The Social Investment Tax Relief Scheme in the United Kingdom

The initiative

One of the solutions to this issue was Social Investment Tax Relief (SITR), which was launched by the UK government in April 2014 "with the aim of encouraging investment in social enterprises by unconnected individuals.”[3] This was partly to place social enterprises on an equal footing with mainstream business, which has had access to the Enterprise Investment Scheme (EIS) for many years. "SITR was also intended to incentivise investment in businesses that generate social impact, to enable their growth. With the tax relief covering some of the return to investors, social enterprises can access unsecured loans at more like 6% per annum."[4].

The government had a clear goal in setting up SITR. The government's policy objective in introducing this relief is 'to support social enterprises seeking external finance by providing incentives to private individuals who invest in them' [4]. As Simon Rowell, Senior Director of Strategy and Market Development at Big Society Capital (BSC), commented in our interview: if you're an evolving charity or social enterprise that's trying to trade and you need a kind of support to help driving your business and grow it, you couldn't before get it from investors. That's what SITR was designed to support, to kind of fill that gap between them and solve that kind of emerging need.” BSC was commissioned by the government to carry out research as a basis for SITR, convene stakeholders and make recommendations for how to set the scheme up.

The income tax and capital gain tax reliefs provide a substantial incentive for investors. To make sure new investment is directed to the enterprises which need it most and to meet EU regulations, the investment and the organisation receiving it must meet certain criteria .[5]

The government also set clear constraints to its offering:

• “Organisations must have a defined and regulated social purpose. Charities, community interest companies or community benefit societies carrying out a qualifying trade, with fewer than 500 employees and gross assets of no more than £15 million, may be eligible.”
• “Social enterprises will need to apply to HMRC [Her Majesty's Revenue & Customs] to confirm that both they and the investment they have received meet the conditions of the scheme. Investors are only able to claim tax relief once this confirmation has been given.”
• “Investments in companies set up to carry out a social impact bond [SIB] are eligible for SITR, but only if the company has received accreditation from the Cabinet Office.”[6]

SITR has been continuously revised, most recently in June 2017, when changes proposed by Big Society Capital were made law. For example, the cap on the amount that social enterprises can raise under the scheme was raised from about £290k to £1.5 million in order to enable organisations to access more capital.

The challenge

The work that social enterprises carry out in supporting generally low-income communities and in promoting wellbeing through socioeconomic and environmental causes is of self-evident value. They provide an important supplement to state and NGOs' interventions, but they often face difficulties in financing their operations. “The government recognises the increasing role social enterprises play in the economy and in tackling social problems; and that lack of access to capital holds social enterprises back at various stages of their development.”[1]

This is lack of access to capital is partly due to the high interest rates in the commercial market. “Many social enterprises... required investment to scale their impact but, as is the case with many social enterprises across the UK, a lack of assets they could borrow against (e.g., a building to offer as security for a mortgage) was a major stumbling block. This made borrowing rates too high, in the region of 10%-12% per annum.”[2]

The public impact

By July 2016, a report published by the NPC and Big Society Capital found that there had been some use of SITR. "We estimate that £3.4 million has been invested across 30 organisations to date in SITR deals - these include direct investments in enterprises and investments through SITR funds.” The amount of money leveraged by these investments is estimated to be multiple times that number. Additionally, “the amount of capital raised in an average deal is just over £100,000 and the average cost of capital is 4.8% p.a. over a five year period. About 80% of deals to date have been loans, with the rest community shares or SIBs."

In some quarters this was seen as disappointing, as estimated numbers had been much higher at up to 500 million GBP over 5 years.Nevertheless, there has been take-up, as these two examples demonstrate:

• “There are some success stories, of course. The first SITR project was in Bristol with the charity FareShare South West, which aims to tackle food waste by giving surplus food to vulnerable people. It was set up by social impact investment company Resonance, which launched the UK's first large-scale SITR fund. This fund reached its first close of £1.3 million in February 2016.”

