Five questions about social investment tax relief

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:

  1. 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
  2. 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.

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16 Comments

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16 responses to “Five questions about social investment tax relief

  1. SITR is actually a really interesting proposition for the growing social enterprise. Many, my own (Swarm Apprenticeships) included, are indirectly Government funded and incur their costs long before the associated income arrives – but it does arrive, with almost the same certainty as those green power feed in/generation tariffs..

    This will comfort SITR investors perhaps unwilling to take the higher risks associated with Social Impact Bonds.

    What doesn’t seem to be clear, is what legal structures qualify. CIC, CLG, IPS?

  2. Beanbags admin

    It applies to Charities, CICs, Bencoms and Social Impact Bonds. It doesn’t apply to CLGs that aren’t CICs or charities.

    • Is that because CLGs are considered to be ‘for profit’, or more likely, not exclusively for social benefit?

      Certainly the best (and perhaps first good reason) for becoming a CIC limited by guarantee!

      • Beanbags admin

        Yes, it’s not about profit, it’s that CLGs aren’t regulated social organisations. Agree that it’s the first direct, specific benefit of being a CIC limited-by-guarantee. It will be interesting to see if it leads to an increase in CIC CLG registrations (although nearly 6,000 had been registered by the end of 12/13 even without any practical incentive).

      • Robert, You’ve reminded me of an interview 10 years ago when we’d set up as a CLG and the CIC was still a year away:

        “If a business is going to be robbed or otherwise compromised by corruption and corrupt practices, it’s profits will be less or possibly even non-existent. The P-CED model is not a charity sort of operation. It is business. What we choose to do with profits is entirely up to us, and we choose before anything else happens to set most of our profits aside to assist poor people. In fact, our corporate charter requires us by law – UK law, where rule of law is very well established – to use our profits only for social benefit. We cannot do anything else with it. To the extent that it is difficult or impossible to engage honestly and predictably in business activities in any given community and make a profit, we are reduced in what we can do with any profits that might be made. I do not take kindly to, and do not accept, paying bribes and gifts to government officials or to anyone else in order to do business. ”

        It was about our efforts to tackle social inequality in Crimea,

        http://www.iccrimea.org/scholarly/economicdev.html

  3. There was a time around five years ago that many were calling for Community Interest Companies to be allowed tax relief. To me that went against the idea of social enterprise as business for social benefit turning back toward charity and state subsidy. At the time I wasn’t aware of the extent to which social enterprise was already being subsidised. The alternative of creating benefit for those who invest in social enterprise would in my view be more effective in creating a social economy and it aligned with the idea of onward investment in community development funds to seed new social enterprises. With a social enterprise summit upcoming, I shared these thoughts on one of the few open public discussion spaces of the time.

    http://lnkd.in/dyn8PDX

    There are ways to mitigate risk in unsecured lending. The loan circle approach in microfinance is a example. Community shares are more relevant perhaps. There is another model known as a capital partnership which repays both monetary and sweat equity in nths shares of a productive asset which could be kilowatts of electricity from an energy partnership. Last but not least, the Fairshares model developed at Sheffield Hallam.

    Severing the relationship between pensions and annuities has the potential to unleash a considerable amount of enlightened self- interest.

    • Beanbags admin

      Not sure SITR is really an example of social enteprises becoming more dependent on state subsidy. It’s the social enterprise equivalent of reliefs already available for investments in private businesses.

      • The support of CICs by means of tax relief is what I’m referring to as state subsidy. The alternative, giving people an incentive to invest in stimulating enterprise, was advocated. Goverment saw fit to do apply the EIS first.

  4. Good round-up David – I suppose I’d just add that the starting point for this was (as you indicate in the last comment here) to make the playing field more level for social enterprises who can’t do equity – which is most of them. As you say, it is an unknown how it will be implemented / what it might lead to – worth adding that the (greater) recognition of social enterprise by the Treasury is in and of itself an important step alongside the tax relief.

    • Beanbags admin

      Yes, agree that the legal validation of social investment in charities and social enterprises/social enterprise as an activity could be significant in terms of wider policy debates.

      I completely support the leveling of the playing field for social enterprises who can’t do equity in principle. What’s not (yet) clear is how many of those organisations actually want to be on that playing field. We’ll soon find out.

  5. Hi David. Thanks for the Buzzbnk mention. We look forward to helping organisations raise debt-based SITR via our loan-based crowdfunding platform. We are certainly seeming some interest from social enterprises to raise SITR eligible loans and to do that via crowdfunding. I will be happy to provide data on this as we go forward. Perhaps a good check point would be in 3-4 months.

    What is interesting for us is that we also have the introduction of the Loan-based crowdfunding regulations as of April 1, so with these two mechanisms in place we are hoping to increase the amount of lending to social enterprises by the general public and grassroots.

    On the lenders side, we see multiple motivations for lending, including those who want to do more than a donation but are not necessarily looking for a pure financial return. As with Gift Aid, we think SITR will be some type of lever – which type exactly has to be seen (e.g tipping point to make the loan, increase the average size of lending, etc.) and how much impact it will create.

    Very interesting times ahead and we can use the data coming in from platforms like ours and others to gain meaningful statistical data. This will be crucial to separate out the perceptions, theory and hypothesises we have only be able to debate without evidence to date.

    all the best,
    Theresa Burton
    CEO & Co-founder Buzzbnk

  6. Chancellor George Osborne announced a tax relief for social investment in his Budget, designed to stimulate investment in social enterprises.

  7. Pingback: The end of the beginning | Beanbags and Bullsh!t

  8. EZ

    Just to clarify – the £290k limit is the max an individual social enterprise can raise under the relief over 3 years. Individual investors can invest up to £1m per year e.g. in multiple social enterprises.

  9. Beanbags admin

    Yes, the point about the limit is that it prevents big deals – and, importantly from a policy angle, the use of relief for Social Impact Bonds (in their current form) – rather than that large numbers of HNWIs will be prevented from investing as much as they’d like to in social ventures in a general sense.

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