Social Investment Tax Relief

Transcription

1 Social Investment Tax Relief A BRIEF GUIDE A guide to the first tax incentive of its kind in the world that targets social investors prepared by

2 Social Investment Tax Relief A Brief Guide Table of Questions Introduction... 2 What is a Social Enterprise?... 3 What is Social Investment?... 3 What is Social Investment Tax Relief (SITR)?... 3 Why has the Government introduced this?... 3 Do all Social Enterprises qualify?... 3 Are there any other qualifying conditions?... 4 Are there any excluded business activities?... 4 So how much can my social enterprise receive?... 4 What is the impact of state aid?... 5 What does SITR mean for investors?... 5 What qualifies as an investment for the purposes of SITR?... 5 Are there any other conditions on the type of investment?... 6 Can the relief be withdrawn?... 6 What is the difference between SITR and Community Investment Tax Relief (CITR)?... 6 Who can we contact for more information?... 8 Social Investment Scotland (SIS)... 8 Morton Fraser... 8 Scott-Moncrieff... 9 SOCIAL INVESTMENT TAX RELIEF 1

3 Introduction For some time, Social Investment Scotland (SIS) believed that the very fact tax relief was offered to investors for investment in `traditional enterprise activity but not for a social enterprise was wrong. So, along with others in the social investment sector, we welcome the introduction of Social Investment Tax Relief (SITR). SIS s mission is to connect capital with communities: not only for organisations looking to raise investment but also for investors who may be looking to make an investment that is socially and environmentally responsible via a social enterprise. Therefore, the new SITR sits right at the heart of our mission and we look forward to doing what we can to ensure the opportunities it presents are realised. We recognise, however, that for organisations looking to raise investment, the different options may be confusing enough already. Investors looking to use this new relief may not be immediately aware of the concept of a social enterprise. This short guide, prepared in partnership with our professional advisers who share our enthusiasm for the new relief and more generally for social enterprise, should help to alleviate some of this initial confusion. SIS or either of our partners would be more than happy to develop the conversation should further information be required. Alastair Davis CEO Social Investment Scotland SOCIAL INVESTMENT TAX RELIEF 2

4 What is a Social Enterprise? The term 'social enterprise' does not have a specific legal meaning. It's commonly understood to mean a business with a social purpose. The typical definition is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners". You will see from this definition that there is no mention of the form a social enterprise must take (e.g. a company, a charity, etc.). What is Social Investment? SIS describes social investment as an investment made in a third sector organisation with the expectation of both a financial and a social return. This is where the financial return is, at the very least, the repayment of the capital amount (but more often than not with interest as well) and the social return is measured using a series of indicators. What is Social Investment Tax Relief (SITR)? It is the first tax incentive of its kind in the world that targets social investors. Introduced from 6 April 2014, SITR provides tax relief to qualifying individuals who make social investments. It's reported that the relief could unlock up to 0.5 billion in new finance for charities and social enterprises across the UK. By , it is said it will be worth 35 million to social investors. In many ways, SITR mirrors the reliefs offered by Enterprise Investment Schemes (EIS). Why has the Government introduced this? The Government's policy objective in introducing this relief is to support social enterprises seeking external finance by providing incentives to private individuals who invest in them". So, the aim is to make investment by individuals in social enterprises more attractive for prospective investors. The Government wishes to stimulate and encourage activity here. Do all Social Enterprises qualify? No, they don t. For the purpose of SITR, there is a specific definition of social enterprise and it is worth noting that this definition is more restrictive than that set out above. For the purpose of the SITR, social enterprise means: A community interest company; A community benefit society; A charity; or Any other body the Treasury decides to include. SOCIAL INVESTMENT TAX RELIEF 3

