State Aid elephant concerns as Treasury trumpets Social Investment Tax Relief


The debate around the Social Investment Tax Relief is in full swing, as the deadline for proposals around its implementation closes. What are the key issues set to determine the impact of the tax break?

Diverse organisations have voiced proposals to help shape a meaningful initiative for social change ahead of the consultation on the Social Investment Tax Relief, launched at the release of the last Budget.
SITR is welcomed across the social sector as a potential driver of social change. But the details of the tax break are deemed critical to its effect on a diverse social sector. There are worries that many won't be eligible to benefit, including many bigger charities, alongside warnings of a detrimental effect on charitable giving. For some the key concern is that SITR won't have enough teeth, for others it could be capable of cannibalizing philanthropy.
Dan Lehner, head of ventures at social entrepreneurs foundation UnLtd, said that one conundrum stood out as the Social Investment Tax Relief took shape: “What kind of companies should represent eligible investments for SITR?”
Big Society Capital, Charity Finance Group, the National Council for Voluntary Organisations (NCVO), Co-operatives UK and Locality have all echoed this with their responses to the consultation, and leading charity and social enterprise law firm Bates Wells Braithwaite has also highlighted the eligibility question. "We are concerned that as it stands, only CICs or charities limited by guarantee are eligible for the relief," says BWB Partner Luke Fletcher, a member of the HM Treasury's consultation working group. "Co-ops and large numbers of companies limited by guarantee will be excluded." Their omission, says Fletcher, represents approximately 30% of all social enterprises. "We encourage the Treasury to make the relief available to co-ops and companies limited by guarantee, on conditions similar to those of a CIC: namely, the existence of a sociail purpose and limited distribution of profits during the period of investment."
The SITR also currently excludes organisations with over 250 employees.
Big Society Capital (BCS) proposes that the relief should allow investment in social impact bonds, which do not currently use community interest companies, community benefit societies or charity legal structures.
BSC has also called for government to 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.   
Likewise, the Charity Finance Group wants simple unsecured loans to qualify for the relief, and proposes that the maximum level of investment permitted through the relief be raised.
CFG thinks that investment in large charities should qualify for the relief, and that proposed exclusions on qualifying activities, such as residential care and financial services, would unnecessarily exclude many organisations.
Other organisations are also concerned that co-operative models will not quality. This is a principal concern outlined in the responses to the consultation submitted by Co-operatives UK and Locality.
Lucy Findlay, managing director at Social Enterprise Mark, said: “Some co-operatives' structures and companies limited by guarantee are excluded from the government’s list. Around 50 per cent of Social Enterprise Mark holders do not currently qualify for the social investment tax relief.”
Cannibalizing philanthropy
Dan Corry, CEO of New Philanthropy Capital, raised the question of cannibalism in a blog post for Public Finance:  “Do tax breaks to encourage social investment just cannibalise funds that would otherwise have gone to grant funding?”
The National Council for Voluntary Organisations (NCVO) has also raised concerns around SITR drawing people towards investing and away from giving. NCVO sees this as a potential outcome if the relief is more attractive than the current gift aid for higher-rate taxpayers.
Charlotte Ravenscroft, head of policy and research at NCVO, said the level at which the social investment tax relief was set was a very important factor: “The question is whether it will attract new investors who have not considered investing into charities or social enterprises before, or whether it will take away donations from charities as people decide to invest instead.” 
State Aid – the elephant in the room
Luke Fletcher of Bates Wells Braithwaite has dubbed State Aid the 'elephant in the room', in a press briefing on the SITR consultation. It may seem minute but could have a gargantuan impact on the tax relief. 
State Aid is any support provided by an arm of the government; for example, local authorities or direct support from central government. There exist a number of rules around the offer of such support to protect the free market and avoid distorting competition or bestowing an unfair advantage on recipients of State Aid.
At the moment up to €200,000 (know as the 'de minimis' threshold) can be granted in any one period of three years, and will not count as State Aid. But HM Treasury has not yet sought State Aid clearance for the Social Investment Tax Relief for any sums that go beyond this threshold – so the relief would currently not apply to larger investments.
Fletcher is concerned that State Aid rules therefore risk "torpedoing any new relief“. 
“The Treasury is proposing that the amount of any investment benefiting from the relief will need to be below what is known as the de minimis threshold, which is €200,000,” Fletcher explains. “In practice, this would make the relief available for only the smallest investment opportunities and is likely to seriously inhibit take up of the new relief."

Fletcher adds that many charities and social enterprises seeking investment will not be able to use the de minimis State Aid exemption for the relief, as they will already have exhausted the €200,000 threshold with investment readiness grants and other public grants.
“This creates the risk of the relief not being taken up at a meaningful scale and, if it is not taken up at scale, there is no guarantee that HM Treasury will ever seek specific State Aid clearance in future,” he warns.
“We very much hope that the Treasury will seek expert advice on State Aid in advance of any further design of the relief and will consider whether specific State Aid clearance should be sought in advance of the relief’s introduction.”
The deadline for consultation responses closes today (6 September). With HM Treasury’s mailbox full to the brim with proposals for changes and improvements, the search for signs of whether the relief will reach significant scale or plummet begins...