Relief in sight - Making Social Investment Tax Relief work better for community businesses

A tax relief on investments is probably one of the items least likely to be considered newsworthy at present, certainly for those in the social economy. But as thoughts turn to how we plan to rebuild our economy following this current national emergency, a crucial component of any plan for rebuilding has to be how we channel more money to the businesses working in some of our toughest markets and communities.

In Relief in Sight, a Flip Finance report for Power to Change, we explore how Social Investment Tax Relief (SITR) is a potentially useful tool that is not currently widely used. We believe there is significant untapped potential for SITR in spite of the low take up to date.

Organisations in the social economy invariably wear their payment of tax as credentials of their ethical standards, and rightly so. The five biggest co-operatives in the UK pay more in tax than the combined contribution of Amazon, Facebook, Apple, eBay & Starbucks.*

But as well as tax probity and payment, we want community businesses to be aware of the relevance of tax relief and what they can offer their potential investors. 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 excluded 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 investment and social purpose. 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, will align with the social purpose of the community business.

Community businesses, investors and partners working together can help to develop something more impactful. There have been (relatively) large numbers of SITR-based community share offers through platforms, but very few loans. Direct raises can seem – and are – complex.

There are community businesses, charities and social enterprises that want risk finance and cannot get it on the terms they want and need it. Many are excluded from using the relief as it doesn’t fit what they do. There are at least some investors who would be keen to make these kinds of investments. We need to find better ways to connect these groups.

There are key changes that could immediately increase the effectiveness and reach of SITR. Government should make the relief 50%, not 30%. 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, we’d be interested on hearing from any community businesses interested in this and how others have used it.

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