The potential of social investment tax relief

Featured in Charities Management Magazine

Exploring the funding opportunities presented to charities by social investment tax relief.

Social investment tax relief (SITR) was introduced in 2014 in a bid to encourage individuals to support charities and social enterprises by helping them to access new sources of finance. Typically the finance provided will be in the form of share capital or unsecured loans repayable after three years.

Since April 2014, any registered charity, Community Interest Company (CIC) or Community Benefit Scheme (CBS) with fewer than 500 employees and gross assets of no more than £15 million can use SITR to raise funds for various projects from individuals with a social conscience.

But also – and more importantly – SITR can be used to raise money from high net worth individuals who are attracted by the 30% income tax relief. It was billed as the first scheme of its kind in the world to incentivise social investment through the personal tax system.

Crucially for charities it appears any investment through social investment tax relief – whilst still subject to some of the usual exclusions on spending such as property development and dealing in land and shares – may still be considered for such activities as operating and managing a nursing or care home. This means if applied wisely, it can provide a genuinely exciting additional funding source for charities to help them move forward with significant capital projects.

Investor benefits

There are long list of benefits for the investor too. A potential return on their money whilst supporting a cause they care about is the most obvious, but there are some hugely appealing tax reliefs as well.

Subject to the eligibility of the charity or social enterprise, any investor making a loan or equity investment can benefit from income tax relief for 30% of the investment made. This is usually taken off the income tax bill for the year the investment was made.

Capital gains disposal relief (tax on any profit made from the investment) is also available after three years, together with capital gains deferral relief. In this latter case investors can defer payment of capital gains tax by investing other gains in a SITR qualifying investment.

The deferred capital gain becomes payable when the SITR investment is disposed of, but can continue to be deferred if reinvesting in another SITR qualifying investment. It is not unusual for investors to ‘rollover’ gains in this way two or three times, which should make the SITR market attractive to serial investors.

To quote the scheme’s own promotional video, it is designed to encourage investors to make the world a better place: “Good for you, good for business, good for society”.

Untapped potential

Despite the appeal of social investment tax relief to both charities and investors, there has been a disappointing take up so far. By the end of 2015, it is believed that less than 15 investments had clearance, with just over £500,000 invested into qualifying businesses during 2015.The current year is more promising with over 50 outstanding applications for SITR eligibility pending.

It is fair to say that charities are not traditionally big innovators and are clearly risk averse, particularly when it comes to new ways of raising finance. Many will therefore shy away from new funding streams in the early adopter phase.

However, the biggest stumbling block so far has been the EU’s cap on the amount that charities can receive. Under EU rules governing the initial introduction of social , individual enterprises can only receive a certain amount of government subsidised investment. The limit is €344,827 (approximately £250,000) over three years; not a huge amount in the context of a medium-large charity, and certainly not enough to revolutionise the way in which UK charities can top up their income.

In his Autumn Statement of 2014, Chancellor George Osborne announced that the Government would be seeking approval from the EU to increase this figure to £5 million per organisation per year. At that point, the increase was expected to be ratified in the Finance Act 2015, subject to agreement from the EU and it would have put SITR on the same level as the more recognised Enterprise Investment Scheme (EIS), which offers similar tax reliefs to individuals looking to invest in the private sector and has led to billions of pounds of investments.

However, approval has not yet been granted, no further announcements have been made and the limit remains at €344,827 over three years. Unless this limit is increased, I find it hard to see how social investment tax relief can make inroads for charities and unlock what some experts believe is a £480 million investment opportunity over the next five years.

The recent Government paper on Social Investment: a force for social change confirms it is still a government priority to obtain European Commission approval for this state aid clearance.

Evidence of success

There are some success stories, of course. The first SITR project was in Bristol with the charity FareShare South West, which aims to tackle food waste by giving surplus food to vulnerable people. It was set up by social impact investment company Resonance, which launched the UK’s first large-scale SITR fund. This fund reached its first close of £1.3 million in February 2016.

One of the most high profile examples is community football club (community benefit society) FC United of Manchester, which serves the community of Moston in North Manchester with projects including youth work, school holiday play schemes and adult education. The club previously played home matches at Bury FC’s Gigg Lane but used SITR to help fund a new stadium, which gives them a home ground and provides a permanent base for its community outreach work.

There is certainly evidence to suggest that the Government is trying to encourage take up of the scheme. Big Society Capital, the independent social investment institution, has launched GET IT, a free package of support to help organisations use SITR, as well as Good Finance, a website to help improve access to information on investment and finance for charities and social enterprises.

Revenue stream

But is it enough? Does the current limit of €344,827 over three years justify some of the UK’s larger charities targeting SITR as a revenue stream when other, more traditional funding sources are perhaps easier, quicker and cheaper to pursue? Not forgetting of course, that turnover and employee limits will mean the largest charities are excluded from this scheme anyway.

George Osborne has played his card and seems to agree that the SITR investment limits needs raising to boost participation from charities and obtain wider coverage. As it stands however, there is no further progress and no recent announcement in the March 2016 Budget – but watch this space.

For more information on this subject, please contact Nigel Shaw or – 01904 464 100