“One of the most high-profile examples is community football club (and community benefit society) FC United of Manchester, which serves the community of Moston in North Manchester with projects including youth work, school holiday play schemes and adult education. The club previously played home matches at Bury FC's Gigg Lane but used SITR to help fund a new stadium, which gives them a home ground and provides a permanent base for [their] community outreach work.”[8]

This enhanced case study is part of our policymaker interview series. For the series, we talked to policymakers from across the world about their policies, policy-making and life in government. The interviewed protagonist for this case study is Simon Rowell, Senior Director of Strategy and Market Development at Big Society Capital (BSC).      

Stakeholder engagement

The UK government was a key stakeholder in the process, but many others were involved in setting up SITR, principally the social enterprises, charities, community interest companies and other similar organisations for which the policy was designed. The government asked for the opinions of various bodies before formulating the guidelines of the policy and considered their recommendations during formulation. These bodies were the ones most engaged with the policy: social enterprises, as well as representative bodies, legal and accountancy advisers, investors and financial advisers (see also Strength of evidence below): “In addition to the consultation document and working group, Treasury and HMRC officials also held a series of individual meetings with representative bodies in the North East, Scotland and London”.[1] There was additional engagement and support from the European Union (EU), as well as other UK social investment initiatives such as Big Society Capital and Social Investment Scotland.

This stakeholder engagement is also evident from the revisions that the government made to the policy in 2014. “There was widespread demand for an increase in the investment limit to enable more organisations to benefit, and for bigger investment plans. Thus, the government consulted stakeholders over the summer of 2014 on what that increase should be and what evidence there was to support an increase to that level. We also asked how a VCT [venture capital trust]-like option for social investment would work and about other ways in which we could ensure an enlarged but well-targeted relief. [1]

Political commitment

The government has shown its continuous commitment towards the policy in its consultation process on SITR. “Social enterprises play an increasing role in enhancing growth and meeting social and community aspirations. This government has shown a long-standing commitment to support that growth. The prime minister, when he launched the consultation on SITR at the G8 conference on 6 June 2013, asked how we could create the best possible environment for social investments in Britain.”[1]

The government also encourages social enterprises to take advantage of the scheme. “There is certainly evidence to suggest that the government is trying to encourage take-up of the scheme. Big Society Capital, the independent social investment institution, has launched GET IT, a free package of support to help organisations use SITR, as well as Good Finance, a website to help improve access to information on investment and finance for charities and social enterprises.”[6]

When the need for an increase in the investment limit was observed, the government announced that it would increase the maximum SITR investment, and the revisions to the scheme in 2017 underline the government's continuing commitment to SITR. "

According to Simon Rowell, this was partly due to a collaborative approach to the policy: “we managed to maintain government trust and the legitimacy of this scheme by making sure that it's tight enough in areas where it needs to be, and the sector has kind of compromised to make sure that the Treasury is still happy with the fact that it's meeting their objectives, but not being abused.”

Public confidence

There is no widespread public awareness of SITR. Even among the target users, there is some reluctance to deploy it. “It is fair to say that charities are not traditionally big innovators and are clearly risk-averse, particularly when it comes to new ways of raising finance. Many will therefore shy away from new funding streams in the early adopter phase.” [6]

However, many of the organisations that have made use of SITR, and those that have benefited from the work of these social enterprises, have appreciated the opportunities it offers:

• “Social Investment Tax Relief has enabled us to grow quickly and support an ambitious plan” Jacqui Reeves, CEO, FareShare South West...
• “People invested because they wanted to be part of something that will influence and change lives in North Manchester” Andy Walsh, General Manager, FC United of Manchester...
• “Social Investment Tax Relief has enabled us to explore new and innovative ways of tackling important social issues” Mark Simms, Chief Executive, P3.[7]

Clarity of objectives

The government's main objective in introducing SITR was clearly stated from the outset: to facilitate social enterprises' access to capital and to support social enterprises seeking external finance by providing incentives to private individuals who invest in them. So, the aim is to make investment by individuals in social enterprises more attractive for prospective investors. The government wishes to stimulate and encourage this activity.”[8]

