Social Investment Tax Relief is under review. Chris Williams, co-author of Capital Gains Tax Relief for SMEs and Entrepreneurs, looks at the options.
One might think that as charities and social enterprises have lost revenue and are desperate for support due to the COVID-19 emergency a taxpayer-supported boost would be most welcome. But social investment tax relief (SITR) which was created as a way of encouraging support for these enterprises in the years of austerity didn’t really take off then, so will it be any more use now? This is a very pertinent question when the future of SITR is under review.
SITR was always intended to have a limited lifespan and take-up SITR was slow almost to the point of non-existence but the Government gave it a stay of execution, extending its sunset deadline from 5 April 2019 until 2021. At the same time the Government proposed to review SITR on the basis of investor and investee experience but the review process has been glacially slow: a call for evidence was published on 24 April and closed on 17 July 2019 since when nothing more has been heard.
So the Government faces a number of questions.
- Is SITR structurally sound?
- Can it be reformed to make a genuine, worthwhile contribution or should it be scrapped as fundamentally flawed?
- If scrapped can or should it be replaced?
Is SITR sound?
SITR can only really be said to be sound if it produces meaningful social benefits for lower administrative costs and lost revenue than the social benefit obtained. Factors inimical to social benefit revolve less around the benefits than the attractiveness of SITR to social enterprises and investors. The social enterprises themselves need to be sure they qualify and will not be hamstrung by compliance burdens while investors must be prepared to take the risks of the SITR failing as an enterprise or failing to meet the conditions for relief in exchange for a return that will never be huge.
Anecdotal evidence so far suggests that too few people are convinced of the merits of SITR which is little more than a sweetener for investors who might have supported the associated causes anyway.
Should SITR stay or should SITR go?
The clash of objectives here is between creating a relief that will be attractive and one that will remain true to its original objective of nurturing small-scale social enterprises as measured within the EU state aid rules which the UK proposes to continue to apply post-Brexit.
We probably will never know if the SEIS model was adopted out of a genuine intention to focus on small (beautiful, local) projects or because the lazy option was to grab SEIS off the shelf and run with it and see what happened.
Hopefully the responses to the Call for Evidence will shed light on whether expansion of the scheme is likely to increase its overall social impact and encourage the Government to retain and expand it.
Can or should SITR be replaced?
Only if something better can be produced: retaining the scheme’s current architecture but with higher limits than conform with EU state aid would technically amount to replacement, not reform but the UK has given up its position of ability to contribute to those rules.
Will SITR survive?
This may turn out to be as much a political question as one about the merits of the scheme. On the one hand the Government’s enthusiasm has never seemed more than lukewarm: on the other, at the time of COVID-19 it might not appear helpful to remove a potential source of financial succour to struggling social enterprises unless something better can be announced in its place. And therein lies another problem; a replacement plan would need to be designed from scratch and put through consultation before it was implemented and the Civil Service is already stretched fully if not beyond its elastic limit dealing with Brexit as well as the additional burdens caused by COVID-19. This overstretch may be the reason why the Government has not published the results of the Call for Evidence yet: no one may have had time to look at them.
Meanwhile 5 April 2021 edges ever closer and governments don’t like to be seen to be ignoring issues. So SITR is likely to be retained, at least until something better can be produced, meaning probably a further stay of execution until 2022 by which time the consequences of COVID-19 should be better known or at least appraised.
Allowing SITR to linger on before cutting off its life support would allow the Government to say it had given the relief a chance but it was not viable. Then the conversation could be turned, if the Government so wished, to consideration of its replacement.
What is SITR?
Social Investment Tax Relief (SITR) has been with us since 2014 when it was introduced to extend Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) type of income tax and capital gains tax reliefs to social enterprises set up specifically for socially beneficial purposes.
The relief is based on the architecture of the existing Enterprise Investment Scheme (EIS) and seed EIS but with the significant differences that:
- the social enterprise which receives the investment does not have to be a company;
- permitted investments include loans as well as shares; and
- SITR shares may be redeemable.
EIS and SEIS, SITR provides income tax relief, CGT deferral by way of called hold-over of gains matched with the investment and outright relief from CGT on disposal of the SITR investment.
The amount of SI income tax claimable relief is 30% of the amount invested and the maximum investment for an individual is £1 million per tax year. This makes the rate of income tax relief slightly less than the 31.35% relief an additional rate taxpayer obtains for a donation to a charity made under gift aid but this relief is augmented by the CGT reliefs.
The maximum amount of risk capital finance that a social enterprise can receive over its lifetime is capped at £1.5 million
In addition to the lifetime limit, there is a rolling three-year limit which caps the amount of investment raised under SITR over three years. Until 5 April 2017 this limit applies to all social enterprises (ITA 2007, s 257MA). From 6 April 2017, the limit is restricted to ‘older’ social enterprises, where either (ITA 2007, ss 257MNA(1), (6), 257MNC):
- at least seven years have elapsed since the social enterprise’s first commercial sale; or
- if the social enterprise is an accredited social impact contractor, at least seven years have elapsed since it first entered into a social impact contract.
Under the three-year rolling limit, the maximum amount of investment that a social enterprise can raise under SITR is limited to conform with EU rules on de minimis state aid. The rules provide that the maximum amount of potential tax relief on investments must not exceed €200,000 per social enterprise, over three years. Using the formula in the legislation (ITA 2007, s 257 for periods before 6 April 2017 and ITA 2007, s 257MNC for periods on or after that date), and assuming current tax rates, the maximum amount of SITR investment a social enterprise can accept is €344,827 over three years. This limit is also based on the assumption that the social enterprise has not received any other de minimis aid (such as grants, SEIS or EIS funding) within the previous three years. If it has received other such funding, then the maximum investment is reduced by about 1.7 times the amount of the other state aid received.
If the de minimis limit is exceeded, part of the investment may still qualify for SITR relief but the excess will not, meaning that relief must be apportioned among the shares issued.
What is a social enterprise?
A social enterprise is defined as a:
- community interest company (CIC);
- community benefit society that is not a charity;
- accredited social impact contractor; or
- other body prescribed, or of a description prescribed by the Treasury.
A social enterprise does not have to be a company provided that it meets the other criteria. This distinction enables loans to social enterprises that are not companies to qualify for relief. Listed companies do not qualify for SITR.