8.6 Social Investment Tax Relief
Social Investment Tax Relief (SITR) was launched in April 2014 with the aim of encouraging investment in social enterprises by unconnected individuals. On 6 April 2017, the scheme was enlarged to allow up to £1.5m of qualifying investments a social enterprise can receive under this scheme within seven years of its first commercial sale. For older enterprises, the state aid de minimus principle still applies, limiting qualifying investments to the sterling equivalent of €344,000 in any three-year rolling period.
The rules for SITR mirror those of EIS and SEIS in some but not all areas. For instance, the rules regarding connected persons and subsidiary entities are very similar.
As with EIS and SEIS, the social enterprise must be engaged in a qualifying trading activity. This means that social enterprises solely reliant on voluntary, donated or investment income are not eligible. But a social enterprise with a wholly or majority owned trading subsidiary is eligible, as long as the funds raised are invested in the trading activity. There are some minor differences in the definition of qualifying trading activities. Under the changes introduced in April 2017 all energy generation activities, leasing and the hiring of assets, the provision of financial services to social enterprises, and the operation or management of nursing or residential homes, have been excluded. But the provision of legal and accountancy services, and the operation or management of hotels or comparable establishments remain as eligible trading activities. The government has also said it will introduce an accredited scheme for the provision of affordable social care, that will be an eligible trading activity for SITR purposes.
There are major differences in the type of enterprise that qualifies for SITR and the nature of the investments. SITR is only available for investment in social enterprises. SITR defines social enterprises as charities, community interest companies and certain types of community benefit societies. At the heart of this definition is the requirement that the enterprise has a statutorily defined asset lock, so only community benefit societies with the prescribed asset lock (see Section 2.4) fit the definition, along with charitable community benefit societies, where the asset lock is determined by charity law. Co-operative societies are not included in this definition because there is no statutory asset lock for this type of society. Other eligibility criteria include a requirement that the social enterprise must not have more than 250 employees or more than £15m in gross assets.
SITR is available for both debt and equity investment in social enterprises. The eligibility of debt finance makes SITR radically different from EIS and SEIS, both of which only apply to equity investment. To qualify for SITR, debt finance must be unsecured and there must be no pre-arranged exit for the investor for at least three years. It must be subordinate to all other debts held by the social enterprise and not attract more than a commercial rate of interest.
Like SEIS, the maximum amount an older social enterprise can raise is restricted to the €200,000 state aid de minimus limit. But unlike SEIS, where the maximum amount that can be raised is fixed at £150,000, SITR uses a formula to calculate the maximum amount, based on the value of the tax reliefs, less any state aid already received by the social enterprise during a rolling three-year qualifying period. At current tax relief rates, this works out as €344,827, or just over £250,000.
Like EIS, SITR is a tax relief for individuals (not corporate bodies) and is currently set at 30%. The maximum amount an investor can invest in SITR schemes is £1m per annum. Individuals are not eligible to invest in a social enterprise under SITR if they have previously invested in the same enterprise, and these investments were not made under SITR or one of the other tax relief schemes covered in this section of the handbook. Connected persons, defined in a similar way as for EIS and SEIS, are not eligible for SITR, including any investor with more than 30% of the total loan capital or voting rights. Investors are eligible for capital gains hold-over relief on gains reinvested in SITR schemes, and also for capital gains disposal relief on gains made on qualifying SITR investments.
SITR is not available on any investment for which the investor has already received SEIS, EIS or Community Investment Tax Relief. But a social enterprise can offer SITR on debt finance in combination with SEIS for equity finance, as long as cumulative tax relief benefit does not exceed the maximum restrictions applicable to each scheme; although, in the case of older social enterprises, these restrictions are based on de minimus state aid, and this has been interpreted slightly differently for each scheme, so HMRC may need to determine which investment was made first in order to work out how much can be invested in each scheme. A social enterprise can also offer SITR on loan capital at the same time as offering EIS on share capital; these schemes are independent of each other, and EIS is not subject to de minimus state aid rules, although it is subject to enterprise age rules.
SITR is administered by the SCEC at HMRC. The arrangements are similar to those for SEIS and EIS, including the provisions for advance assurance. Qualifying investments made on or after 6 April 2014 are eligible.
If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at [email protected]