Social Investment Tax Relief
Phil Pugh blogs…
In the 2013 budget announced by the Conservatives, a social investment tax relief (SITR) was to be introduced within the 2014 finance bill. This is due to receive royal assent in July 2014 but as of yet this has not be entered into UK legislation. Below is a brief outline of the relief available and the criteria a business is required to meet in order for investors to then be eligible for this new relief.
How does it work?
- Relief to income tax will be given in a similar manner to other investment relief schemes such as the “enterprise investment scheme” (EIS) and “venture capital trusts” (VCT).
- An individual may invest and a business may receive up to £290,000 in a social enterprise with an income tax relief of 30% of the funds invested (up to £87,000).
- Each separate investment may attract only one form of investment relief (EIS, SEIS, VCT, SITR).
What types of businesses qualify for the SITR?
In order for a business to be eligible for investment under the new rules, it must match the following criteria;
- A “community interest company”. The definition of this is a business with primarily social objectives. The surpluses of profits generated by the business are then principally invested back in to the community for this purpose.
- A “community benefit society”. A community benefit society operates for the benefit of the community rather than its members. As such, profits generated are not distributed to the members in a conventional format but via interest paid on the member’s investment.
- A charitable organisation.
- The enterprise must have no more than 500 employees and assets with a value of no more than £15,000,000 prior to the investment and then £16,000,000 following the investment.
Who can receive this relief?
For an investment to qualify for the SITR, an investor must not have a controlling interest in the enterprise. In summary, if the investor could be seen as one of the below, then the investment is unlikely to qualify for relief;
- An employee of the social enterprise
- A Partner of the social enterprise
- A trustee of the social enterprise
- A remunerated director of the social enterprise
- A person connected with a majority holder in the social enterprise
This list is by no means an exhaustive one and, if in doubt, we would advise that you seek professional advice before proceeding with any investment.
What can I receive in return for my investment?
There are a number of instruments normally available to an investor in a business. These are somewhat limited when investing in a social enterprise – to protect the interests and status of the recipient. As such, the considerations in return of the investment are available as follows;
- A shareholding of up to 30% of the issued share capital. If shares are already held within the business then the total holding may not exceed 30%. Should the enterprise fail and the business require winding-up, then the return of the investment would be made after that of any other share capital held at that time.
- An unsecured debt investment. Any debt investment must relate to the “riskiest layer” of debt held. This is likely to act as a deterrent to potential investors. Similar to the issue of winding up above, the return of any debt investment would rank below other liabilities of the enterprise.
It appears that the social investment tax relief is an extremely useful relief for an extremely small audience. This will not be applicable to the majority of commercial businesses and in which case the EIS. SEIS or VCT reliefs will then be available in the majority of cases. These offer a very similar form of relief with varying limits and regulations to suit most scenarios.
The briefing points above are just that and there may be regulations not stated above that would further determine the enterprise and individuals eligibility to the relief.
As a new and largely untested relief, we would strongly advise that you seek professional advice should you wish to consider it in any new or existing enterprise.
Phil Pugh AAT
If you would like to talk to Phil or one of our chartered accountants, call 01326 660022 today.