Everything you need to know about Social Investment Tax Relief

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Neil Pearson Partner, Head of ESG and Social Value

We spoke to Neil Pearson, an expert in SITR from Mills & Reeve law firm about how SITR works, who is eligible, and how it can help you and your investors.

Tell us about Mills & Reeve and your role?

I’m a partner in the corporate tax team at Mills & Reeve, and also firmwide head of ESG and social value. I’ve worked in social and impact investment for the best part of ten years, helping set up investment funds that specialise in supporting social enterprises and helping enterprises raise much-needed investment to grow. I was also involved in the development and introduction of SITR in 2014.

What is SITR?

SITR stands for “Social Investment Tax Relief” – a way to encourage private individuals to invest in social enterprises, by way of either shares or loans, by offering tax relief on the amount invested.

Put simply, if a SITR investor invests £10,000, it only costs the investor £7,000 (but the enterprise still gets the full £10K).

How can SITR help an organisation?

Raising funds is hard enough at the best of times for social enterprises. But if you can offer your investors a 30% “rebate” on the amount they invest, you are going to stand a better chance of raising the money you need to grow and develop your social enterprise.

There are also some funds set up specifically to invest in social enterprises where the tax relief is available – so by offering SITR you are also widening the pool of potential investors.

Bear in mind that, because of the way the SITR rules work:

  • if you are raising debt under SITR, the investors have to wait at least three years before they can be repaid any of the loans – giving you much-needed breathing space to grow the business’s finances to the point where you can afford to start making repayments;
  • you may be able to agree to a lower rate of interest with SITR investors, on the basis the investment is being subsidised by the tax relief;
  • unlike banks, lenders under SITR cannot demand any form of security or guarantee, so it does not matter if you don’t have assets over which the lenders can take a charge or mortgage.

How to know if a business qualifies for SITR?

Unfortunately, the rules for eligibility are a bit fiddly, but the key criteria include:

  • you must be one of four types of organisation (including charities, community interest companies, most community benefit societies, and accredited social impact contractors);
  • you must be carrying on a so-called “qualifying trade” (any trade other than those on a list of excluded activities), and all monies raised must be employed for the benefit of that trade;
  • you can’t be too big (more than 250 full-time employees and less than £15m of “gross assets” on your balance sheet);
  • if your enterprise has subsidiaries, there are some complicated rules about the group structure, and any subsidiary that will use the SITR monies must be (and remain) at least 90% owned.

Trades that are on the list of excluded trading activities:

  • Energy generation
  • Leasing or letting assets on hire
  • Receipt of royalties or license fees
  • Property development
  • Managing or operating nursing homes or residential care homes
  • Banking, insurance, money-lending, or other financial activities
  • Being a landlord

However, because the detailed rules are pretty complicated, this is by no means an exhaustive list of the conditions and is something on which you must obtain expert advice. Nevertheless, some organisations, such as Big Society Capital, offer great support and help, as well as guidance on their website that helps you understand more clearly whether or not you meet the eligibility criteria.

What should everyone know about SITR?

If you can offer it to your potential investors, it’s a no-brainer!

Also, any SITR-qualifying investment must be held for at least three years before it can be sold or repaid, otherwise, the investor loses the tax relief. So SITR funding is very much a form of “patient capital”.

What type of capital can SITR raise?

SITR is available on investments into ordinary shares.

However, some social enterprises (such as charities) do not have a share capital and so cannot issue shares. Also, there is no ready way in which shareholders in social enterprises can find a buyer for their shares if they want to realise their investment.

So SITR is also available on investments by way of loans.

By extending the tax relief to loans, it means that (unlike most other tax incentives offered to investors in the UK) SITR investors can get tax relief on loans to social enterprises with a guaranteed repayment date. It also provides a simpler way in which investors can, ultimately, realise their investment and get their money back.

How much can a business raise?

That depends on how long they have been trading for.

If your enterprise (and its subsidiaries) made its first commercial sale more than seven years ago, the amount is capped at around £300K. The limit rises to £1.5m for younger businesses.

But, if your enterprise or any subsidiary has received certain types of state aid, that needs to be taken into account when working out exactly how much you can raise under SITR.

Again, these state aid limits are complicated, so something to get expert help with.

Getting help can be tricky as most experts in state aid law work for large firms of lawyers and accountants and therefore charge fees that social enterprises are very unlikely to be able to afford. In this case, a good place to seek advice would be with the accountant, financial adviser, or lawyer to the enterprise.

Why is SITR important?

Now, more than ever, social enterprises need to be encouraged. In our “build back better” environment, social enterprises are helping to provide solutions to the problems that we, as a society, face. But they also find it harder than other trading companies to raise the funding they need to grow, as they may not have the revenue potential, or asset base, of companies operating solely for profit.

SITR is the only tax relief that supports investors into social enterprises and encourages the movement of private capital into more socially-minded businesses. So it’s a great way in which investors can do good, and make a return along the way.

Anything additional you think readers should know?

If you think you might qualify for SITR, do your homework early, and get help on it before you approach potential investors – remember, the availability of the tax relief may well help you persuade people to invest.

How can people get in touch with you?

Email me or any of my colleagues in the tax team at Mills & Reeve LLP and we will be happy to speak to any business interested in finding out more about SITR.