Tax is in the news again: paradise papers, offshore investments and our most famous social investors going to extraordinary lengths, via Malta, to do their bit for Lithuanian retail.
In and amongst the tax dodging of the Mrs Brown’s Boys cast, the tax news that has been somewhat over shadowed this week is the release of the statistics for companies raising funds using the Social Investment Tax Relief (SITR). This is the first time the stats on the use of SITR have been published. It’s fair to say that the take up has not been astronomical – 30 deals since 2014 with a total raise of approximately £2.8m. But with a further 120 deals in the pipeline and some fantastic examples of community business using this method, extremely successfully, to date , there is reason to be enthusiastic.
Tax relief. Community benefit. Enthusiasm. They are not exactly the most obvious of bedfellows. Organisations in the social economy invariably wear their payment of tax as credentials of their ethical standards, and rightly. The five biggest co-operatives in the UK pay more in tax than the combined contribution of Amazon, Facebook, Apple, eBay & Starbucks. And yet we think that community businesses should be aware of the relevance of this tax relief. Why?
Well, firstly, tax relief can be an important incentive to invest in new and high-risk enterprises, and many community businesses are exactly this. It’s important that they should not be precluded from accessing this type of capital.
For many people, social investment – in any form – is still a novel idea, bringing together the apparently polar opposites of share capital and social purpose. Mention of tax reliefs (such as the Enterprise Investment Scheme) would seemingly reinforce confusion about whether a social investment proposition is for public benefit or private gain.
As the name implies, Social Investment Tax Relief incentivises social investment, not investment for private profit:
• SITR is only available for investment in social enterprises.
• SITR defines social enterprises as charities, community interest companies and certain types of community benefit society.
• At the heart of this definition is the requirement that the enterprise has a statutorily defined asset lock; this safeguards against speculative gain by an investor.
All these stipulations ensure the right type of cash, with the right motivation that will align with the social purpose of the community business.
But back to those numbers:
SITR deals raised £2.3m in 2015/16. So it’s drowned by its corporate contemporaries (companies raised £1,888 million of funds via EIS, for example). This reflects the fact that many of the business models of many social enterprises won’t necessarily lend themselves to tax motivated retail investment. Under the right circumstances, however, SITR can be used as a device to unlock the right sort of cash on the right sort of terms.
With 25 deals completed in a year, mostly around £100k, SITR is comparable with the levels of other specialist lenders to the social economy. This will never be a £2bn market. And we should not expect it to be- my expectations are simpler.
Here are the three key changes that could immediately increase the effectiveness and reach of SITR:
1. Government should make the relief 50%, not 30%.
2. A third of applications are being turned down, we need to find out why this is, and raise the acceptance level.
3. Finally the barrier to growth in the SITR market is not deal size, it’s excluded activities. Exclusions on property and rental should be removed. If you are foregoing capital appreciation, there is nothing wrong with tax relief on a socially motivated property investment.
This isn’t about calling for a massive increase in the numbers – but it is about seeing more community businesses getting more money from the right people on the right terms for them. And as ever, I’d be interested on hearing from any community businesses interested in this and how others have used it.