SITR Update by Neil Pearson

Social Investment Tax Relief (SITR) was introduced in July 2014 to help social enterprises raise funding by offering tax reliefs to investors. In this blog we’ll explain what’s happened with SITR so far and explore why we could now be on the threshold of SITR becoming much more widely used.

Recap

SITR is a government initiative to encourage investors to invest in qualifying social enterprises (SEs) through newly issued shares or unsecured debt investments. Individuals can invest up to £1mn per annum in one or more SEs (independent of any investment under other tax reliefs) and investments must be held for a minimum of three years.

The tax incentives are:

• 30% income tax relief
• Exemption from Capital Gains Tax (CGT)
• CGT deferral available (on gains arising after 5 April 2014)
• Up to 100% inheritance tax relief after two years (on certain qualifying share investments)

The story so far

SEs looking to offer SITR to potential investors can get an assurance from HMRC, in advance, that the relief will be available.

Since SITR was put on the statute book from July 2014:

• 70 applications for advance assurance have been made to HMRC
• Of those 70: 35 have been agreed and 20 are still going through the HMRC process[1] [so 15 didn’t meet the criteria]
• Fewer than 15 compliance statements have been issued (SITR1s) to claim the tax relief, of which half have been accepted.

So it looks like there’s somewhere between 50-60 investments so far under this tax relief that have been successful where investors will be claiming their 30% back off their income tax relief. Which means 50-60 SEs have been able to obtain funding which they wouldn’t have been able to otherwise get.

Is this a fast or slow start?

This has exceeded some commentators’ expectations for the first year of the tax relief, which assumed there would be zero tax cost to the Treasury. So we’re doing better than that. And bear in mind new tax reliefs always take time to get off the ground:

1. We’re still talking to people who have never heard about it – both IFAs and investors
2. This is a new tax relief being put into a relatively new sector.

Together, both these issues will mean it takes time to see growth in this sector. Remember also that in the first year that EIS was implemented (1993/4), £3.9mn was raised under that tax relief, but the latest statistic showed this has increased by 2013/14 to £1.5bn[2] (we’re not saying that SITR will reach those heights but tax reliefs do take time to get going).

Where next?

There are a number of factors that suggest that we are on the threshold of real momentum and growth in the social investment space:

1. Investment readiness: There is more support to help SEs understand what this means and create business plans accordingly, e.g. support from Big Society Capital
2. More funds: Funds are only just starting to make their presence felt. As we see more funds close and start investing money, we will see an acceleration and increased awareness within the financial community
   • There is a prospect in the not too distant future of Social VCTs that will raise funds and offer tax reliefs like any other venture capital trust, but will invest those funds in SEs
   • Crowd-funding: At the moment these platforms undertake EIS and debt fund raises so an SITR debt fund raise would be within their capabilities
3. Joint ventures: We’re likely to see more joint ventures between charities or SEs for specific projects, sharing risk, costs and expertise: even big charities that don’t qualify for SITR by themselves could partner up to create new enterprises and those SEs themselves could attract funding through this tax relief
4. New vehicles: as local governments’ budgets continue to shrink,there will be more and more vehicles being set up to take over running of facilities from local government. To be self-sustaining they will need to raise finance and in many cases this could be done through SITR
5. Social Impact Bonds (SIBs): the UK is already the world leader, and at Worthstone’s recent Social Investment Academy the Minister for Civil Society said that SIBs “will become the norm for the way many public services are funded” and that in a few years’ time “they will be the most talked about funding mechanism for government social projects”. We have already seen two SIBs qualifying for SITR so we should be expecting more. And for those advisors/compliance officers/PI underwriters who are worried about being sued if you don’t achieve social good but do achieve financial return, SIBs help solve this dilemma because SIBs are payments by outcome contracts so if your investors are making money, social good has already been achieved
6. Increase in the limits – some fund managers are already poised to launch SITR funds if the annual limit increases to £5mn so we should see an increase in available products for IFAs to recommend to their clients
7. IFA concerns regarding regulation: we know there are worries around regulatory barriers but that the regulator (with the support of government) is trying to tackle and reduce these concerns as seen in their recent call for input on barriers to advising on social investment.

Therefore, with more help for investees to get investor ready, crowd-funding, Social VCTs and SIBs making more funds available in addition to an increase in the fund limits and the regulator trying to remove the barriers perceived by IFAs, this should hopefully create a perfect storm to see social investment gain momentum and significantly grow.

Useful Links: –

–   HMRC: www.gov.uk/government/collections/social-investment-tax-relief

–   Big Society Capital website has some detailed information and links to other useful resources, as well as examples of SITR fund raises:  www.bigsocietycapital.com/social-investment-tax-relief

Our thanks to Neil Pearson from Neil Pearson Consulting Ltd. for providing the content for this blog article.