Tax Efficient Investments 

Understanding Social Investment Tax Relief and how to make it work

  • Learn what the Social Investment Tax Relief is and how it compares to other social enterprise structures.
  • Understand what has hampered take-up of this tax relief.
  • Consider what changes might be made to improve SITR.
CPD
Approx.30min
Understanding Social Investment Tax Relief and how to make it work

Social Investment Tax Relief (SITR) was designed to increase the access to reasonably-priced investment capital by a range of eligible organisations which were struggling with established channels.

It is a tax incentive modelled on the better-known Enterprise Investment Scheme (EIS). 

Unlike EIS, though, its aim is to generate a positive social return (or ‘impact’) as well as a positive financial return. But it is failing.

SITR was launched in 2014 and was designed to increase the availability of capital to a range of eligible organisations that might struggle to raise finance at a reasonable cost through traditional methods: community interest companies, accredited social impact contractors, community benefit societies and charities. 

The key difference with EIS is any investment can be structured as a loan (or equity) as opposed to as an equity, given the capital structures on the organisations above. 

Another difference is the limits per organisation are lower – a qualifying social enterprise can only raise £1.5m over its lifetime, or only circa £300,000 if the entity has been operating for more than seven years.

What is SITR?

SITR is a way in which social enterprises can raise funds through investment, and offer their investors tax relief.

Designed to help fill the “funding gap” for social enterprises, the investment can be structured as equity or debt.

The tax reliefs:

  • Income tax relief at 30 per cent (with carry back).
  • Capital Gains Tax (CGT) deferral – if a chargeable gain (made after 5 April 2014) is invested into an SITR qualifying investment.
  • Tax-free capital gains – gains made on disposal are free of CGT.
  • Loss relief against income and IHT exemption may also still apply if the SITR qualifying investment is structured as equity rather than debt.

The limits:

  • Individual investor limit of £1m per tax year (on top of the £1m EIS amount, or £2m if it's a knowledge intensive business).
  • Any social enterprise can raise up to around £300,000 in any rolling three-year period.
  • However, a social enterprise that has been trading for less than seven years can raise up to £1.5m over its lifetime.

The qualifying social enterprises are:

  • Charities
  • Community interest companies 
  • Community benefit societies
  • Be a “prescribed” bencom (i.e. incorporate, in its rules, the asset lock).
  • Accredited social impact contractor – typically a special purpose vehicle that will issue social impact bonds to raise finance for a particular project.
  • Any other body prescribed by the Treasury – so they have given themselves the flexibility to extend the scheme in the future to other or new types of social enterprises.

Other than social impact contractors, these are all forms of organisation which are overseen by a regulator (other than HMRC), and are subject to asset locks and restrictions on paying out profits to members.

What has gone wrong? 

SITR has seen little take-up from the bodies it was designed to assist which means this potentially important tax relief needs a governmental review now.

Anecdotal evidence suggest around £2m was invested last tax year (2017-18), while the official amount for 2016-17 is 25 social enterprises received investment and £1.8m of funds were raised. Nothing to crow about, then.

Since SITR was launched, to end of 2016-17 tax year, only 50 social enterprises have raised funds of £5.1m through the scheme.

Clearly this is disappointing for everyone involved in the social investment sector, at a time of spiralling interest from investors for social impact investment.

Currently investors don’t have many options for tax-efficient social investment. There is, of course, Gift Aid but that is donating, not investing. And the feedback from investors is they like the fact SITR enables them to generate a modest financial return and a high social return. 

So demand from investors is not the problem – it is simply a supply issue and the government should look to loosen the restrictions on SITR to ensure more UK venture capital scheme capital brings social, as well as financial, return.

Admittedly, following recent EIS and VCT rules changes, more capital will be invested into growth businesses, boosting UK Plc and creating jobs which is, vicariously, a certain level of social return. 

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. In what year was SITR launched?

  2. Is the following statement about SITR true or false? "Designed to help fill the “funding gap” for social enterprises, the investment can be structured as equity only."

  3. Investors like the fact SITR enables them to do what?

  4. When it comes to tax-efficient social investment, what options do investors have, according to the author?

  5. What type of investment restrictions should be revisited, Mr Hopkins suggests?

  6. Investors, fund managers and investee companies need what to help grow the market?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Learn what the Social Investment Tax Relief is and how it compares to other social enterprise structures.
  • Understand what has hampered take-up of this tax relief.
  • Consider what changes might be made to improve SITR.

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