a social enterprise by way or shares or debt
  • The investor claims 30 per cent income tax relief on the amount invested
  • The social enterprise applies the funds in a trading activity
  • After three years (or longer) the investment is sold or repaid

For example, if an investor lends £1,000 to a social enterprise, under SITR the investor can offset 30 per cent of the amount invested against other income tax liabilities. So the real cost to the investor is only £700. But the social enterprise receives £1,000. At the agreed repayment date, the social enterprise repays the £1,000 to the investor. Plus, potentially, interest along the way.

Under SITR, investors might also benefit from other tax reliefs namely:

  • No capital gains tax on any gains made when the investment is sold
  • The ability to defer capital gains tax liabilities by re-investing the gain, under SITR, into a social enterprise

A few key features of SITR

Tax relief is available on loans, as well as shares
Unlike similar tax reliefs in the private sector (EIS or SEIS), this tax relief is available on loans as well as share investments. Which means investors who lend money to social enterprises don’t have to wait for the business to be sold to get their money back.

This is a tax relief to support trading
SITR is a tax relief to support businesses. Which means charities can take advantage of SITR to raise funding for their trading activities (whether primary purpose trading, or via a trading subsidiary), but not for their charitable activities.

And the organisation raising funding must be carrying on a “qualifying trade” ie, a trade that is not on a list of excluded activities (such as property development, leasing or letting, or money-lending).

Only “social enterprises” can raise funding under SITR
For an organisation to be eligible to raise SITR funding, it must be a charity, community benefit society, community interest company or so-called “accredited social impact contractor” (typically a special purpose vehicle that will issue social impact bonds to raise finance for a particular project).

This is a tax relief for individuals
Only “real” people can claim SITR. Partnerships, trusts, pension funds or other investment vehicles such as family investment companies cannot invest under SITR.

Limits
Social enterprises that have been making sales for less than seven years can raise up to £1.5 million under SITR over their lifetime. Older enterprises can raise up to around £280,000 - £290,000 in any rolling three year period.

An individual can invest up to £1 million in each tax year under SITR.

Why raise monies under SITR?

Well, for starters, any social enterprise that can offer tax relief to potential investors is going to put itself at an advantage, and increase the chances of a successful funding round.

And if you compare SITR debt to bank debt:

  • If lenders are getting tax relief, a social enterprise can offer a lower rate of interest and investors still make a good return
  • SITR debt must be unsecured and cannot be guaranteed – banks typically only lend if they can take security or some form of personal guarantee
  • An investor cannot demand any repayment of SITR debt for at least three years, so it gives a valuable breathing space before repayments start, and it means that with SITR debt there is no risk of lenders “pulling the plug” early

Examples

We’ve already seen some great examples of SITR being used to help social enterprises raise growth capital. For instance, the social enterprise Jericho Foundation recently secured the first investment from Resonance’s West Midlands SITR Fund for its ReUsers business (which takes unwanted stuff and turns it into items that people want to buy). That investment will allow the business to take on a third building, to grow its turnover by 25 per cent over the next 12 months, and to create an extra six apprenticeships and volunteering positions for people who have significant personal or occupational barriers to employment, training or social inclusion.

The future

In a recent report commissioned by the EU comparing venture tax reliefs around the world, SITR was ranked fourth, globally. Yet to date, take up of the tax relief has been lower than anticipated.

The Government is launching a review of SITR as part of its wider overhaul of incentives to stimulate and grow social enterprises, and in his Spring Statement on 13 March the Chancellor announced a call for evidence on the SITR scheme and its impact on social enterprises. This is an area that is supported by both main political parties, and so (irrespective of the make-up of Government) we’re hopeful that the review will lead to a wider, and more generous relief to allow more social enterprises to raise funding, and develop and grow their businesses.

Mills & Reeve is actively involved in that process, both as a member of one of the working parties in the Government’s Social Impact Implementation Taskforce, as well as working with organisations such as Big Society Capital to help frame their arguments for change to the SITR rules. We’ll keep you informed of developments!

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