Making social investment tax relief work for charities

Last Thursday, the Coalition’s fourth budget received Royal Assent, making all the measures announced within it active. One of these was the Social Investment Tax Relief (SITR) – buried on page 364 of the Finance Act 2014 – a measure that NCVO called for back in January 2012.

This means that individuals that invest in charities, community interest companies and community benefit societies can now receive a reduction in their tax bill to provide an extra incentive to socially invest.

Most importantly for charities these investments can be unsecured loans – by providing a significant tax cut for investors that provide finance for charities, SITR has the potential to help organisations who are looking to raise loan finance to support their work.

Research by Big Society Capital and City of London suggests that this relief could generate over £150m of investment into the sector over the next three years.

How does it work?

SITR works by reducing the income tax bill of an investor by 30% on shares they buy in CICs or loans that they provide to charities, community interest companies or community benefit societies.

But what do charities and CICs need to be aware of when considering SITR?

  • Charities and CICs wanting to use SITR cannot have more than 500 employees or hold more than £15m in gross assets (e.g. property or shares owned in other companies).
  • The relief may only be used to carry out a “trade”, for example, delivering a recycling service for a local community. It cannot be used for property development or community energy projects that attract Feed in Tariffs. A full list of excluded activities is included in HMRC’s guidance.
  • All investment raised must be used for the trade within 28 months following the investment.
  • In order for loans to qualify for SITR they have to have an element of risk – so they cannot be secured on property or have any repayment guarantees or fixed returns.
  • Loans must also not offer more than a commercial rate of return (although they can ask for less than this) and repayment of these loans may not take priority over any other loans the charity has.

For example, Margaret provides £100,000 in loans for The Really Environmental Charity to develop a recycling service for a local community. Margaret is now able to get £30,000 in income tax relief (30% of £100,000). Her income tax liability was £45,000 – but because of her SITR relief, she now only has to pay £15,000 (£45,000 minus £30,000).

The Really Environmental Charity now has £100,000 to invest in its recycling services for the local community over the next 28 months – potentially at a lower rate of interest, because Margaret has already received £30,000 in tax relief for making the loan.

More detailed information can be found out by reading HMRC’s guidance.

A welcome start, but…

While the introduction of SITR is welcome, we believe that there are a number of areas that it could be improved.

For example, many charities wish to raise social investment to grow their trading arms. However the trading subsidiaries of charities are not eligible to receive investment through SITR unless they are also constituted as charities or CICs. As most charity trading arms are not constituted as charities or CICs this limits the impact of the relief.

Another key area was the size of the tax relief. Under current rules, organisations can only receive a maximum of £275,000 over three years from SITR investments due to EU State Aid rules. This limit could be even lower if organisations are receiving other forms of “state aid”, for example, grants from government to  become investment ready.

We believe that this is going to limit the effectiveness of the relief, with many charities wanting to raise larger amounts to fund the delivery of new services or develop their capacity to grow.

The government has listened and is now consulting on how this limit can be raised as well as other ways that the scheme could be improved. However in order for this limited to be raised, the government needs to present a compelling case to the European Commission in order to get its approval.

How can you help?

NCVO will be responding to this consultation arguing for the limit to be raised, but in order to make the strongest case possible, we need examples of charities and community interest companies that have wanted to raise  more than £275,000 in social investment but have been unable to do so – either having to scale back their ambitions or give up raising social investment all together.

If your organisation, or an organisation you know, has faced these barriers in raising social investment or you would just like to find out more information about SITR, please leave a comment below or email me

Update 18.09.2014 – NCVO & CFG have put together a response to the consultation which you can read here.

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Andrew was NCVO’s senior policy officer. He covered issues around funding, social investment, tax and the impact of the economy on the voluntary sector. Andrew has left NCVO, but his posts are kept here for reference purposes.

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