Social Investment Tax Relief: Who will qualify?

As social sector organisations dash to get their responses to the Treasury for the consultation on Social Investment Tax Relief, diverse recommendations, taxing questions and prickly viewpoints are coming to the fore.

At the last Budget the Government launched a consultation, which closes Friday, on how to bring in tax relief for those investing in social enterprise. The Government’s aim of the tax break is clear: to encourage private investment in social enterprise and help it to become self-sustaining in the long term. 

It proposes that individual investors be allowed to make social investment tax relief investments of up to £1m a year in regulated social sector organisations – charities, community benefit societies and community interest companies. Investors will be able to claim back up to 30% of their investment against their income tax or capital gains tax liabilities.
In a recent blog post for Public Finance, Dan Corry, a former head of public policy for No.10 Downing Street put on his Treasury hat to pick apart the case for the tax break. For the Treasury to get behind the Social Investment Tax Relief (SITR), the argument needs to show that the money foregone – the taxpayer's shilling – is well spent.
The Enterprise Investment Scheme (EIS) – a similar tax break, which gives tax relief for investments in shares in qualifying companies, and for investing in Venture Capital Trusts that invest in smaller, high-risk companies – is buttressed by the view that the firms investors support will grow to scale, producing wealth, jobs, and more tax revenue. 
But a tax break on social investment is not as clear cut. "Unless they are quasi-business type social enterprises, we would not expect to see enormous growth in individual social enterprises, nor are the investors likely to be taking massive risks in return for a (rare) but potentially enormous upside as is the model in venture capital", says Corry.
In this light, SITR is more a question of “subsidising the investor to take a sub-market return because we think there’s a social benefit to doing so at both an individual not-for-profit level and for society and the economy as a whole” Corry adds.
And, if SITR is to be bolstered by the argument that there is a large social benefit to come from its implementation, the treasury, investors and social enterprises alike will need to be both committed to and convinced of the cause.
Trust me I'm a social enterprise


UnLtd and Big Society Capital have drawn attention to a pressing need to cultivate trust around social enterprise and the promise of social gain, and recently hosted a roundtable discussion on ‘trust engines’: mechanisms that allow social entrepreneurs to articulate, evidence and then protect the social value and social purpose of their organisations.
In a recent article on Pioneers Post Dan Lehner head of ventures at UnLtd highlighted the need to introduce greater clarity into the social enterprise space. "Perhaps more than any other - one conundrum still stands out: namely “what kind of companies should represent eligible investments for SITR?” says Lehner. 
Currently the proposed position is that the relief be applied when investment is made into a charity, community interest company or community benefit society. But, the treasury consultation paper talks about only giving a tax break where the social enterprises receiving investment 'are becoming commercial' (para 4.8).
There is a need for clarity around what counts as social investment, but Big Society Capital have argued in their proposals for SITR that the scope is too narrow. In a response to the consultation made public last week, Big Society Capital said it approved of the basic structure of the tax relief proposed by government, but that it wanted several changes to make it work more effectively.
Limits and exclusions
A key theme in Big Society Capital's response is that the the proposed details are too limiting. One proposal is to allow investment in social impact bonds, which do not currently use community interest companies, community benefit societies or charity legal structures. 
BSC have also proposed that the Government should allow unsecured loans to qualify for the tax relief contending with the current proposal for loans to qualify only where there is a specific link between the return on the investment and the success of the organisation.
Nick O’Donohoe, chief executive of Big Society Capital, said in a statement accompanying the response: "The Government’s commitment to establishing a social investment tax relief is a timely initiative with the potential to transform the social investment market.
"However, getting the terms of the tax relief right will be essential and there are some critical issues that still need to be addressed if it is to be effective."
Co-operatives UK and Locality have also voiced their support for the Social Investment Tax Relief in a response to the consultation, but with a sprinkling of key concerns around inappropriate limits and exclusions.
A principal concern for Co-operatives UK is that bona fide co-operative societies do not currently qualify for the relief. Another concern the body outlines is that the exclusion of IPS co-operatives could have a perverse incentive for enterprises to register as community benefit societies in order to qualify for investment tax relief, where the co-operative society form may be more appropriate.
Dan Corry also points out that among the Community Interest Companies (CICs), Community Benefit Societies (Bencoms) and charities that qualify for the tax break "only those with fewer than 250 employees seem likely to benefit". This creates a barrier for larger charities with social enterprise arms seeking to benefit from SITR.
A key concern highlighted by Corry is that, if technical issues of the tax break are not sufficiently tackled, “it is relatively easy to see lots of would-have-been firms turning themselves into social enterprises to jump through this loophole.” 
Over the coming weeks, as working groups contend with a range of taxing issues, legal structures, and technical conundrums, diverse organisations and individuals operating in the social economy will wait to see in what shape SITR emerges from the consultation.
The consultation on the Social Investment Tax Relief closes for submissions on Friday 6 September.