5 It is significant that the definition (for SITR tax purposes) does not include co-operatives, noncharitable companies limited by guarantee or companies limited by shares. The Government's aim here is to seek to ensure that the organisations which fall under the SITR scheme are regulated in some way (either by a charity regulator or the CIC regulator for example). This means that non-charitable co-operatives and non-charitable companies limited by guarantee are not included. The Government states that such organisations will have to "adopt one of the regulated or monitored forms in order to be eligible for SITR. This is a straightforward process". Are there any other qualifying conditions? Yes, there are. We have set out above what social enterprise means for the purpose of this relief. However, there are other conditions which such a social enterprise must meet before an investment in it can be eligible for the relief. Amongst the conditions are: The social enterprise must be unlisted, have fewer than 500 employees and have gross assets of 15 million or less. The investment must be used to finance a 'qualifying business activity' (see definition below) and must be used by the social enterprise within 28 months of it being provided. The social enterprise must be independent, i.e. it cannot be a 51% subsidiary or otherwise under the control of another company. Are there any excluded business activities? Yes, the shares or loans must be issued to finance a 'qualifying business activity'. The trade must be conducted on a commercial basis with a view to making profit. Most trades will be qualifying trades. However the main excluded activities are: Dealing in land, commodities, futures, shares, securities or other financial instruments. Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities. Property development. Fishery and aquaculture activities. The subsidised generation or export of electricity. Road freight transport for hire or reward. Providing services or facilities to another business whose business consists substantially of one of the above excluded activities. So how much can my social enterprise receive? Broadly speaking, eligible social enterprises will be able to receive a maximum of around 290,000 over three years. The reason for this maximum is because of the rules on state aid. SOCIAL INVESTMENT TAX RELIEF 4

6 What is the impact of state aid? Investments which attract SITR are subject to the restrictions on the giving of state aid. The Government has indicated that this means there will be a limit of 290,000 over three years on any investment in a social enterprise which qualifies for the relief. This is to bring the relief in line with the restrictions on the giving of state aid. Restricting the scheme to this limit means that the relief can be offered without the Government having to seek approval from the European Commission. In the longer term, the Government has indicated its intention to seek clearance for a larger tax relief scheme but what this means in practice remains to be seen. What does SITR mean for investors? It simply means individuals can reduce their UK income tax liability in a tax year by an amount equal to 30% of their investment in the social enterprise. The maximum amount any one individual can invest is 1million: therefore the maximum tax relief an individual can claim in any one tax year is 300,000. The individual can elect to have some or all of the investment treated as though made in the tax year preceding that in which the investment was made. Furthermore, when the individual disposes of the shares, there will be no capital gains tax payable if the investment has been held for the relevant three-year period. What kind of individuals can make investments? To qualify for SITR, the investor (or an associate) must not at any time between the date of incorporation of the social enterprise (or establishment of the entity if not incorporated) and three years from the date of investment have been: An employee; A partner; A trustee; or A remunerated director of the social enterprise, the subsidiary of the social enterprise, partner or a linked company of a social enterprise. The individual investor will not qualify for SITR on an amount on which they have already received EIS relief, SEIS relief or Community Investment Tax Relief. What qualifies as an investment for the purposes of SITR? Relief is available for investments made between 6 April 2014 and 5 April The investment can be made either in the form of: New shares in the social enterprise; or A debt instrument, including simple loans. SOCIAL INVESTMENT TAX RELIEF 5

7 Are there any other conditions on the type of investment? Yes, these include: The shares must not carry any right to a dividend which is fixed or greater than a reasonable commercial rate. There must not be any provision in place to have the investment redeemed, repaid or repurchased within a three-year period starting from the investment date. There must not be any exit arrangements in place to protect the investor s capital within any three-year period starting from the investment date. Shares must be subscribed for fully in cash and be fully paid up. If the investment is a debt instrument, the amount must have been wholly drawn down by the social enterprise before relief is available, the debt must be unsecured and the interest should not exceed a commercial rate of return. The investment will only qualify if it is made for genuine commercial reasons and is not part of a scheme to avoid tax. The investor must not receive any value from the social enterprise, for example the social enterprise lending money to the investor or selling them assets at less than market value. Can the relief be withdrawn? Yes. The main reason for the withdrawal of income tax relief will be if the investor disposes of the whole or part of their investment before the end of the relevant three-year period. Relief will also be withdrawn if any of the other qualifying conditions cease to be met. What is the difference between SITR and Community Investment Tax Relief (CITR)? The concept of using tax relief to attract investment into the third sector is not new. Community Investment Tax Relief (CITR) is a mechanism of providing the investor, whether an individual or a corporate, an additional financial return on the investment. Some key differences between SITR and CITR include: CITR is only available for investments into Community Development Finance Institutions (CDFI). CITR provides an indirect relationship with the social enterprise and the investor, placing the investment into a fund which will then be on-lent into several organisations. SITR provides the investor with a direct relationship with the social enterprise itself. CITR is worth up to 25% of the investment value spread over a five-year period. It is possible for the two reliefs to be used to complement each other, providing leverage for further investment, providing the social enterprise with access to a greater value of investment at an affordable price. SOCIAL INVESTMENT TAX RELIEF 6

