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Investment in social enterprise makes an economic difference by employing two million people and contributing £55 billion to the economy. It also makes a social impact by helping social ventures expand the work they do. However, the social investment market is still in its infancy. In the December 2013 Autumn Statement, chancellor George Osborne announced that the UK would lead the agenda for responsible recovery through the introduction of a new tax relief designed to promote investment in social enterprises. The relief, ‘Social Investment Tax Relief’ (SITR), became available in April 2014.
Today’s post looks at why social investment is important, how it works and what benefits it may be able to offer you as a business owner or investor.
Why introduce Social Investment Tax Relief?
Following the economic recession of 2008 social enterprises have experienced difficulty in raising capital from private investors and commercial lenders. Recent cuts to public services, however, have made the demand for capital investment higher. SITR therefore aims to make investment into social enterprises for private investors more appealing by offering competitive tax benefits. For social enterprises, it opens up alternative channels of funding.
What are Social Enterprises?
The Finance Act 2014 defines a ‘social enterprise’ as a community interest company, community benefit society or charity (which can be a company or a trust). Not all social enterprises will therefore qualify. SITR does not apply to co-operatives, or non-charitable companies limited by guarantee or companies limited by shares.
The enterprise must trade with social objectives at its core, and may operate in a variety of sectors, including healthcare, sport and leisure. The enterprise must have fewer than 500 employees and assets of no more than £15 million before the investment, and £16 million following the investment. To qualify for investment, these conditions must be met continuously from the date of investment for the following three years.
What are qualifying investments?
Investment into qualifying social enterprises will take the form of a subscription for new shares or by purchasing debt (i.e. a loan) in the social enterprise. It is anticipated that there will be scope in the future for indirect investment in social enterprises, whereby investors can pool their funds to support a variety of social enterprises. The investments must be paid for in full, and in cash, at the time the investment is made.
It is not possible to invest in a social enterprise of which you are an employee, partner, trustee or paid director. Shareholders with over 30% of the share capital or voting power are also exempt from investing in the social enterprise in which the shares are held.
How does the tax relief apply?
You should always receive financial advice before taking out an investment and ensure you understand the risks of the investment.
For a helpful infographic on how the tax relief works in practice, have a look at Big Society Capital’s website.
How much can my social enterprise receive?
Broadly speaking, eligible enterprises will be able to receive a maximum of around £290,000 over three years. This is to bring the relief in line with the restrictions on the giving of state aid. Restricting the scheme to this limit means that the relief can be offered without the Government having to seek approval from the European Commission. In the longer term, the Government has indicated its intention to seek clearance for a ‘larger tax relief scheme’.
How can I register my social enterprise?
Firstly, you should check that your enterprise meets the terms of the SITR legislation. If you are satisfied that it does, you will need to complete a Compliance Statement and send it to HMRC but you should always seek financial and legal advice before taking any steps. You must complete and send a new Compliance Statement each time the social enterprise receives new investment. The Compliance Statement is necessary to ensure investors receive tax relief.
Other forms of social investment and funding
If SITR is not available or compatible with your business, other sources of potential investment may be available to you.
- Community development investment relief (CITR): The CITR scheme provides a tax incentive to investors in Community Development Finance Institutions (CDFIs). CDFIs provide financial assistance to enterprises within disadvantaged communities. The tax incentive is a form of tax relief, which reduces the investor’s income tax or corporation tax liability. The relief is worth up to 25% of the money invested, spread over five years.
- Social venture capital trusts: In the 2015 budget, the government announced details of a new Social Venture Capital Trust (Social VCT), which will attract tax relief at 30%. Investors will pay no tax on dividends received from a Social VCT or capital gains tax on disposals of shares in Social VCTs. The government will legislate for Social VCTs in a future Finance Bill.
- Crowdfunding: there are numerous online crowdfunding websites which social enterprises can use to raise finance for their ventures. This avenue may be welcome for enterprises that do not qualify for investment through more traditional routes.
- Grants: any form of enterprise is able to accept a grant. However, charities tend to find funders more receptive due to the guarantee that all funds will be applied exclusively for its charitable purposes. Common sources of grants are charitable foundations, government and EU funds.
Tax advantaged schemes which invest in small and medium enterprises are likely to display above average levels of volatility and financial advice should always be sought before making any investments.
This blog was written by Ana Speed. Ana is a trainee solicitor within the Student Law Office and has spent the last six months working in the business clinic. Ana has particularly enjoyed working for social enterprises and advising clients on intellectual property disputes.