Specifically, the intention was for SITR to enable:

• "Charities and Social Enterprises to raise new investment to support their trading services. It could provide routes to investment which offer better value and could potentially be less costly than other sources of investment.”
• "The organisations to raise smaller amounts of investment in a more cost effective way. SITR may be attractive to new investors who are interested in supporting the creation of social impact.”
• "Investors to gain personal tax reliefs which include income tax at 30% of the amount they invest, capital gains disposal, and hold-over relief."[7]

Strength of evidence

There was a substantial consultation period for SITR, during which evidence was taken from the principal interested parties. “The government published 'Consultation on social investment tax relief' on 6 June 2013, and invited the views of social enterprises, as well as the views of representative bodies, legal and accountancy advisers, investors and financial advisers on the design of the scheme. The consultation set out proposals to address a number of design issues on the investee organisation, the investment, and the tax relief, and asked for evidence about the state of the social investment market.”[1]

The consulting was extensive and resulted in a recommendation which was widely endorsed:

• “The consultation ran for three months and closed on 6 September [2013]. The government received 79 responses from representative bodies, social enterprises, cooperatives, investors and legal and financial advisers.”
• “The consultation document invited interested parties to send nominations for a working group to discuss the issues in more detail. The government received 35 nominations to the working group of whom 22 were chosen. HM Treasury held three meetings of a working group of interested stakeholders to discuss the consultation document.”
• "Following comments received during consultation, tax relief was proposed, to provide income and capital gains tax relief for investment in social enterprises."[1]

Simon Rowell pointed out the research carried out by BSC at the outset of the project: “Part of what we did was commission research with the City of London, more detail about what a tax relief might look like, what its impact might be, why people might be interested in it and why various different stakeholders across industries, enterprises and government might be interested in this. That was really important, as well as actually having a central point to do that, and actually becoming a kind of independent actor”. However, there were also some difficulties in accessing the necessary data to underpin the initiative with evidence: “We're a new industry so, we don't have the data itself or probably a mechanism to collect the data, and that makes it really hard to make a powerful evidence-based case, about why this relief is gonna work and what its impact is going to be. […] How can you best collect information and data from current sources without being a burden to the social organizations, which already spend a lot of time measuring things? How can you ensure that organizations and non-profits can collect that information in a rigorous way, that actually can appeal and answer the questions of government?”.

Feasibility

The legal basis of SITR is clearly set out in Part 5B of Income Tax Act 2007. "For the purpose of the SITR, social enterprise means: a) A community interest company; b) A community benefit society; c) A charity; [or] d) Any other body which is regulated in some way." [8]

The main constraint has been the EU's cap on the amount that charities can receive. “Under EU rules, SITR is a form of state-subsidised aid, and qualifying enterprises are restricted in the amount they receive. There is a formula which determines the cap and, at the current rates for... SITR, this makes the limit €344,827 per social enterprise over any three-year period.”[9] This restriction has been raised to £1.5 million (see Political commitment above) and the scheme has been enlarged within new legislation set out in the Finance Bill 2017.

SITR does have advantages for social enterprises over other forms of assistance. “The investment can be made in the form of equity or debt. This is key, as many social enterprises are structured without share capital and have no means of issuing equity in exchange for investment. This is the main shift from EIS, meaning that certain organisations with no share capital are no longer alienated from this investment catalyst.”[8] It makes investing in social enterprise more financially feasible as well. “There is a long list of benefits for the investor, too. A potential return on their money whilst supporting a cause they care about is the most obvious, but there are some hugely appealing tax reliefs as well.” [6]

Management

As a form of tax relief rather than an organisation, SITR does not require any management structure. “SITR is administered by the SCEC (Small Company Enterprise Centre) at Her Majesty's Revenue & Customs (HMRC). The arrangements are similar to those for SEIS and EIS, including the provisions for advance assurance. All qualifying investments made on or after 6 April 2014 are eligible.”[6]