8 Summary The introduction of SITR has the potential to provide social enterprises with access to affordable capital to enable them to grow in scale, ultimately maximising social impact and driving sustainable growth. The investment can be made in the form of equity or debt. This is key, as many social enterprises are structured without share capital and have no means of issuing equity in exchange for investment. This is the main shift from EIS, meaning that certain organisations with no share capital are no longer alienated from this investment catalyst. Since the recession, we have seen social investment gain visible momentum and the emergence of a real and tangible asset class, generating both a financial and social return to investors. There is also a perceived shift in investor behaviours, with a clear desire to generate a social return whilst investing on a commercial basis. Although SITR is a very positive development for the sector, the scheme itself is limited by state aid rules, restricting amounts raised to a maximum of 290,000 over a three-year period. However, the Government has recently announced, via its social investment roadmap, its intention to increase the scope and scale of SITR to take the scheme above state aid limits in the coming years. We will keep monitoring developments, and in particular the widening of the scheme, to ensure that social enterprises are able to maximise the opportunity this tax relief provides. We will also work to ensure the relief is used to attract new money from investors new to the social enterprise space, to support the growth and development of the social enterprise sector as a whole. SOCIAL INVESTMENT TAX RELIEF 7

9 Who can we contact for more information? This document was put together by Social Investment Scotland, Morton Fraser and Scott-Moncrieff. The contents of this guide are for information only and are not intended to be construed as legal or tax advice and should not be treated as a substitute for specific advice. More detailed guidance on SITR has been published by HMRC The guidance focusses only on social investment tax relief and not the underlying social investment. Over and above the tax relief which may be available to investors, there will be legal and regulatory considerations for organisations who are seeking to secure social investment (such as the restrictions on the making of 'financial promotions'). Specific advice should always be sought on these matters from someone who is suitably qualified to provide that advice. Social Investment Scotland (SIS) SIS is Scotland s largest provider of investment to the third sector in Scotland, as well as a charity and social enterprise itself. Our sole focus is to support growth in Scotland's communities by providing a range of finance products. Our loan funds have already helped more than 220 organisations with investments totalling more than 45 million. For more information visit or contact Thomas Gillan, who heads up the SIS Finance team, at Thomas@socialinvestmentscotland.com Morton Fraser Morton Fraser s Third Sector Team represents some of Scotland s best-known third sector organisations. Our work ranges from providing advice on structuring through to mergers, governance and charity law matters. We have also recently been involved in the development of the 'Social Impact Investment Partnership' model documents, in collaboration with YMCA Scotland, and we play an active role in the social investment sector in Scotland. The team adopts a cross-departmental approach that includes both private client and commercial lawyers (drawing on trust and commercial experience) to provide a focused service for each of our clients. We can also provide advice to individuals who are considering investing in social enterprises and wishing to benefit from SITR. For more information, please contact: Lauren Scott, Associate, at lauren.scott@morton-fraser.com SOCIAL INVESTMENT TAX RELIEF 8

10 Scott-Moncrieff Scott-Moncrieff is one of Scotland s leading firms of auditors and business advisers, providing a full range of professional services to clients in the charity, private and public sectors. We are advisers to around a quarter of Scotland s top 100 charities, more than any other accountancy firm. We are consistently listed as leading auditor in Top Charities in Scotland published by Caritas Data and all respondents to the current Charity Finance audit survey rated Scott- Moncrieff s expertise, commitment and overall service in the top category. This resulted in the magazine presenting us with the awards for top UK charity auditor in our peer group in both categories: overall service and charity expertise. This gives our prospective clients confidence that we deliver what we promise. We advise charities on all aspects of tax from reviewing charity tax exemptions and structuring trading activities to VAT. We can advise social enterprises on attracting investment and individual investors on how to claim SITR. For more information, please contact: Kirsty Murray, Tax Senior Manager at kirsty.murray@scott-moncrieff.com or Morag Watson, Tax Director, at morag.watson@scott-moncrieff.com SOCIAL INVESTMENT TAX RELIEF 9