Understanding social investment tax relief and how it works

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Social investment tax relief (SITR) was introduced five years ago to boost investment in social enterprises and charities. It hasn’t had the take up expected.

The government is currently seeking evidence as to why it is not being sufficiently utilised. AAT recently surveyed 100 of its 4,250 licensed accountants with specific questions about SITR. Strikingly, not a single respondent knew of the relief.

What is SITR?

SITR or “social investment tax relief” encourages individuals to support social enterprises, helping those enterprises to access new sources of finance.

Those who make an eligible investment of up to £1.5m can deduct 30% of the cost of that investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year. The investment must be held for a minimum period of three years to benefit from the relief.

What investments are eligible?

To qualify, the social enterprise or charity being invested in must have a turnover below £15m, fewer than 250 employees, be undertaking a qualifying activity and not be in financial difficulty.

What’s the problem?

SITR has been used substantially less than anticipated. Initially, HM Treasury forecast an annual cost of up to £35m a year, yet SITR cost less than £2m in total for its first three years of operation. Less than 100 applications have been made over the past five years.

There are almost 500,000 social enterprises in the UK (forming just under 10% of the SME community). Of course, many of these enterprises will not be eligible for SITR; they will either be turning over more than £15m, have more than 250 employees, or not be undertaking a qualifying activity. They may even be in financial difficulty. Likewise, AAT accepts that many qualifying enterprises do not need or want investment.

However, the size of the market and general need for investment suggests something must be wrong with SITR.

What should be done?

Some believe that the low takeup means SITR is unnecessary and should not be continued beyond April 2021.

AAT believes it is worth looking at SITR more closely to determine what might have gone wrong. Design flaws, issues with the application process and failures in how SITR has been communicated have been raised as concerns.

 The application process

Various organisations and individuals have expressed concern about the time taken for HMRC to respond to  SITR applications.

 However, HMRC figures show that 88% of responses to SITR applications occur within 15 working days – and 97% within 40 working days. This would suggest that lengthy application delays are unlikely to be a significant factor in the poor take-up rate.

 Design flaws

Design flaws include the list of excluded activities, such as property development, energy, agriculture, road transport and over a dozen other sectors.

Some of these have no obvious justification and are areas that charities will often be concerned with. So many  exclusions will inevitably deter some from applying.

 Maximum limits

Increasing the tax relief from 30% to 50% would make SITR much more attractive to investors. There is a clear precedent in the Seed Enterprise Investment Scheme, which provides 50% relief up to £100,000.

This increase could be funded by reducing the maximum investment permitted from £1.5 to £1m. As HM Treasury’s own research has revealed, the median sum sought by social enterprises is £80,000. Fewer than 10% seek investment of between £1m and £5m.

Awareness of SITR

There is a widespread lack of awareness about SITR. Most people don’t know it exists, let alone how it works in practice or who is eligible. AAT believes this is probably the biggest contributory factor to the low take-up of SITR.

AAT is not aware of any government communications to promote SITR but has taken action to increase member awareness. To help determine the extent of this problem, AAT recently surveyed members with specific questions about SITR. Not a single respondent knew of the relief.

More encouragingly, all of those who responded said it was something they would consider bringing to the attention of their clients now that they knew what it was. This was far from a scientific exercise, but it does indicate that lack of awareness might be the biggest hurdle holding SITR back.

What next?

If you didn’t know what SITR was before you read this article, it might be worth finding out more. Alert your clients to its existence or perhaps take advantage of the relief yourself.

For more on SITR:

Phil Hall is AAT's Head of Public Affairs and Public Policy.

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