The social enterprises and investors and their advisers therefore need to have a clear grasp of the financial and legal implications of SITR. “SITR is not available on any investment for which the investor has already received SEIS, EIS or Community Investment Tax Relief. But a social enterprise can offer SITR on debt finance in combination with SEIS for equity finance, as long as cumulative tax relief benefit does not exceed the maximum restrictions applicable to each scheme; although these restrictions are based on de minimus state aid, this has been interpreted slightly differently for each scheme, so HMRC may need to determine which investment was made first in order to work out how much can be invested in each scheme.” [3]

Measurement

The UK government did not have strong measurement mechanisms in place to assess SITR's effectiveness and impact; most of the measurements have been carried out by NPC on behalf of Big Society Capital. Simon Rowell commented: “We saw a gap in the measurement and no one was convening it, not government as far as we could see, so we decided to do that voluntarily and commissioned NPC. We thought we would start to build confidence in that there was a scheme happening, it was working and it was used in a variety of ways.”

The most important quantitative metrics about SITR relate to: the amount invested through its use; the number of social enterprises that have made use of it; and the interest rate applied. According to the NPC report this was £3.4 million to 30 organisations at 4.8% per annum on average in the first two years of operation. The qualitative metrics relate to the social impact of the work that social enterprises have been able to carry out as a result of this additional funding.

Alignment

The government has been well aligned with stakeholders, whether they are social enterprises, their investors or their advisers, in the following processes:

• Consulting with stakeholders during a six-month period in 2013
• Setting up SITR in 2014
• Increasing the limit on SITR, to take effect from April 2017
• Introducing legislation in the Finance Bill 2017 to enlarge the SITR scheme.

There is also alignment between the government and the UK's social investment organisations, such as Big Society Capital and Social Investment Scotland, to promote the scheme to social enterprises and investors alike.

Bibliography

[1] Social investment tax relief: summary of responses, December 2013, HM Treasury

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/264507/social_investment_tax_relief_summary_of_responses.pdf

[2] Social investment tax relief made easy, Grace Howells, 11 October 2016, Pioneers Post

https://www.pioneerspost.com/business-school/20161011/social-investment-tax-relief-made-easy

[3] Social Investment Tax Relief, Community Shares

http://communityshares.org.uk/resources/handbook/social-investment-tax-relief

[4] Social Investment Tax Relief (SITR) Factsheet Information for Professional Advisors, 20 January 2015, Enterprise Investment Scheme Association (EISA)

https://www.eisa.org.uk/wp-content/uploads/2014/08/SITR-Factsheet-.pdf

[5] Guidance: Social investment tax relief, Updated 23 November 2016, Cabinet Office

https://www.gov.uk/government/publications/social-investment-tax-relief-factsheet/social-investment-tax-relief

[6] The potential of social investment tax relief, Nigel Shaw, 12 April 2016, Garbutt Elliott

http://www.garbutt-elliott.co.uk/blog/social-investment-tax-relief/

[7] GET SITR: An Essential Guide to Social Investment Tax Relief (SITR), Big Society Capital

https://www.bigsocietycapital.com/sites/default/files/GET%20IT%20leaflet%20final_0.pdf

[8] Social Investment Tax Relief: A Brief Guide, 2014, Social Investment Scotland (SIS)

http://www.socialinvestmentscotland.com/files/9413/9697/0411/SITR_Guide.pdf

[9] Social Investment Tax Relief, 20 January 2015, Enterprise Investment Scheme Association (EISA)

http://www.eisa.org.uk/wp-content/uploads/2014/08/1.-Social-Investment-Tax-relief-Overview-final1.pdf

About, FareShare South West

http://faresharesouthwest.org.uk/about/

Income Tax: enlarging Social Investment Tax Relief, 26 January 2017, HM Revenue & Customs

https://www.gov.uk/government/publications/income-tax-enlarging-social-investment-tax-relief/income-tax-enlarging-social-investment-tax-relief

Social Investment Tax Relief (SITR): Two Years On, Abigail Rotheroe, 4 July 2016

http://www.thinknpc.org/publications/social-investment-tax-relief-sitr/