news

UnLtd’s response to the Social Investment Tax Relief Consultation

UnLtd’s response to the Social Investment Tax Relief Consultation

Written by

David Bartram

Director of Delivery and Investment

Earlier this year the Government launched a consultation on Social Investment Tax Relief (SITR) with an aim to understand how it has served the sector, and to gather input to inform its future. It currently has a clause which will bring the scheme to an end in April 2021.

We took this an opportunity to share our experience of SITR. We believe it is a valuable development and should continue beyond 2021. However, a number of essential changes are needed to unleash its potential and transform it into a tool that actively leverages more capital for social purpose organisations.

What is Social Investment Tax Relief?

Social Investment Tax Relief (SITR) is a tax break for individual investors making investments into charities and social enterprises. It provides a 30% tax break for eligible investors.

The relief was launched in 2014 as part of the government’s drive make the UK ‘the easiest place in the world to invest in social enterprise’.

SITR is the charity and social enterprise equivalent of existing venture capital schemes[1] - Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) - that aim to encourage private investors to invest in early stage companies and other small businesses.

Aside from the organisations that are eligible, the main difference between SITR and other venture capital schemes is that it is available on debt as well as equity investments.

How has it worked and what needs to change

SITR was launched to close the gap between the supply and demand of early stage capital and the recognition that social investment deals under £500k are often prohibitively expensive and high risk.

In 2014, the then Chief Executive of Big Society Capital, Nick O’Donohoe, claimed that for any social investors making investments of £250k or less, some form of subsidy would be required and “some part of the investment will always have to be grant.”

SITR was introduced as one mechanism to incentivise and leverage in more capital into this early stage market. However, it’s had a much lower take-up than expected with just over £11.6m raised through it since launch in 2014[2]. The Government has opened this consultation to explore why.

We believe the premise and structure of SITR is a positive development for the sector, not least in recognising the challenges of the early stage social investment market. However, our experience has found several factors that may have resulted in SITR having a lower take-up than expected. Our recommendations for Government are on how to unleash SITR’s potential in leveraging more capital for social purpose organisations.

The challenge is in the supply of capital caused by uncertainty in investing in asset locked organisations. We have found that the perceived added complexity, scalability and risk profiles of these models often put investors off.

Our recommendations

  • Address the lack of investor awareness around Community Interest Companies (CIC) by investing in education and awareness-raising. Our anecdotal evidence suggests there remains a lack of knowledge from investors on CICs, and other asset locked structures. There is uncertainty about their ability to sell assets, generate and distribute profit and potential for exits. The changes to the sale of shares and dividend distribution in 2014 went widely unnoticed.  
  • Open up SITR to mission-locked entities, not just asset locked ones. Our evidence suggests that that much of the demand for social investment lies within non-asset locked entities i.e. social purpose organisations. SITR should be about attracting new investors into this market but few can get over the hurdle of the restrictions around the traditional social enterprise model. In our experience very few funds can operate sustainably (even with the tax relief) if restricted to asset locked investments, and deal flow is hard to come by. Please see more evidence on this in UnLtd’s learning paper.

Note: The copied model from EIS hasn’t always been appropriate. Whereas EIS tax relief has been effective in bringing capital into the sector, some of the restrictions placed upon it - which have been copied to SITR - have not necessarily been fit-for-purpose.

  • Reconsider the £15m asset limit as it prevents asset rich but otherwise cash poor social ventures from accessing SITR. The £15m asset limit excludes some charities which are gifted and inherit buildings and other assets. Although they might be ‘asset rich’, they don’t necessarily have the ability to extract liquidity from these assets to invest in enhancing or providing service, particularly given the difficulty in selling these assets due to mission locks. As such, the asset limit may prevent some organisations from accessing much needed capital enabled by SITR.  
  • Remove the 30% maximum ownership restriction when investing in debt. Whereas the 30% maximum ownership makes sense for limiting control when investing in equity, that is not the case with debt. But current restrictions mean one investor is not able to make a loan in full under SITR. Instead, they need to find co-investors to be eligible which takes more time and effort, and can put off investors in some cases.

Next steps

Our full response to the consultation is available to download at the bottom of this page.

The Government is now looking at consultation responses and is expected to publish their response in 12 weeks. When that happens, we will look at their response and publish our reflections – so keep an eye on our blog and social media.

UnLtd is also part of the Social Investment Coalition that is looking at the wider landscape of social investment and how it could be transformed to put social ventures’ needs at its heart.

If you’d like to know more about any of this please get in touch with me at [email protected].  

[1] https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors

[2] https://www.bigsocietycapital.com/get-sitr/social-investment-tax-relief-deals-database