New Tax Relief for Social Enterprises
On 6 June 2013, HM Treasury and the Department for Business Innovation and Skills launched a consultation on the design of a new tax relief for social investment which proposes to allow investors who put money into regulated social enterprises to claim back part of their investment against their tax bill in relation to both income tax and capital gains tax. The new relief is called Social Investment Tax Relief (SITR). The Government's proposals included limiting the relief to 'qualifying' social investment in community interest companies (CICs), community benefit societies (Bencoms) and Charities.
Although legally the term "social enterprise" has no meaning, it is used to describe those businesses and organisations which trade for a social purpose. Social enterprises can take the form of various legal structures and vehicles.
There are some tax relief schemes already available for trading companies, for example the Enterprise Investment Scheme (EIS) which encourages individuals to invest in small higher risk trading companies by giving those individuals income tax and capital gains tax relief. Seed Enterprise Investment Schemes (SEIS) provide the same reliefs but this scheme is designed to encourage individuals to invest in start-up trading companies.
The Government in its recent consultation proposed that the SITR will firstly offer income tax relief on qualifying investments which will be calculated at a percentage of the amount of the qualifying investment made, and deducted from an individual's income tax liability. Secondly, the relief would be available on capital gains tax, allowing the payment of such tax to be deferred where proceeds of a disposal are reinvested in a qualified social enterprise. It is proposed that CICs, Bencoms and Charities will be the only "qualifying" social enterprises.
- The other criteria proposed for the consultation include the following:-
- The investor cannot be connected to the qualifying social enterprise;
- The investor must hold the investments for a minimum of five years;
- The original investment must not qualify for tax relief under either the EIS or SEIS;
- The original investment must not be secured against assets or subject to guarantee;
- The holders of the investment must not have preferential rights to assets on winding-up compared to other holders of the same type of investment; and
- Returns on investments should be payable at broadly commercial rates and on broadly commercial terms.
It was also proposed that there would be caps on the investments per investor per year, and a cap on the maximum investment per qualifying social enterprise over three years', such caps are to avoid the need to obtain European Commission approval.
The consultation closed on 6 September this year and the Government, on 10 December, published the details of the new SITR in its response to the consultation.
The Government has proposed a number of changes to the SITR. The draft legislative provisions designed to implement the SITR and explanatory notes on the draft legislation have also been published.
David Gauke, the Exchequer Secretary to HM Treasury in his foreword to the response, said that the proposed tax relief will not only provide income and capital gains tax relief for investment in social enterprises, but it will also allow the following:-
- Tax relief for residential homes, nursing homes and a wider range of activities than the existing venture capital tax reliefs;
- Allow tax relief for simple debt as well as equity investments where debt is the lowest ranking in the organisation (taking into account that many organisations within this sector do not issue shares); and
- Provide tax relief on investment in social impact bonds, where the UK leads the world in developing investment in contracts for public services where returns are based on successful social outcomes.
The consultation, which ran for three months, attracted 79 responses from representative bodies, social enterprises, cooperatives, investors and legal and financial advisors. The draft legislation will be introduced in the Finance Bill 2014, and will reflect the decisions made by the Government in its response.
The main decisions are set out in summary below:-
The Government has widened the range of eligible organisations in terms of size and activity, compared to an EIS. The investee organisations via the scheme can have fewer than 500 employees rather than the 250 employee limit set out in the consultation document and gross assets of £15 million or less. The Government said it recognised that a higher employee limit would be more appropriate for the social enterprise sector as there are many social enterprises with over 250 employees who struggle to raise finance and are therefore still deserving of the tax relief.
Eligible activities can include nursing homes, or residential care homes, leasing/hiring assets and financial activities where the funds are lent to Charities, CICs or Bencoms. The Government stated that it recognised that a wider range of eligible activities will help the scheme to have a greater impact.
The Government has stated that it has widened the size and range of eligible investments. The maximum amount of tax-relieved investments which an organisation can receive will be calculated according to a formula, based on the maximum amount of tax. The exact amount will depend on the rate of relief, to be announced at Budget 2014- the Government expects this formula to provide a higher figure than the £150,000 over three years per investee organisation in the consultation. The Government has also confirmed that the cap of £1 million on investments per investor per year is an appropriate amount for the scheme and is in line with the EIS.
The Government has decided that there will not be a requirement for investor returns to be linked to financial performance; however, investments will need to meet a number of conditions including the condition that the investor returns do not exceed a commercial rate of return. There is also to be no security or guarantee over repayment of the investment, the investment must be the lowest ranking and the investor will have no right to require early repayments.
The tax reliefs
The Government has confirmed in its response that the income tax relief on qualifying investments will take the form of a deduction from income tax liability. The rate will be set at Budget 2014.
The CGT relief will take the form of a deferral of chargeable gains. A gain will not be taxed if an amount of money equal to it is invested in a social enterprise within a specified time. The deferred gain will instead be treated as accruing and becoming taxable when the qualifying social investment is sold, matures or is redeemed.
The minimum investment period will be three years, not five years as proposed in the consultation. There will also be no tax relief on dividends or similar returns- returns will be subject ti normal income tax treatment.
The draft legislation, which was published on 10 December, will undergo a period of consultation, which will close in 4 February 2014. The Government has stated that it recognises there is more to do to improve the tax and legislative environment for social investment.
Jane Tully of the Charity Finance Group has been reported as saying the responses are a "step in the right direction". The Social Investment Forum has also commented on the Government's response. Nick Temple, who is Chair of the Social Investment Forum and Social Enterprise UK's Director of Business and Enterprise said that the members of the forum "welcome the move made by the Government to recognise the financial needs of the UK's growing social enterprise sector". Mr Temple has also been reported to say that the access to finance has always been the biggest barrier for social enterprise to both start up and grow, and the SITR has the potential to inject much needed capital into these organisations.
It has been noted that the relief currently excludes companies limited by guarantee- which is a very popular legal vehicle for social enterprises. Nick Temple also stated that the Social Investment Forum looks forward to working with the Government on both shaping and implementing the roadmap ahead to ensure it works for all social enterprises as well as investors.
The Government's consultations response is published at https://www.gov.uk/government/consultations/consultation-on-social-investment-tax-relief
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.