Guidance

Venture capital schemes: apply to use social investment tax relief

Social investment tax relief helps social enterprises raise finance by offering tax relief to individual investors.

The social investment tax relief (SITR) scheme is one of 4 venture capital schemes - check which is appropriate for you.

How the scheme works

SITR is designed to help you raise money to support the trading activity of your social enterprise or charity. It does this by offering your investors tax relief on their investment if the qualifying conditions are met.

Tax reliefs will be withheld or withdrawn from your investors if you don’t follow the rules for at least 3 years after the investment is made.

Who can apply

You can apply if you’re:

You must have fewer than 500 full-time equivalent employees at the time the investment is made and can’t:

  • be controlled by another company
  • have more than £15 million in gross assets immediately before the investment is made
  • be quoted on a recognised stock exchange
  • be in a partnership
  • control another company that isn’t a qualifying subsidiary

You can have subsidiaries but you must hold more than 50% of the ordinary share capital in each subsidiary.

Find out more about setting up a social enterprise.

About the investment

You must be raising money for a qualifying business activity and your investors must buy new shares. Any money they lend you as a debt investment must also be new.

The maximum amount of investment you can get through SITR is €344,827 (about £250,000) over 3 years, this:

  • includes any other de minimis state aid received in the 3 years up to and including the date of the investment
  • will also count towards any limits for later investments through other venture capital schemes

You can’t guarantee your investors will get their money back before other shareholders or lenders, if your social enterprise fails.

Shares

Any shares you sell:

  • must be new shares
  • must be paid for in full, and in cash, at the time the investment is made
  • mustn’t be preferential shares

Debt investment

The amount you’re lent:

  • must be for a new debt investment or loan
  • must be made in cash, in a single or several payments
  • mustn’t be secured on any assets

Any interest you pay on the loan mustn’t be more than a reasonable commercial interest rate and the capital can’t be repaid during the qualifying period.

How to use the investment

All money raised from the investment must be used within 28 months of the date of the investment.

You, or your 90% social subsidiary must use the money raised by the investment for either:

  • carrying on the qualifying trade
  • preparing to carry on the trade within 2 years of the date of the investment

Any money you use to buy shares or stock in a company isn’t a qualifying activity.

Qualifying subsidiary companies

If your company owns subsidiaries they need to be ‘qualifying subsidiaries’. This means:

  • your company must own more than 50% of the subsidiary’s shares
  • no one other than your company or one of its other qualifying subsidiaries can control this subsidiary
  • there must be no arrangements which would put someone else in control of this subsidiary

The subsidiary must be at least 90% owned by your company where either the:

  • business activity you’re going to spend the investment on is to be carried out by the qualifying subsidiary
  • subsidiary’s business is mainly property or land management

Qualifying business activity

Most trades qualify but you must be trading commercially and trying to make a profit. You don’t need to be trading in the UK.

Your company may not qualify if most of your trade includes things like:

  • dealing in land
  • banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities unless lending money to another social enterprise
  • property development
  • fishery products
  • agricultural products
  • generating or exporting electricity
  • road freight transport for hire
  • providing services to another person where that person’s trade substantially consists of excluded activities, and the person controlling that trade also controls the company providing the services

Before raising your money

You can ask HM Revenue and Customs (HMRC) to check if your investment is likely to qualify before you go ahead, this is called advance assurance.

How to apply

Your compliance statement must be submitted within 2 years after the later of the:

  • completion of the initial 4 months of carrying out a qualifying business activity
  • tax year in which the shares were issued

You’ll need to include:

  • up to date copies of:
    • your company’s memorandum and articles of association
    • the rules of your social enterprise
    • the loan agreement or debt instrument if the investment is through qualifying debt
  • a copy of:
    • your latest accounts, including any subsidiary social enterprise
    • any documents issued to investors

Send these by email HMRC to email: enterprise.centre@hmrc.gsi.gov.uk or write to:

Small Company Enterprise Centre
(Admin team)
Wealthy and Mid-size Business Compliance
S0777
Newcastle
NE98 1ZZ

You must complete a separate application for each share or debt investment issue.

What happens next

If your application is successful, we’ll send you a form SITR2 and form SITR3 to give to your investors. Your investors won’t be able to claim the tax relief until they receive their SITR3 from you.

Where HMRC decides the investments don’t succeed in meeting SITR requirements, you’ll be able to review and appeal the decision.

Appealing the decision

If you’re unsuccessful, we’ll write to you explaining why. You can ask HMRC to review the decision.

Reporting changes

You must tell HMRC if your social enterprise stops meeting any of the above conditions within 60 days. If you don’t tell HMRC in time, you could be charged a penalty.

If you don’t use the money within 28 months of the investment, HMRC will withdraw some or all of your investor’s tax relief.

Published 16 June 2017