How groundbreaking is the new Social Investment Tax Relief?

Thu 06 Mar 2014

Gifts to charities – whether of cash, shares or land – have for many years attracted an income tax write off.  However for the first time the Social Investment Tax Relief (SI Relief) gives income tax breaks (as well as capital gains deferrals) on equity or debt investments in charities and other social enterprises.

Social enterprise is increasingly seen as a source of dynamism and innovation within the third sector, creating solutions where the state is withdrawing from certain areas of social provision, or “for-profit” solutions are viewed as inappropriate– perhaps the most obvious example of the latter being the wish to encourage credit unions to the exclusion of payday lenders.

The intention of the SI Relief is to create new sources of private investment into the sector by providing tax breaks similar to those enjoyed by EIS or VCT investments into the “for-profit” sector.

First a couple of definitions.  The term “Qualifying Social Enterprises” includes community interest companies, community benefit societies or charities – whether the latter is set up as a company limited by guarantee, a trust or a limited liability company.

The SI Relief gives an income tax credit equal to a proportion of the amount invested which can be up to £1m per year.  It seems to be assumed at the moment that the credit will be 30% of the investment, if only on the basis that that is the rate of EIS Relief and no other indication has been given.

The investment can broadly be equity or debt provided that both are exposed to full commercial risk.  The relief is only retained if the investment is retained in the social enterprise for a 3 year period.

So far so good: if an individual invests £100,000 into a qualifying social enterprise for a three year period and receives a £30,000 income tax credit then they are receiving already a 10% net return for each of the three years of the investment.  On top of this will come the actual commercial return.  However there are restrictions on the scheme which seriously reduce its usefulness.

Firstly and not particularly surprisingly there are limitations to SI Relief which are very similar to those on EIS and VCT reliefs, including the need to be a minority investor in the social enterprise of not more than 30%.  This may of course create some difficulties for the family charitable foundation in seeking to use the relief.  However the most serious limitation must be that only €200,000 can qualify for the scheme per investee organisation over three years.  It remains to be seen whether this very low limit is moved up when the provisions become law.

As is so often the case the SI Relief seems to be a half decent idea, surrounded by a great deal of complexity (the draft legislation runs to 61 pages) then reduced to something of exceptionally limited interest by a ridiculously low level of fundraising allowed per organisation.  As it stands it is difficult to envisage any significant take up unless the government is prepared to be somewhat bolder in the scoping of the relief.  Otherwise it will simply be an announcement of very little substance.