Government supports Social Enterprises by announcing tax incentives
01 April 2014
Social Investment Tax Relief ("SITR"): what is it and what can it do for you?
In the March 2014 Budget, the Chancellor declared that the government was backing social enterprises by announcing the first tax incentive in the world that targets "social good investors", being a tax relief for investments on social enterprises at a rate of 30%. This relief is equivalent to existing venture capital and enterprise investment scheme reliefs. This is good news for charities and social enterprises as it is hoped they will now be able to access around half a billion pounds of additional income over the next five years (the introduction of venture capital tax reliefs some 20 years ago led to individuals investing £14 billion into small growing businesses). The Finance Bill 2014 (Finance Bill), which was published on Friday 27 March, sets out details of SITR. We have set out the headline points below.
How can Wrigleys assist?
For over 25 years, we have been advising social enterprises on the establishment of investments for social purposes and have provided advice to charities and social enterprises for raising finance, including via community share and bond issues. In doing so, we have advised how such investments can incorporate tax relief schemes available for investors and we can help to structure future investments in your charity or social enterprise so as to maximise the benefits afforded by SITR and your potential investor pool. We are also registered with the Financial Conduct Authority to give advice on financial promotions meaning we can approve suitable invitations or inducements to invest that constitute a financial promotion for the purposes of the Financial Services and Markets Act 2000.
If you have any queries on SITR or how we can assist you to maximise its potential, please contract Malcolm Lynch (0113 204 5724) or Peter Parker (0113 204 5792) who are members of the firm's Charity and Social Economy team.
| 1. What tax reliefs are available? |
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Income tax relief:
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- Income tax relief is available to individuals who subscribe for qualifying shares or make qualifying debt investments in a social enterprise and who have UK tax liability against which to set the relief.
- The investment must be held for a period of 3 years from the date the investment is made.
- Relief is available at 30% of the amount invested, on a maximum annual investment of £1,000,000.
- Relief is not available on any investment in respect of which the investor has obtained relief under the Enterprise Investment Scheme, or the Community Tax Relied Scheme.
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Capital gains hold-over relief:
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- The payment of tax on a capital gain can be deferred where the gain is reinvested in qualifying shares or qualifying debt investments.
- The gain can arise from the disposal of any kind of asset, but must arise in the period from 6 April 2014 to 5 April 2019 and the SITR qualifying investment must be made in the period one year before or three years after the gain arose.
- There is no minimum period for which the SITR qualifying investment must be held.
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Capital gains disposal relief:
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- If income tax relief was received on the costs of the SITR qualifying share or debt investment, and the investment is disposed of after it has been held for at least three years, any gain on the investment itself is free from capital gains tax.
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| 2. Requirements relating to the investment and the investor |
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The investment:
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- Investments must be in newly issued shares or new debt investments. Investments must have been paid in full, and in cash, "at the time the investment is made". Note that when an investment is considered "to be made" will depend on the nature of the investment. Investments in shares will be deemed to be made when the shares are issued to the investor. As to when an investment under a debt instrument is made will depend on the nature of that instrument. In most cases, the investment will be deemed to be made when the instrument is entered into, but for instruments which provide for drawdown of loans in multiple tranches, the investment will be deemed to be made at the time of each drawdown, even if the investor is committed to making those loans available at the time the instrument is entered into.
- For investments by way of shares, the shares must be full risk ordinary shares, which includes not carrying any rights to a fixed return. The shares must also not carry any rights to the social enterprise's assets in the event of a winding up which ranks above the other creditors (including shareholders) of the social enterprise.
- For investments by way of debt, the instrument must be in the form of a debenture and must be unsecured. The investment must not offer more than a commercial rate of return and must be subordinated to all other debts of the social enterprise and rank pari passu with the social enterprises lowest ranked shares.
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The investor:
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- The qualifying share or debt must have been issued to the investor (or to the investor via a nominee).
- During the period from one year before the investment to the third anniversary of the investment, the investor must not own more than 30% of the social enterprise's: (i) ordinary share capital, (ii) loan capital or (iii) voting rights.
- The investor must not be employed by, a partner of, a trustee of, or a paid director of the social enterprise at any time during the period of one year before the investment to the third anniversary of the investment.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors
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April 2014
