Social Investment Tax Relief (SITR) was recently ranked 4th out of 46 in a Europe-wide study on the effectiveness of tax incentives to foster investment into SMEs and start-ups. It is also the only tax relief of all those reviewed that is specifically targetted at charities and social enterprises. So this is definitely something to celebrate!

There's been some good news about the UK in Europe... Yes, really! It was highlighted to me when a recent headline caught my eye: 'Time to cheer UK's world-class tax-efficient schemes'. The story focussed on a PwC report commissioned by the EU in 2017 to look at venture capital government initiatives from across Europe. In particular, it celebrates that of the 46 different tax schemes reviews, the UK achieved the top slots:

• Enterprise Investment Scheme (EIS) at number 1
• Seed Enterprise Investment Scheme (SEIS) at number 2
• Venture Capital Trusts (VCT) at number 5

And very excitingly, Social Investment Tax Relief (SITR) at number 4.

SITR: an opportunity for social enterprises and charities

Whilst it's a relatively little known tax incentive, SITR's place in my heart is cemented by the fact that it is specifically designed for social enterprises and charities to help them raise more affordable, patient, risk-based capital.

There have been lots of less-than-positive comments about SITR: on getting traction, the complexity as well as caps and exemptions. So it's worth taking a moment to reflect on the opportunity that SITR presents. To do that we asked two leading exponents of the tax relief, Neil Pearson Partner at Mills & Reeve and James Dickens, Chartered Financial Planner at Grierson Dickens, for their views.

Neil Pearson, Partner and SITR Tax expert at Mills & Reeve

SITR means investors can look after their hard-earned savings, make financial returns with a tax subsidy, and make a real difference to society by the way in which they invest. What’s not to like?

The UK has, for some time, led the way in creating an environment in which social impact businesses – businesses that measure success in terms of positive social impact as well as profit – can grow and succeed. But one of the key factors in achieving growth, whilst delivering financial returns and greater social impact, is funding.

Many social enterprises find it difficult to raise growth funding from conventional sources. Which is where Social Investment Tax Relief (“SITR”) has a key part to play.

Introduced in 2014, and expanded in 2017, SITR allows individuals to help social enterprises grow by offering a tax relief on investments. Under SITR, an individual can subscribe for shares in, or lend money to, a social enterprise and claim 30% tax relief. So, for example, if an investor lends £1,000 to a social enterprise, the real cost to the investor is only £700. But the social enterprise receives £1,000 of much needed funding to help it grow, to help it become more financially secure, and to achieve more positive social impact. And when the loan is repaid the investor can take that cash and re-invest it to support another social enterprise – so the same money can create an even bigger social impact.

Social enterprises that have been trading for less than 7 years can raise up to £1.5m under SITR – older enterprises up to around £280-290K. So SITR funding can make a huge difference to ambitious social enterprises.

No tax relief is without its challenges. HMRC is keen to ensure that tax relief is targeted at the right sort of social enterprises, so the rules can be a bit complex to those unfamiliar with the delights of tax legislation. And as SITR amounts to a state subsidy for business, it is treated by the EU as state aid, which means (until Brexit at least) the SITR legislation has to comply with EU state aid regulations. But this does, of course, open up the possibility of reform post-Brexit.

So all in all, SITR means investors can look after their hard-earned savings, make financial returns with a tax subsidy, and make a real difference to society by the way in which they invest. What’s not to like?

James Dickens, Chartered Financial Planner, Grierson Dickens

"SITR effectively limits the risk of using your money to invest and address social issues, by reducing the financial impact of any loss, via favourable tax and loss relief treatments."  

Social impact investments are indeed an excellent way to diversify existing investments by supporting sustainable businesses. However, not only are they a long-term investment opportunity, they also present the possibility of addressing long term major social issues which, arguably, private investors and the private sector are better placed to address than the public sector. 

Supporting social enterprises means supporting employment and careers for many individuals, who are often amongst the most disadvantaged members of society. Undoubtedly, employment and a career path are proven and effective routes out of poverty and exclusion.  So, if these alone were not good enough reasons to invest, a government tax incentive, such as SITR has to be the icing on the cake.  SITR effectively limits the risk of using your money to invest and address social issues, by reducing the financial impact of any loss, via favourable tax and loss relief treatments.   

There are many and varied social investment opportunities out there but there appears to be widespread fears about investing, largely driven by lack of knowledge. It is true that social impact investing is not for everybody. But with greater education through articles like this one and through the UK’s adviser population, we expect to see a hugely increased flow of investments in to this area over the next few years.  This will be further driven by the tendency of younger investors to be more focussed on the social and environmental consequences of where they are putting their money.

Tax incentivised investing, in which the UK has always been a world leader, has now reached beyond the realms of conventional start-up businesses, to support those who so badly need the backing of the huge amount of private wealth in the UK.

Spreading the message about what SITR is and can do

It is clear one of the key challenges is in raising awareness of what SITR is and can do. One of the key ways to do this is in running high profile events with partners such as Philanthropy Impact in order to share information and learning and through our GET SITR our campaign.

But with the opportunity for a review of SITR now committed to in the Governments’ recently announced Civil Society Strategy there is chance for us to lobby along with other sector supporters like Social Enterprise UK, the Community Shares Unit, Power to Change and Community Energy England for changes which might further support the use of this investment incentive.

Next time let’s hope SITR reaches the top spot!