The Finance Act (No.2) 2017 received Royal Assent on 16th November. It confirms the heralded, but long delayed, increase in the limit on the amount of social investment tax relief (SITR) qualifying investment that an eligible social enterprise can receive. The limit has increased from about £275k in any three year period to a lifetime limit of £1.5m. A number of other SITR eligibility rules have also changed, some of which are set out below.
Organisations which have been waiting to raise up to the higher limit will now be able to seek HMRC pre-qualification assurance for such investments. Organisations can continue to raise non-SITR qualifying investment over the existing limits.
Social enterprise conditions
- The increased SITR limit will only be available 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 required to be an eligible social enterprise 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 which share space with businesses or community groups such as a community sport centre hiring out the sports hall, a 5-a-side pitch or granting a concession to a physiotherapist or a community pub which hires out space to a library service;
- 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.
- The social enterprise must not be in financial difficulties.
Where an investor already holds shares or bonds issued by the social enterprise, the investor will be ineligible to receive SITR unless such shares or bonds are either permitted subscriber shares or a 'risk finance investment' in respect of which a compliance statement for EIS, SEIS or SITR has been issued.
The investment must be made before 6 April 2021 rather than by 6 April 2019.
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.