Social Enterprise Tax Relief

Social Enterprise Tax Relief

This is a tax relief scheme designed to support Social Enterprises seeking external finance offering a range of tax relief that can be claimed by individual backers on investments made between 6 April 2014 and 5 April 2019.

It covers both investments in shares but also in qualifying debt for instance. The reason for this of course is that many Social Enterprise projects would be governed by entity like a Company Limited by Guarantee which does not have share capital.

SITR appears to offer many attractions to Social Enterprises as a source of funding for projects such as setting up a commercial trading activity by community facilities or trying an innovative service where some risk capital is required. However, it is not really an alternative to long term mortgage finance. It is designed for funding short term projects.

Although an individual can invest up to £1 million a year and qualify for SITR under EU state aid rules a Social Enterprise can receive about £290K over three years in tax relief (government subsidised) investment. Therefore, only relatively small sums can be raised and limits the size of projects that can be funded. However, the government are looking to enlarge the scheme and seeking application from the EU so that SITR can be received by organisations from £5 million a year to £15 million in total.

A Social Enterprise project or entity can be:
  1. A community interest Company.
  2. A community benefit Society with an asset lock.
  3. A Charity, either a Company or a Trust.
  4. An accredited social impact Contractor.
This relief is restricted to small and medium size Social Enterprises but the rules are still quite wide. It applies to organisations having:
  1. Fewer than 500 fulltime equivalent employees.
  2. Gross assets of not more than £15 million.
  3. Gross assets of not more than £16 million, immediately after the investment.
What are the tax reliefs?

  1. Income tax relief of up to 30% of the amount invested subject to a maximum annual sum of £1 million. Since relief is given by way of reduction of tax liability there must be enough UK tax liability against which to set the relief but there is no need for the investor to be a UK resident.
  2. Capital gains deferral relief that again is reinvested in shares or investments that qualify for SITR income tax relief. Although a claim for SITR income tax relief need not be made to claim deferral relief, the SITR qualify investment must be made one year before or three years after the gain.
  3. Capital gains disposal relief as long as SITR income tax relief was obtained on the cost of the investment and was not later withdrawn and the investment is disposed of after it has been held for at least three years.
Although investment can be made either directly or through a nominee the qualifying investment must take the form of a qualifying subscription for shares or debt in a qualifying Social Enterprise. Investment in equity must be in shares that:
  1. Are fully paid for in cash at the time of issue.
  2. Rank alongside or behind all other shares and debts other than those that qualify for SITR in the event of a winding up, and are not entitled to a dividend that:
    1. Is of a fixed amount
    2. Has any part at a fixed rate
  3. Is fixed by reference to the amount invested.
  4. Is fixed at a rate not dependent upon the Enterprise’s financial success, or
  5. Represents more than a reasonable commercial rate.
The debt investment must be:
  1. Unsecured.
  2. Carry interest that is not more than a reasonable commercial rate.
  3. Rank behind other debts except other unsecured debt in the event of a winding up.
  4. Rank equally with the lowest ranking share capital in the event of a winding up, if the Social Enterprise also has issued share capital.
The investor must not:
  1. Be a partner or Trustee of the Social Enterprise,
  2. Be a paid director or employee of the Social Enterprise.
  3. During the period beginning one year before and ending three years after the investment together with Associates owning more than 30% of the Social Enterprises.
    1. ordinary share capital
    2. loan capital or
    3. voting rights
There are other restrictions but for small amounts of money from investors seeking to help the Social Enterprise the attraction of tax relief must be a good reason to invest.

John Caladine
November 2015