How will the Social Investment Tax Relief support your venture?

Now that the social investment tax relief has arrived, it's time to drill down into the specifics. How will it support your venture? And can we expect it to transform the social enterprise sector at large?


It feels like it’s been a long wait, but finally from today social investment tax relief will apply to eligible investments, following the publication of the Finance Bill in March. 

The main cogs began to turn at the 2013 Budget, when the government launched a consultation, which closed in September, on how to bring tax relief for those investing in social enterprise. 

After a number of strong-willed contributions from various parts of the sector, the Chancellor George Osborne announced during this year’s budget that the rate of the relief would be set at 30 per cent. This was soon followed up by confirmation of the finer details with the publication of the Bill on 27 March. 

Eligibility criteria 

So how exactly can social organisations work out whether they will be able to take advantage of this relief?

There are three areas of eligibility that enterprises need to consider when working out whether the relief could be applicable to investments made to them. 

Firstly, they must work out whether they are the right type of investee organisation. The government has been clear in its first version of the Bill as to which organisations are eligible, choosing to include only certain types of legal structure. 

To be eligible, an organisation must be either a registered charity, a Community Benefit Society, or a Community Interest Company. It must also have fewer than 500 employees, less than £15m in assets and must not carry out any excluded activities, which include personal lending and electricity generation.

The next area of consideration is whether the type of investment is eligible. Here, the government has decided to focus on shares or unsecured debt only. The amount can be a maximum of £290,000, the investment must not have received relief already, and the minimum investment period is three years. 

Finally, the type of investor must tick the right boxes. Here, to be eligible, they must be an individual paying tax in the UK and they must invest directly or through a nominee fund. 

Many missing out

The sector gives a mixed reaction when asked for its thoughts on these criteria, with the investee organisation criteria appearing to be the main sticking point. 

“We are pleased in some ways and not in others,” says Nick Temple, chair of the Social investment Forum, which is a member of the Social Economy Alliance. “What we are disappointed by, but do understand, is that a substantial proportion of social enterprises tend to be companies limited by guarantee. We understand why they have not been included, but the fact that significant parts of the sector will miss out is a shame.”

Only two or three years ago the Treasury wouldn’t have even sat around a table with people in our sector, so this is a very positive development.

Mike Mompi, social impact investment adviser at ClearlySo, which connects social businesses and enterprises with investors, agrees. “It is a challenging balance between those we would want to include, and those that want to take advantage of the tax break who should not be doing so,” he says. “As an organisation, we don’t define impact businesses according to their legal structure, and this might encourage people to do so.”

Matt Robinson, head of strategy at Big Society Capital, says that for those social enterprises that are not eligible, it is “quite easy to apply to become a CIC”. “Until this, CICs haven’t come with any tax benefits, but that has changed now,” he says.

Mompi says that in time he hopes that this criteria could be changed. “We would hope in future amendments that it won’t be limited by legal structure. However, we do understand the challenges with that,” he says. 

The State Aid problem

Another area where many are hoping to see improvement is the maximum investment amount, which is in place due to the government not yet having State Aid clearance for SITR for any sums that go beyond the current threshold.

The Treasury has committed to go to the European Commission for State Aid approval, but until or unless it is granted, this threshold will remain in place. It is aiming to start the process for seeking approval this month, and the commission aims to make its determination within 18 months of the start of the formal process.  

“The limit is quite low at the moment,” says Robinson. “We want to see this become much bigger in the future. For example, with the Enterprise Investment Scheme it is up to £5m.”

Comparisons to tax breaks like EIS – which gives relief for investments in shares in qualifying companies, and for investing in Venture Capital Trusts that invest in smaller, high-risk companies – are drawn by many, most of whom point out that SITR now finally puts social enterprises on a level playing field with organisations that had already benefited from this type of relief. 

“I think this is putting social investment on the map for many more investors and mainstream investors than ever before,” says Mompi. “Before, they were at a disadvantage compared to traditional businesses that qualified for EIS.”

Fulfilling the potential

So given all of this, how much of a difference is the relief likely to make to investment in the social sector? 

“We think it will make a big difference,” says Robinson. “And the good thing is that it is has targeted the type of investment, i.e. unsecured products, that is in the shortest supply for the sector.” 

Temple is also positive, but tempers this by adding that there needs to be a concerted effort to ensure that all of this potential promise is fulfilled in practice. 

“The Community Investment Tax Relief arrived 10 years ago with much excitement but it has delivered a relatively small amount to the sector over the decade,” he says. “So we need to ensure that something similar doesn’t happen with this.”

He says that a crucial part of this will be “identifying some early wins” and then for the social investment sector and government to communicate them effectively.

Temple adds that enterprises who feel the relief may be applicable to them should get the right advice by contacting financial intermediaries and people who work with angel investors. 

Indeed investors are already showing signs of interest, with Mompi saying that investors are actively looking into the relief. “We’re hoping to get SITR qualifying investments into social enterprises with a qualified demand for investment capital from social investors as soon as realistically possible,” he says. 

David Floyd, managing director of Social Spider, also has a tempered view on the future. “It's an exciting opportunity but we don't really have any way of knowing how many investors will be interested, how many social enterprises will be interested and whether, if they are, we've got enough of the right mechanisms and structures in place to put them together,” he says. 

But he adds that crowdfunded deals could be an area of potential. “Fifty crowdfunded loans of an average of £50,000 in 2014-15 would be a fantastic start,” he says. “I think that's possible and it would be a really big deal if it happened, but the overall sums involved would still be relatively small compared to the government's estimates."

Despite some criticisms and hopes for amendments in the future, there is general agreement that this is at least an encouraging first step. 

“Only two or three years ago the Treasury wouldn’t have even sat around a table with people in our sector, so this is a very positive development,” says Temple. “Now there is an opportunity for us all to build on this relationship in terms of future government policies.”

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