Ladies and gentlemen, it’s time to start making some noise about the new tax scheme introduced by the government – Social Investment Tax Relief – or SITR for short.
Intended to encourage investment into social enterprises, the scheme was made effective from 6 April 2014 (the related Finance Bill doesn’t actually receive Royal Assent until July 2014) so it’s official this month.
As a Chartered Accountant himself, Impact Hub Westminster Managing Director Alex Soskin couldn’t wait to get into the nitty gritty of SITR. As with most tax legislation, it gets a little complicated, so Alex has put together a simplified guide to give us a flavour of what is to come.
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If you’re feeling particularly geeky then please click here for the official draft HMRC guidance.
My disclaimer is that the summary and associated guidance is draft, and will be set in stone in July 2014. This blog does not constitute tax advice.
 
Who qualifies as a social enterprise under SITR?
To be eligible you must be one of the following:
1)      a Community Interest Company (CIC), a community-benefit society, or a charity
2)      unquoted
3)      have < 500 full time employees
4)      have < £15m of gross assets
The scheme doesn’t apply to those of you who set up social enterprises as ordinary limited companies with social articles. This is precisely why CIC’s just got interesting folks. My opinion is that before this tax relief existed, CIC’s only amounted to a signal of good intentions to the outside world, with no specific financial benefits attached. Well now the game has changed, which is precisely why I am so excited about this scheme.
 
Investment requirements:
1)      The investment must be made IN CASH – no in-kind investment or ‘pay you later’ scenarios apply here.
2)      They must be newly issued, full-risk, ordinary shares (referred to as qualifying shares), OR
3)      They must be debentures with no carrying charge over the assets of the enterprise, i.e. unsecured loan.
 
Investor requirements:
1)      The investor must hold less than 30% of the equity, loan capital or voting rights of the enterprise,
2)      Must not be an employee, partner or paid director of the enterprise, AND
3)      Must be investing as an individual, not a corporate body.
 
So how will this scheme make investments in social enterprise more appealing to ‘ordinary’ investors?
There are some great tax reliefs available within the overall SITR scheme. A brief description is as follows:
1)      Income tax relief:
a. Investors can claim up to 30% of their investment value against their income tax bill.
b. This is applicable for investments in both qualifying shares and unsecured loans – THIS IS THE MAIN DIFFERENTIATOR FROM THE ENTERPRISE INVESTMENT SCHEME (EIS) DUE TO LOAN INVESTMENTS BEING MADE APPLICABLE.
c. The investment must be held for a minimum of three years.
2)      Capital gains hold-over relief:
a. An investor can hold over a capital gain from a previous investment if they invest the gain into investments that qualify for the SITR income tax relief.
b. This benefits the investor by further reducing their tax liability in the year they sell a profitable investment and make a qualifying social investment. Capital Gains Tax currently stands at 28%.
3)      Capital gains disposal relief:
a. If you hold the social investment for three years or more, and then sell it, any gain is free from capital gains tax.
 
If an investor compares their investment options for social and non-social investments, then the potential upside from all these reliefs is substantial. It is not yet clear whether reliefs 2 & 3 combined could enable an investor to write-off their tax liability from the previous investment for ever. Even if not, the relief makes social investments at least 30% more appealing.
As a consequence, I believe that this relief will make social investments appealing to investors who wouldn’t ordinarily invest in social enterprise. This means more money flowing towards positive social and environmental outcomes – a welcome legislative move in my books.
As a community of social enterprises, we at Impact Hub Westminster really need to pay attention to this. It’s a game changer, and it’s up to us to make sure it leads to more money flowing to good business.
If you’re interested in learning more, then you can express an interest in an SITR explanation session below.
Best wishes,
 
Alex Soskin ACMA
Impact Hub Westminster Managing Director 

Express an interest in an SITR explanation session