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This publication is available at https://www.gov.uk/government/consultations/social-investment-tax-relief-call-for-evidence/social-investment-tax-relief-call-for-evidence
1.1 The social investment market
Social enterprises are organisations that are not principally motivated by profit or commercial return. Instead, they have a social purpose to achieve community benefit through the organisation – a social return. Most profits will be reinvested in the enterprise to help it fulfil its social purpose.
Because of social enterprises’ intention to make a social impact and the way their businesses are structured, it is not always easy for them to access commercial lending to grow and develop their businesses. These organisations often produce social returns at the expense of some of their financial returns, which is at odds with the principles of mainstream commercial investment.
As a result, the market for social investment is undersized, meaning social enterprises generally have less capital, rely on secured lending and have more demand for unsecured lending products than is available.
To help counteract this market failure, the government introduced the Social Investment Tax Relief (SITR) in 2014. When SITR was enlarged in 2017, the government announced it would review the scheme within two years of this change taking effect. This call for evidence is being conducted in line with that commitment.
Given the scheme is subject to a sunset provision which, without legislation, will bring the relief to an end in 2021, this call for evidence will also help inform a decision about the future of the relief.
Since 2014, only a limited number of social enterprises have made use of the tax relief, and take up has fallen short of what was anticipated when SITR was introduced and subsequently expanded.
This call for evidence seeks views on how SITR has been used since its introduction, and why its use has been lower than previously anticipated. In addition to views from SITR investors and investees, this review also seeks the views of social enterprises who could have used SITR, but have not, and those who want to use the scheme but cannot. It is also intended to gather views from social enterprises on their experiences with scaling up, and what impact SITR has had on access to finance for social enterprises.
2. Government support for social investment
2.1 The Social Investment Tax Relief (SITR)
SITR is the government’s tax relief for social investment for trading social enterprises. It is intended to kickstart the market for social investment by encouraging individuals to support social enterprises and certain charities, and helping these enterprises access new sources of finance.
The scheme was introduced because social enterprises are often ineligible to receive investments under existing tax-advantaged schemes, such as the Enterprise Investment Scheme (EIS), because of their legal form. Modelling the scheme around the EIS also provides familiarity for investors and fund managers who have previously used EIS.
Social enterprises are required to spend funds raised through SITR on their trade. The expectation is that the investment will help the social enterprise to carry on a trade and generate profits that can be used, wholly or in part, to provide a social benefit.
To incentivise this investment the government offers tax reliefs to investors. Further information on SITR rules and eligibility are outlined in the next chapter.
2.2 Other government support
The UK has seen significant growth in the social impact investment market and the government has played an important role in building this strong foundation. In addition to tax relief, the government also offers a range of direct support to help tackle societal challenges through solutions that bring together public services, businesses and communities.
In 2018, the government published the Civil Society Strategy to outline its plans to support communities, neighbourhoods and society at large.
Big Society Capital was established in 2012 to build the social investment market and provide wholesale capital and Access (the Foundation for Social Investment) received a £60 million endowment in 2015 to support the capacity of the sector to develop enterprise activity and access social investment.
Bodies such as the National Advisory Board and both the Advisory Group, and the Implementation Taskforce on Creating a Culture of Social Impact Investing in the UK, have also done much to raise awareness of social impact investment.
Social enterprises may also be eligible for financial support through various British Business Bank programmes such as Start Up Loans and the Enterprise Finance Guarantee (EFG).
The Start Up Loans programme aims to encourage entrepreneurship in the UK, increase the rate of business creation and improve survival prospects. It offers loans between £500 and £25,000 at 6% interest alongside free mentoring and support to individuals who are starting a new business or who have been trading for less than two years.
The EFG supports businesses that cannot access finance from their lender due to having insufficient security to meet the lender’s normal requirements. The EFG provides the lender with a government-backed 75% guarantee against the outstanding facility balance.
Recent government policy changes have opened up the ability for Community Investment Tax Relief (CITR) to be used alongside EFG, making it a more attractive relief to investors.
CITR aims to stimulate increased investment and economic activity in less advantaged communities by offering loans and equity investments to businesses whose applications for funding have been rejected by the market.
The CITR scheme encourages investment in these businesses by giving tax relief to individuals and companies that invest in accredited Community Development Finance Institutions (CDFIs).
CDFIs provide finance to enterprises (both profit-seeking and non-profit-seeking) within disadvantaged communities. Some ‘retail’ CDFIs invest directly in enterprises within such areas. Others, ‘wholesale’ CDFIs, provide finance to retail CDFIs that in turn invest in suitable enterprises
3. The SITR scheme
3.1 How SITR works
The headline tax benefit of SITR is relief from Income Tax. Individuals making an eligible investment through SITR can deduct 30% of the cost of their investment from their Income Tax liability, either for the tax year in which the investment is made or the previous tax year (if 2014-15 or later). Investment can be made in the form of equity or debt. The ability to invest debt was introduced to enable individuals to invest in social enterprises that are unable to issue shares because of their legal structure.
