Social Investment Tax Relief (SITR)
Tax Relief for individuals who invest in qualifying third sector organisations can offset 30% of that investment against tax bill.
To be a qualified organisation, an organisation must be:
• A social enterprise- that means a community interest company, a community benefit society or a charity. A charity can have the legal form of either a company or a trust
• Be defined and regulated for social purpose and carrying out a qualifying trade
• Have fewer than 500 employees
• Have gross assets worth less than £15m.
A social enterprise can receive up to £290k over 3 years. This is because the SITR is subject to EC State Aid rules. SITR limit is £275k (€344,827) over 3 years. In addition, investments must exclude any de-minimis aid already received by social enterprises – and within a three year rolling programme
SITR is not available for investment in wholly owned subsidiaries of eligible organisations. However, investment funds may be used for the purposes of a trading activity carried on by a qualifying social subsidiary which is itself a CIC, Bencom or charity;
Investments must be in the form of newly issued shares – in the case of a Company Limited by Shares; or new qualifying debt investments – in the case of a Company Limited by Guarantee.
There must be no arrangement at the time of the investment for either the cessation of the social enterprise trading activities or disposal of a substantial amount of assets.
The investor can invest £1m a year across a number of social enterprises.
During the period of 1 yr before and 3 yrs of the investment, the investor must not own more than 30% of the social enterprises –
* voting rights
* loan capital
* share capital in the case of Company Limited by Shares
• Must be in the form of a debenture: – a medium-to-long-term debt option used to borrow money, at a fixed rate of interest
• Must not carry any charge over assets:- cannot be secured against the assets of the organisation
• Must not offer more than a commercial rate of return.
• Must be subordinate to all other debts held by the social enterprise: and cannot be senior debt.
Example of how SITR works-
Mrs A has an Income tax bill is £75k. She invests £150k in an SE. Her tax relief is 30% of the £150k = £50k. That is deducted from her tax bill, so her adjusted Income tax bill is £75k-£50k = £25k.
In addition Mrs A will not pay any Capital Gains Tax if the investment in the SE is held for 3 years.
SITR Consultation (Deadline 18th September 2014)
Enlarging the existing Scheme
Broadly, there are 3 proposals:
1. Extend the scheme by allowing investors to invest via an Indirect Investment Scheme which is a separate legal entity like a Venture Capital Trust (VCT)
2. Extend the scheme by raising the limit of investment currently hindered by State Aid rules – as such HM Treasury will seek an exemption from the State Aid rules for SITR.
3. Extend the range of eligible activities to include community farms/ community energy
NB: Crowdfunding – an increasing popular means of investment – will qualify for SITR.
1. Under the Current Scheme – it is only individuals that can invest. We believe that this can be a good thing – as an individual investor can have a direct relationship with a social enterprise and the investor can develop a positive and supportive role to the specified organisation.
If the Consultation proposals go ahead, an investor will be able to invest via an intermediary vehicle – i.e. a VCT(see above) or another type of third party Fund Managed structure. The direct relationship between investor and the social enterprise will then be automatically fractured and mediated by the intermediary – diminishing the chances of a positive engagement between the SE and the Investor.
NB: HMRC is also asking if it is desirable in principle to allow hybrid VCTs, including both social and commercial investments?
2. Presently, the total amount invested into any one social enterprise under Current Scheme is restricted by State Aid rules with the maximum investment being set at £275k over 3 years. In addition, any existing de minimis monies must be deducted from the overall investment. The new proposals involve the potential threshold figure of £5million being mentioned as the upper limit. Our understanding is that HMRC is clearly not convinced that such a large figure is required and is looking for evidence that such a sum threshold is needed.
There is a legitimate concern that as you raise the ‘cap’ on potential investment levels, the chances of speculative behaviour by investors inevitably increases. This particularly could be the case where the investment is carried out/overseen by an intermediary vehicle.
In short, both the first and second proposals could well see an increase in the potential of speculative investment in social enterprises by increasing the limit that can be invested and by removing the direct link between the investor and the social enterprise.
Senscot – September 2014