This month’s budget saw the announcement that the UK social investment industry’s favourite policy innovation, Social Investment Tax Relief (SITR), will be set an 30% when it comes into force on April 6th.
SITR is particularly notable because as well as providing relief to investors buying shares in (some) social organisations that are able to offer them, it also provides relief on (unsecured) loans – meaning that organisations without share capital (including charities and CICs limited-by-guarantee) can benefit.
Welcoming the news, Big Society Capital boss, Nick O’Donohoe told Civil Society: “Now is the time for investors to seize this opportunity to invest for social good and benefit from tax relief that is equivalent to existing schemes.”
Elsewhere, Nesta’s Matt Mead, writing for The Guardian‘s Social Enterprise Network explained that SITR: “might not sound exciting but it has the potential to be a major landmark for investment in social impact organisations.“
Are they right? Will SITR precipitate an avalanche of investment in social organisations? Will the government really end up spending its £10 million estimate (on over £33 million worth of investments) on the first year’s worth of SITR.
Frankly, no one’s got the foggiest idea but here’s five questions worth considering:
1. Is SITR a good use of public money? Tax relief involves the government agreeing not take some money from people in tax to encourage them to spend their money in ways that the government thinks are good. In the case of SITR, the government thinks social investment is a good thing and it hopes providing tax relief will lead to more of it.
The National Audit Office reports that the current cost to the state of tax reliefs that have similar goals to government spending programmes (known as ‘tax expenditures) is £101 billion per year. Given that the UK’s entire annual tax revenue is £476 billion, that’s a lot of money.
The cost of SITR is estimated to be £10 million in 2014/15 rising to £35 million in 2018/19 so, based on the overall picture, it won’t make much difference to annual tax revenues. Some in the social enterprise world might argue that it would be more helpful if the government just gave £10million to social enterprises, rather than giving money back to people who invest in social enterprise. There are (at least) two arguments against doing this:
- As a result of the government giving back 30% to investors, social enterprises get both that 30% and an additional 70%, so they end up with more than 3 times as money
- The introduction of SITR may not cause an overall increase in levels of investment but, in some cases, money that would otherwise have been invested in private businesses may be invested in social enterprises instead
On balance, as the sums involved are relatively small in a general sense but potentially big in terms of the UK social investment market, SITR seems like a good use of public money if: (a) you support social investment and (b) it works.
The added bonus is that if it doesn’t work (and no one makes any eligible social investments) it won’t be spent.
2. Will SITR make High Net Worth Individuals (HNWIs) more likely to invest in companies they can’t own? From the government’s point of view, SITR is primarily focused on generating more investments from rich people. According to the published guidance: “Investors are expected to be similar to those investing in the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). Compared to the self-assessment population, those investors tend to be male, located in the south of England and have higher overall income levels.“
Initiatives like Clearly Social Angels, suggest that there are definitely some well off business people who want to make investments that enable them to make (some) money while also making the world a better place, and there’s evidence from Unltd Big Venture Challenge programme that growing numbers are investing in ‘for-profit’ social businesses which use a convention company limited-by-shares structure. What’s less clear is whether many of these investors will want to invest companies which don’t sell shares and can’t give them a stake in the company in exchange for their money. Is it desirable (or even possible) to be an angel investor without being a shareholder? Assuming the answer’s ‘no’ or ‘not really’, what sort of offers will eligible social enterprises be making to HNWIs?
An additional barrier to investment from HNWIs in the short term is that, prior to a government application to the EU for State Aid approval, only investments up to €200,000 are eligible for relief.
3. Will there be any opportunities for people who aren’t really rich to make eligible investments? Significant numbers of people who are not especially wealthy are already receiving tax relief on investments in co-operatives through existing tax reliefs. Both the EIS and the Seed Enterprise Investment Scheme (SEIS), which offer similar levels of relief to (or in the case of SEIS higher than) SITR have been used by organisations involved in the Community Shares programme.
It’s possible that the potential offer to less wealthy people – invest £500 or so that you can afford to lose in a business that you think’s really good, and if you’re lucky, you might get some or all of it back – could be less confusing than the offer to HNWIs. It’s crowdfunding with additional benefits but (from the social enterprise’s point of view) additional responsibilities to the crowd of funders. What’s not clear is how many social enterprises will be willing and able to make that kind of offer.
4. Do significant numbers of social organisations actually want investment from individuals? SITR has been introduced at the end of a lengthy campaign but that campaign has been led by leading figures in the world of social investment and (some) social enterprise umbrella bosses. I can count on the fingers of one finger, the number of social entrepreneurs (who don’t work in social investment) who’ve ever talked to me about tax relief.
There’s no evidence that large numbers of social organisations (I’m not currently aware of a single anecdote, although I’m sure must one or two) have been deterred from selling shares (if they’re able to) or seeking unsecured loans from individuals because they were unable to offer tax relief on those investments.
In the case of loans in particular, the fact that organisations haven’t considered this option before doesn’t mean they won’t do so in the future – particularly if crowdfunding websites such as Buzzbnk are able to help them do so – but it’s anyone guess how many will. It could be 5000, it could be 5. The Bonk of Pants offer is an example of the kind of offer that has been made without tax relief that may be easier to do now SITR is in place.
5. Is tax relief on debt on a good idea? The really (potentially) innovative element of SITR is the fact that relief is available on unsecured debt. The thinking is that behind the policy is that unsecured debt is as near as organisations without share capital can get to selling equity. This may be true but that doesn’t mean that it gets very near.
As mentioned above, in a situation where an individual is making a large personal investment, an unsecured loan lacks the key benefit provided by an equity stake of enabling the investor to take part ownership of the organisation. In the case of charities in particular, there’s no obvious way to fudge that issue – investors can’t be made trustees of a charity in return for their investment without creating a (pretty serious) conflict of interest.
At least equally importantly, an unsecured loan also fails to provide investors with an asset that they can sell on to somebody else. Quasi equity loans – where investors are repaid a proportion of an organisation’s revenues (or profits) rather than a set monthly amount – have clear advantages for organisations but they don’t solve the problem that there’s no obvious way an investor can make a big profit on an investment in an organisation without share capital (even if it that organisation is really successful).
In a situation where a commercially-minded investor thinks there’s a good chance that they won’t get their money back, it’s not clear that SITR at 30% does enough to derisk their investment to make a deal significantly more appealing (particularly given that the same level of relief is available on investments in private businesses that do have those additional benefits).
In situations where organisations are looking to take on a loan on the basis that they have clear revenue streams and a track record of profitability, it’s not clear what loans from individuals receiving SITR will add to the existing market for loans from Social Investment Finance Intermediaries (SIFIs). The latest available figures (for 2011-12) show a total value of unsecured loans deals in the social investment market of £10.5 million (plus £0.3 million in quasi-equity deals).
The key reason why unsecured loans with SITR might work is if there’s a significant market of both HNWIs and groups of less-HNWIs who are looking for opportunities that inhabit a grey area between an investment and a donation. This market doesn’t exist yet but the success of SITR (and, to an extent, the whole idea of social investment in charities and other ‘not-for-profit’ organisations) is based on the belief that it can be created. From April 6th onwards, we’ll see if that belief is correct.