In addition to 30% Income Tax relief on the value of investments, individuals can defer Capital Gains Tax (CGT) by investing a chargeable gain in a qualifying social investment. The CGT will become payable when the social investment is sold or redeemed.
Investors also pay no CGT on any gain on the social investment itself, but they must pay Income Tax in the normal way on any dividends or interest on the investment.
The Income Tax and CGT reliefs provide a substantial incentive for individuals to invest in social enterprises. However, to ensure the scheme is sustainable, continues to meet EU regulations and is not open to abuse, the investment and the organisation receiving it must meet certain criteria.
SITR is a notified State aid and is therefore subject to limits on the amount of aid government can give to enterprises. There are different limits on the amount of investment a social enterprise may receive, depending on when it began receiving investments.
For all social enterprises and charities, the maximum lifetime investment that can qualify for SITR is now £1.5 million. This figure also includes any funds raised through the other venture capital State aid schemes. Some older enterprises, including those that received SITR investments before April 2017, may also be subject to an additional limit of €344,000 of investments over a three-year rolling period. Further information on these investment limit rules can be found in the HMRC guidance.
Box 3.A: State aid
Where government considers whether to support particular activities or sectors, it must determine whether that support is considered a State aid. State aid is a government subsidy that gives some businesses a distortive advantage over their competitors and impacts on trade in the European Union.
SITR is one example of a State aid where government provides a subsidy to investors to encourage investment into specific types of companies or funds. Along with other UK State aids such as EIS, Seed EIS (SEIS) and Venture Capital Trusts (VCTs), SITR provides an upfront incentive to investors, alongside other reliefs. To be able to provide this subsidy there must be evidence that SITR is addressing and sufficiently targeted at a specific market failure.
The current State aid regime for substantial subsidies requires sufficient evidence of market failure and the necessity and proportionality of the intervention before allowing innovative state support for individual companies and funds. The regime also means that government cannot provide a subsidy for investors to invest in a specific type of fund or group of companies outside of current State aid limits. As an illustrative example, it would not be possible to provide a new narrow incentive for investment into companies in certain sectors without new quantitative evidence that this would address a specific market failure. The UK will continue to be subject to the EU State aid regime while it remains a member of the EU. During any implementation period EU rules on State aid will continue to apply.
However, should the UK leave without a deal, the EU State aid rules are being transposed into UK domestic legislation under the European Union (Withdrawal) Act. The UK legislation replicates the existing state aid framework. This ensures that the UK will retain a functioning and robust State aid regime that gives aid grantors and beneficiaries certainty. Once the UK has left the EU the Competition and Markets Authority will monitor and approve new aid granted in the UK.
As this review is looking at understanding the reception and operation of the current SITR scheme, this consultation seeks responses consistent with the current State aid regime.
3.2 Eligible enterprises
Organisations receiving SITR investments must have a defined and regulated social purpose, or be an accredited social impact contractor. Regulated social enterprises must take the form of a community interest company, community benefit society or a charity. The social enterprise must be carrying out a qualifying trade, have fewer than 250 full time-equivalent employees and have gross assets of no more than £15 million immediately before investment is made.
Charities may be eligible for SITR where they are carrying out trading activities. For more information see charities and trading guidance. There are also a wide range of other tax reliefs available to charities which ensure they don’t pay tax on most income and gains if used for charitable purposes.
Companies that are formed for the purpose of entering into, and carrying out, a social impact contract with a public authority are eligible for the SITR scheme if they are accredited. The instrument for investing in these companies is known as a ‘Social Impact Bond’ (SIB). Accreditations are now undertaken by the Centre for Social Impact Bonds in the Department for Digital, Culture, Media and Sport.
Most trades qualify for SITR, but social enterprises must be trading commercially with the intention to make a profit. In all cases, the money raised through SITR investments must be used to develop the trade carried out by the social enterprise. Social enterprises that are in financial difficulty, however, are excluded from the scheme.
Certain trading activities are excluded where the social enterprise can access finance because of the nature of the activity, or where the activity is at risk of being misused by tax planners. For example, an enterprise may not qualify for SITR if most of its trade includes activities like: dealing in land; property development; banking, insurance, money lending, hire-purchase financing or other financial activities; and power generation.
Since the scheme’s expansion in 2017, social enterprises can raise up to £1.5 million of SITR investment over their lifetime. A 2012 survey of 1,255 voluntary, community and social enterprise organisations described in ‘Investment readiness in the UK’ showed that respondents were primarily interested in investment between £10,000 and £100,000. Fewer than 10% of respondents were looking for investment of amounts between £1 million and £5 million, and fewer than 5% for amounts over £5 million. A recent survey by Social Enterprise UK found the median amount of finance sought by social enterprises in 2017 was £80,000.
3.3 Policy history
SITR was introduced in 2014 following consultation on a new tax relief for investment in social enterprise. In addition to a written consultation, the government established working groups formed of social enterprises, community interest companies and charities to advise on the design and scope of the policy.
