An updated version of this article was published on 14 December 2017.
The heralded increase in the limit on the amount of social investment tax relief (SITR) qualifying investment that an eligible social enterprise can receive was due to have increased on 6 April 2017 from about £275k in any three year period to a lifetime limit of £1.5m, but the rule change was dropped from the 2017 Finance Bill when the Bill was substantially slimmed down prior to the parliamentary recess caused by the snap general election.
For the time being, organisations looking to raise up to the higher limit will not be able to do so, nor will they receive HMRC pre-assurance for such investment. Organisations can, however, continue to raise non-SITR qualifying investment over the existing limits.
The Treasury has indicated there has been no policy change and the government will aim to legislate at the earliest opportunity in the new parliament to bring in the rule change retrospectively with effect from 6 April 2017. The Queen's Speech published on 21st June mentioned a Summer Finance Bill, so social enterprises and social investors are now hoping that the rule change will be included in it. That said, given the necessary government focus on Brexit, it is unlikely that this tax rule change will be a priority in this parliament.
A number of other SITR eligibility rules were to have changed at the same time. These include:
- the increased SITR limit only being available only to social enterprises which have been established for less than 7 years (unless such organisations are receiving follow-on investment received prior to the 7 year limit) – the original limit will remain for older organisations;
- the number of full time equivalent employees will drop from 500 to 250;
- the following will cease to be eligible trades, unless they are insubstantial:
- hiring out assets– this will adversely impact many social enterprises, such as: community shops or pubs or libraries sharing the space with other businesses or community groups; or a community sport centre hiring out the sports hall, a 5-a-side pitch or granting a concession to a physiotherapist;
- electricity or heat generation;
- generating licence fees or royalties;
- operating or managing nursing homes and residential care homes;
- onward lending to other social enterprises;
- using SITR to refinance existing debt obligations will also be excluded.
What is social investment tax relief?
SITR was introduced to encourage new investment by individuals into community interest companies (CICs), community benefit societies, charities and approved social impact bond contractors. It is designed to help such organisations raise social investment to develop or expand their social mission or to help them find new ways of tackling societal or environmental issues.
SITR entitles investors to claim 30% tax relief on the amount invested in the tax year of the investment. The maximum annual investment which qualifies for SITR is capped at £1m per investor.
The main benefits to a social enterprise receiving SITR qualifying investment are:
- the investment must be unsecured; and
- it is patient capital – there can be no capital repayments for three years, giving time to implement the business plans and start generating income to repay the investment.
For specialist social investment legal support, please contact Richard Hiscoke on 0370 194 8904.