Social investment tax relief (SITR) will sit alongside the existing EIS and SEIS schemes, providing an incentive to investors to invest in regulated social enterprises.
Previously, investors who wanted to move their capital into small social enterprises were disadvantaged in terms of tax relief – but this announcement changes that.
The relief will come as a deduction from income tax, equal to 30% of the amount invested – in line with EIS – and will begin from 6th April this year.
Eligible businesses are regulated social enterprises – in this case, charities, community benefit societies (Bencoms) and community interest companies (CICs).
It will also apply to investment in social impact bonds where the special purpose vehicle is a company limited by shares and accredited by a Government-run accreditation scheme.
Co-operatives that can fulfil the conditions for demonstrating a community purpose can apply to the Financial Conduct Authority to be registered as a Bencom for free, then becoming eligible for the tax relief.
Previously, there was a disparity between small businesses and small social enterprises – one had tax relief for investment, and one did not. Although many believe social enterprises should be advantaged further because of their positive social or environmental impacts, now there is at least equal treatment of social enterprises and other small businesses.
Critics of this tax relief argue that it could unintentionally skew the market, as mainstream investors see only certain types of legal entities (such as CICs or Bencoms) as appropriate for social impact investment and ignore others that do not fit this restrictive model. Nevertheless, it does mean that investors now have an added incentive to invest in impactful businesses.
For those entrepreneurs whose businesses truly have social or environmental impacts at their heart – and can be legally constituted as CICs or Bencoms – this is something that they should be factoring into their conversations with investors.
By helping to de-risk the investment for angels and other investors, this tax relief will help to catalyse the capital needed to grow small social enterprises into game-changing companies.
This is a complex landscape – with tax relief for investors including SEIS, EIS and now ‘SITR’. Talking to an intermediary, such as ClearlySo, can help entrepreneurs to manage their relationships with investors and ensure they can capitalise on this new development.
For many social entrepreneurs, this is a welcome move by the government to encourage even more growth in the rapidly expanding impact investment space.
By Simon Evill of ClearlySo
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