The UK Government has shown initiative in recent years to promote small business growth with tax efficient schemes such as Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). The 2014 Budget created even more incentives for investors with the introduction of the Social Impact Tax Relief (SITR) modelled after EIS. SITR is designed to help social enterprises by offering generous tax reliefs to investors.
Social enterprises form an important part of the UK economy to help communities, people, the environment, as well as the economy. According to the Cabinet Office, UK social enterprises contribute about £55 billion to the economy and employ 2 million people. 82% of social enterprises reinvest profits locally and the new tax relief could potentially generate £480 million in social investment over 5 years.
The basics of SITR are the company must be a community interest company (CIC), a community benefit society with an asset lock or a charity. The firms must have fewer than 500 full-time employees with no more than £15 million in gross assets immediately before investment and no more than £16 million after the investment. Companies may raise either debt or equity through SITR.
Why Invest?
Investors in SITR can claim up to 30% income tax relief for investments made on or after 6 April 2014. Capital gains hold-over relief is also offered as a way of defer gains from other assets can be reinvested into a SITR. Gains must arise from 6 April 2014 to 5 April 2019. Investments must be held for a minimum of three years to obtain the relief. The maximum amount of annual investment for tax relief is currently £1 million.
Besides the incredible tax reliefs, there is a ‘feel good’ factor to making a social impact investment. These companies are designed to help communities and improve people’s lives. Investors now have to option to pick and choose causes that may have a closer connection to them than a financial return.
Conclusions
Encouraging investment and innovation in the social enterprise sector is a good thing for all in the UK. Private investment into these companies takes some burden off of the government and can enable better job and sector growth, as well as more creative and effective ways to solve social issues.
It is always important to evaluate the risks of any investment. Tax breaks and social incentives alone don’t make for a good investment. Investors and advisers should take careful consideration of every opportunity.