New social investment tax relief taking shape - five reasons why it's of interest to community shares
The Government unveiled a new Social Investment Tax Relief (SITR) earlier this year, offering an income tax rebate to those making unsecured investments in asset-locked bodies – charities, community interest companies and community benefit societies. While the 30% rate was announced at Budget, the finer detail of the relief has now started to emerge. Armed with all the information, the CSU has begun to determine how SITR could be good for community shares.
Firstly, tax relief can be an important incentive to invest in new and high-risk enterprises. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have become a mainstay of many community share offers.
Apart from its definition of social enterprise, SITR has many of the same eligibility criteria as EIS and SEIS. It will be run by the same part of HMRC, the Small Companies Enterprise Centre (SCEC), using the same or similar administrative procedures. Another difference is that SITR is available on unsecured debt as well as equity investment.
But, as any corporate financier will tell you, equity is a whole lot better than debt when you are trying to start and grow a business. There is a widespread belief that social enterprises, especially trading charities, cannot raise equity. But, as Hastings Pier Charity has shown, it is possible for charities structured as clgs to convert into charitable community benefit societies. Hastings Pier Charity has just raised over £0.5m in community shares, incentivised through EIS.
So do we really need another tax relief scheme? Here are five reasons why SITR may be good for community shares:1. Combining SITR with EIS and SEIS: SITR can be offered alongside EIS and SEIS; so a society could offer EIS or SEIS on community shares at the same time as offering SITR on unsecured loans. The only restriction is when SEIS and SITR are combined, the maximum that can be raised under SITR is reduced pound for pound by the amount raised under SEIS. For instance, a society raising the maximum allowed under SEIS of £150,000 in community shares, would only be able to raise £135,000 through SITR (ie. the SITR maximum of £285,000 minus £150,000). 2. Speeding up buy-outs: One of the main reasons community buy-outs of pubs, shops and other local businesses fail is that the sellers want to sell quickly, and community share offers take time. It might be much quicker to raise unsecured loans from a small number of committed individuals. The loans could then be replaced by or supplemented with community shares in the medium or long term. 3. Engaging in trades excluded from EIS and SEIS: Most trading activities do qualify for all three types of tax relief, but there are some important exceptions where social enterprises qualify under SITR but not under EIS or SEIS. The most important of these exceptions is residential care, a significant area of activity for social enterprise. Other exceptions include hotels, and social finance intermediaries that invest in social enterprises. 4. SITR is potentially a better brand: For many people community shares are still a novel idea, bringing together the apparently polar opposites of share capital and social purpose. Mention of EIS and SEIS only reinforces the confusion about whether community shares are for public benefit or private gain. As the name implies, Social Investment Tax Relief incentivises social investment, not investment for private profit. From this point of view SITR is potentially a much better, and more appropriate, complementary brand for community shares. And most community share offers are within the scope of SITR; the median size of offer is under £250,000, well within the SITR maximum. 5. Shaping the future of SITR: The government is committed to the long term development of SITR. One area of crucial importance is how SITR is treated under State Aid rules. The government has approached the European Commission to get “notification” for SITR under State Aid rules, which could result in two major changes: the maximum that can be invested in a single social enterprise could be significantly increased; and some trading activities that are currently excluded could be allowed. Among the business activities that currently do not qualify for any of the tax relief schemes are farming, horticulture, woodland management, property development and rental, all significant areas for social enterprise development.
The Community Shares Unit is working with the Cabinet Office and HMRC to develop SITR in the context of community shares. If you are considering applying for SITR and have any questions about the scheme, or would like our support in making your application, please contact us.