How to improve your community with an SITR investment

Joe Lennon FCCA on how you can help a community by investing in a social enterprise through the Social Investment Tax Relief scheme.

Having funds to invest can be an exciting prospect. It can also create a dilemma of where to put your money with a multitude of different options available. Determining which one is best for you can be a complex task that requires a lot of thought, analysis and consideration. If you have considered EIS or SEIS opportunities you may also be interested in the new Social Investment Tax Relief (SITR). SITR makes it possible to conduct your personal investments in a socially responsible way, presenting tax efficient investment opportunities with the aim of helping a community or society.

This tax incentive can be seen as encouraging a growing trend of philanthropy among entrepreneurs and investors, something our Managing Partner Kathleen Parker observed in her blog post, the future of accounting and client service delivery. For organisations that qualify as social enterprises (as defined in the Finance Act 2014, Schedule 11, paragraph 1) this could be a great opportunity to access a new pool of individual investors and funding.

What is social investment tax relief?

SITR was legislated for by the Finance Act 2014 (Schedules 11, 12) to encourage investment in charities and social enterprises by individuals. The purpose of the scheme is to attract risk capital. There are a number of tests an organisation has to pass in order to be deemed eligible for such investment.

What tax relief is available?

Both income and capital gains tax relief could be available if you make an investment under SITR. Here's how it works:

Is SITR suitable for me as an investor? Do I qualify?

• You will be eligible for tax relief under the scheme if you have made qualifying loans or purchased shares which have been issued to you. They must have been fully paid up at the time of investment. The investment may have been made by a nominee.
• Investments of 'associates' (business partners, trustees of any settlement to which the investor is a settlor or beneficiary or relatives) all contribute to the 30% ownership figure.
• You must not be employed by, a partner or trustee, or a paid director of the social enterprise; at any time during the period from one year before to the 3rd anniversary of the investment.
• The investment may not be made using a loan where the terms don't apply to the investment in question.

Is SITR suitable for my social enterprise?

• Your organisation must be a registered charity (with the legal form of either a charity or a trust), IPS Community Benefit society or a community interest company.
• There must be less than 500 employees (if your organisation is a parent company this figure applies to the whole group) and less than £15 million of assets immediately before the investment and no more than £16 million immediately after (again if your organisation is the parent the figure must also include all subsidiaries).
• The activities of your organisation must not include a substantial amount of dealing in land, commodities of futures, banking, insurance, moneylending (except to social enterprises), property development solely or primarily to make capital gains or generating or exporting electricity which will attract a feed in tariff.
• Your organisation must not be listed on the London Stock Exchange or any other recognised stock exchange at the time of investment.
• All funds acquired as part of the scheme must be employed within 28 months of investment.
• Currently you will be able to receive around £290,000 (depending on the value of the Euro) in investments or loans under this scheme every three years however, the government are intent on increasing the threshold.

Why do the government want to extend the threshold?

In December 2014 George Osborne, Chancellor of the Exchequer, announced in the Autumn Statement that the threshold for SITR will be raised to £5m per year from the previous figure of around £290,000; with a maximum total of £15m over an unspecified number of years.

This was in response to sector bodies including the NCVO and Big Society Capital (social investment wholesaler) calling for the threshold to be raised. However, the EU must grant State Aid approval for this change, should this happen the increase will be effective as of 6 April 2015.

The SITR success stories

FareShare was the first ever organisation to complete a SITR investment deal. The Bristol based charity fights food waste and received an investment of £70,000 from a group of investors. FC United of Manchester raised capital using SITR to fund a new stadium and community facilities. Increasing the threshold to £5m for organisations such as the London Early Years Foundation would mean they could grow their foundation to reach and benefit the education of as many children across the capital as possible.

The content of this post is up to date and relevant as at 24/04/2016.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.