- HMRC Guidance on Social Investment Tax Relief
- May 30, 2014
- Law Firm: Withers Bergman LLP - New Haven Office
The ‘social investment market place’ is growing with more investors, including pension funds, commercial banks and insurance companies, considering using capital with the aim of generating both social and financial returns. The government is aiming to support social investment by providing valuable tax reliefs to individual investors (SITR).
HMRC guidance on the operation of SITR has now been released, although this may be subject to change between the date of publication and when the Finance Bill receives Royal Assent, which is expected to be in July 2014.
To qualify for tax relief the investment must be in newly issued shares or qualifying debt investments. Strict requirements are imposed in relation to each of these investments, such as ordinary shares giving no rights to assets on winding up, or no more than a commercial rate of interest. Essentially, there must be no protections from the normal risks of investment.
Investments must have been paid up in full, and in cash, at the time the investment is made. HMRC has highlighted that investments should only be made once the social enterprise is able to receive the payment (e.g. by having an open bank account).
There are requirements relating to the investors themselves, notably that from the year before the investment to the third anniversary of the investment:
The investor and any associates must not own more than 30% of the social enterprise’s share capital, loan capital or voting rights; and
The investor must not be employed by or act as a trustee, paid director or partner of the social enterprise.
The Social Enterprise
The social enterprise can either be a community interest company, community benefit society or a charity. It must have fewer than 500 full-time employees (or equivalent) and have no more than £15,000,000 gross assets before the investment and no more than £16,000,000 after the investment. There is also a formula which sets out the amount of money that a social enterprise can raise under SITR based on previous SITR investments and tax reliefs granted. There are also requirements relating to any other entities within the social enterprise’s group.
Within 28 months of the date of the relevant investment, all the monies raised from that investment must be employed for purposes of the chosen trade whether by the social enterprise itself or by a 90% social enterprise subsidiary. Investors will be keen to ensure that this happens, as, if this is not met, investors will lose their tax relief.
SITR is administered by the Small Company Enterprise Centre (SCEC) which is responsible for deciding whether the investment, social enterprise and investor qualify. A key part of the procedure is the preparation of a compliance statement by the social enterprise stating that all the conditions have been met. Until this compliance statement has been prepared and accepted by the SCEC, the investor is unable to claim tax relief.
The Tax Relief
There are three tax reliefs available to individual investors to encourage them to invest in social enterprises: income tax relief, capital gains hold-over relief and capital gains disposal relief.
Law Commission Charity Project
On 24 April 2014, the Law Commission published a consultation paper on social investment by charities in order to consider trustees’ powers to make, and duties when making, social investments and to consider whether anything can be done by way of law reform to clarify those powers and duties.
The Law Commission provisionally proposes to introduce a new statutory power to make social investments to supplement trustees’ existing powers, accompanied by a non-exhaustive checklist of factors for charity trustees to consider before making decisions about social investments. The Law Commission also concludes that a charity’s permanent endowment should be available to make social investments which are anticipated to preserve the capital value of the endowment.