Social responsibility is a critical topic, and in light of the recent COP26 meeting, the UK government is actively encouraging more social enterprises to get involved in working towards correcting market failures and generating social benefit. To do this, the UK government introduced the Social Investment Tax Relief (SITR) in 2014 and is providing support for these enterprises and charities to become profitable and increase the overall welfare.
What is SITR?
SITR has the goal of incentivising investors to support social enterprises and charities, while these receive access to funding for their trading activities. The idea behind this is that social enterprises provide a societal benefit that may not be fully measured by profit maximisation, but nevertheless they are required for economic growth and development
For an enterprise to qualify for SITR, it needs to prove it is targeting and addressing a real and clear market failure and has no financial difficulties. Therefore, it needs to have a regulated social purpose under the form of a community interest company, community benefit society or a charity. The enterprise should trade commercially with the intent of making a profit and all profits should be reinvested to improve the trade, thus leading to social benefit. For example, some trades that do not qualify for this scheme are lending activities, agriculture, exporting electricity or leasing activities among others. Finally, the maximum funds a charity can raise through SITR, and other government programmes are £1.5 million
Benefits for investors
To attract investors’ interest in this scheme, the government intervenes by providing tax incentives similar to those offered bythe Enterprise Investment Scheme (EIS). Like for EIS, the investor benefits from 30% of the investment cost to cover their income tax liability. This can be used in the year the investment is made or in the previous year. To benefit from this, the investor or lender must follow the scheme for three years and they need to either purchase new shares paid in full in cash, or offer a loan or a debt investment to the enterprise.
Moreover, as with EIS continue, there is no Capital Gains Tax (CGT) on gains from exiting the social investment, and the investor must pay income tax on dividends or interest received.
Differences between SITR and EIS
Even if this scheme targets social enterprises, there are not many entities that have been successful in obtaining advance assurance (AA) from HM Revenue and Customs, because most of them are not involved in trade and do not want to reinvest the proceeds into growing their businesses. This is one significant difference from the Enterprise Investment Scheme (EIS) in which the AA rate is higher, as many firms aim for profitability and developing their revenue.
Finally, because not all firms qualify for EIS, SITR was created to expand the tax incentives to charities or social enterprises.
SITR is one of the measures the UK government uses to encourage and support sustainable businesses with an overall social benefit by allowing them to raise funds from private investors.