Investment in energy generation activities was excluded from SITR from April 2016 to ensure the scheme continued to target enterprises that would otherwise struggle to access conventional, non-tax advantaged finance, and to deter its misuse for tax planning. This change was part of a wider exclusion of energy generation activities across the tax-advantaged venture capital schemes, EIS, SEIS and VCTs.
In 2017, the amount of investment younger qualifying social enterprises could raise through SITR was increased to £1.5 million and the relief became a Block Exemption State aid for investments in those younger social enterprises from April 2017.
At the same time as its expansion in 2017, restrictions on employee numbers and qualifying trades were introduced to make sure the scheme was well targeted and continued to comply with state aid requirements. Among the amendments was the exclusion of activities such as asset leasing, lending, and operating nursing and residential care homes.
The original sunset provision ending the SITR scheme for investments made on or after 6 April 2019 was also amended in 2017, to extend the scheme for income tax purposes to investments made by 5 April 2021. However, the equivalent sunset provision for CGT reinvestment relief was not amended at the same time. The government intends to legislate later in the year to amend retrospectively the termination date in Schedule 8B to the Taxation of Chargeable Gains Act 1992, to align with the Income Tax provision. CGT reinvestment relief will be available under that new legislation on qualifying investments made up to and including 5 April 2021.
Box 3.B: Questions
If you are a social enterprise, are you interested in or planning to scale up? How do you intend to achieve this and how much do you hope to raise in investment?
Other than individual investors, what sources of finance do trading social enterprises seek and acquire?
How difficult or easy is SITR to access for social enterprises?
What are the factors that lead to a successful trading social enterprise?
Do you think social enterprises need private investment and for what purposes?
Is tax the most appropriate government lever for supporting funding for social enterprises?
What criteria would be best measure of success for SITR?
Is the SITR limit of £1.5 million appropriate?
4. Use of SITR to date
SITR was established in to help kickstart the social investment market and help social enterprises become self-sustaining in the long term. Though the scheme’s rules mean not every social enterprise or charity can qualify for SITR, recent analysis by Big Society Capital suggests a potential market size of over 30,000 organisations.
According to Big Society Capital, at the end of 2017 social investment in the UK was worth over £2.3 billion, spread across approximately 4000 transactions still to be repaid. This was a reported 17% increase year-on-year and 50% compared with the end of 2015. The same research found a significant increase in Social Impact Bond deal flow in 2017 to £10 million from the 2016 figure of £2 million.
The SITR scheme has been used substantially less than was anticipated when it was introduced in 2014. Costings published at Budget 2014 assumed the relief would cost £10 million in 2015-16, rising to £35 million in 2018-19. The costings were subject to uncertainties over the levels of investment into social enterprises and the behavioural response to the new relief.
Information on the number of enterprises raising funds and the amount of funds raised since the introduction of SITR are published annually by HMRC.
Official statistics published for the first three years of the scheme, from its introduction in 2014 to the end of the tax year 2016-17, indicate that around 50 social enterprises have raised £5.1 million of investment through SITR. Even if Income Tax relief was claimed on all the investments, the cost of the scheme in those three years would be less than £2 million in total.
As with the other venture capital schemes, more social enterprises seek an advance assurance (AA) from HM Revenue and Customs to check their eligibility for SITR than receive it. However, the proportion of enterprises that receive an AA and go on to receive investment is lower than for these other schemes. Many social enterprises do not qualify because they do not intend to use the money to grow their business or they are not trading.
There may still some misunderstanding by social enterprises of the scheme’s purpose. Many social enterprises, including charities that are not carrying on a trade, have sought to use the money for non-trading activities. Some fund managers had planned to use the scheme for offering low-risk financial products, but were unable to carry through their plans when changes were introduced to the scheme in 2017.
A small number of social impact contractors have been accredited and have used Social Impact Bonds to raise funds under the SITR.
Box 4.A: Questions
If you are an investor, have you made an investment that was eligible for SITR? If not, why not?
Would you invest in social enterprise without tax relief?
What are your expectations when you invest in social enterprise? For how long do you expect to invest? Would you expect/prefer to invest in equity or debt?
Have you used, or considered using, the Enterprise Investment Scheme or Seed Enterprise Investment scheme for impact investing?
If you are a social enterprise, would you use SITR? If not, why not?
As an investor, enterprise or interested party, do you have a view as to why the take up of SITR has been less than expected?
Are you aware of any international examples of similar tax reliefs that have experienced greater take up than SITR?
How did you hear about SITR?
5. Responding to this call for evidence
5.1 Who should respond?
A range of groups will be interested in the questions and evidence presented, including but not limited to:
- the public
- civil society groups, including charities and voluntary organisations
- social enterprises
- community interest companies
- community benefit societies
- registered charities
- financial institutions and fund managers
- trade associations
The government welcomes responses from anyone with an interest in the questions raised.
5.2 When and how to submit your responses
The call for evidence will remain open for 12 weeks, and close on 17 July 2019.
It would be helpful for any responses to focus on the questions outline, but please feel free to submit other information if you think it is relevant to the call for evidence. Any responses that are not directly relevant or linked to the topic of this call for evidence will not be considered.
Please submit your responses to SITRReview@hmtreasury.gov.uk
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