Social Investment Tax Relief

Do you run a charity, social enterprise or community interest company? Is it tough to raise the funding you need to continue your work? Social Investment Tax Relief (SITR) could be the way to encourage more people to invest the cash you need. 

What is social investment tax relief?

Since 2014, people have been able to claim tax relief for investment in social enterprises. Social Investment Tax Relief (SITR) came into being as part of the 2014 Finance Act. Until then, an investor had been able to claim tax breaks for the cash they put into conventional companies. But it wasn’t the case for charities or social. So, the aim of SITR was to redress this balance.

In simple terms, the state aid initiative offers relief from both income and capital gains tax for investors in social enterprises. For organisations that benefit from that investment, it can be a flexible and affordable way to raise money. It can also be a lifeline if other funding options are not available due to poor credit or other criteria.

In 2016, charity think tank NPC reported that 30 organisations had benefited from SITR in the first two years of its existence. It had seen £3.4 million invested in that time, with the average deal worth £100,000. By May 2021, this figure had increased to £15.8 million.

How does social enterprise investment tax relief work?

The point of social investment tax relief in the UK is to help you raise funding. The question is whether you’re eligible to make use of the scheme. If you are, any investor who lends cash or buys shares gets tax breaks on that amount. There is a minimum investment period, however.

To start, you first need to make sure you qualify.

After that, the next step is to secure the funding. This can be done through different channels. You can use a dedicated SITR fund, where a fund manager will oversee investments into your organisation. Or you could try a loan or equity crowdfunding platform.

But it’s a good idea to do your research first. You’ll need to consider what type of investment you want. And you’ll also want to think about which investment route is best.

You also have the option to check with HM Revenue and Customs (HMRC) that your proposal is going to meet the SITR rules. This is called advance assurance and, while it’s not mandatory, it may be a good idea. Bear in mind this will add time to the process.  

Then it’s about completing the agreements with your investor(s). Once that’s done, you’ll get your funding in line with what you agree.

After receiving your funding, you’ll need to let HMRC know via a compliance statement. As soon as HMRC confirms that it’s eligible for social investment tax relief, compliance certificates should be sent to your investors. This lets them claim that relief on their income tax.

Can I use the social investment tax relief scheme?

The answer to this question is based on the status of your business or organisation.

First, you can only apply for social investment tax relief after four months of trading – if your trading qualifies. You then must apply within two years of that period. It could also be that you can apply within two years of the tax year in which shares are issued (if that comes later).

You can use the cash raised for either trading or preparing to trade within two years of getting that investment.

There are also limits on how many employees you have, your ownership status, and the value of your gross assets. The UK government website lists all the criteria that apply to SITR.

If SITR isn’t open to you, it isn’t the end of the matter. At Nucleus, we’re dedicated to helping smaller businesses get the funding they need. And with our alternative funding solutions, let’s see if we can find the one that’s right for you. Talk to us today for more information

Social investment tax relief FAQs

How can I raise money with SITR?

There are three main ways in which you can raise funding that qualifies for SITR. These are:

−      Social investment tax relief funds: In the UK, there are dedicated funds that will invest in organisations. A fund manager will take charge of that process and provide your organisation with support at every stage.

−      Crowdfunding platforms: Using a crowdfunding or peer-to-peer (P2P) platform is starting to become an effective way to raise capital from a wider group of investors.

−      Direct investment: There’s nothing stopping you from going directly to investors for funding. As long as all the criteria are met, it can still qualify for SITR.

To qualify for SITR, investors must either buy shares or lend funding that will then be repaid at some point. No matter which option you choose, there are specific conditions. These are all laid out on the government website.

How much can I raise?

The most you can raise for as long as your organisation is trading is £1.5 million. Not only that, but any SITR investments will count towards other venture capital initiatives you choose to use in future. It can also affect any state aid you try to apply for in future.

What are the advantages of SITR?

One of the major plus points of SITR (if you’re an eligible organisation) is that it gives people a good reason to invest. Tax breaks make it an appealing way to inject cash into good causes.

For your organisation, meanwhile, the rules of the scheme make it a longer-term consideration. An investor can’t provide cash and then demand an instant return. So, it gives you the freedom to do what you do without needing to meet rapid targets.

And it can be a much-needed option if your organisation is struggling to get funding from other sources. It might be, for example, that your credit score isn’t high enough to get a loan.

Examples of SITR in action

Since the introduction of SITR in 2014, organisations across the UK have benefited from it.

The first-ever SITR deal was in 2015 when FareShare South West – a Bristol charity – received £70,000. It came from a group of angel investors through a SITR fund managed by a company called Resonance.

Elsewhere, FC United of Manchester used SITR funding as a community football club to finance the building of a new stadium. The club raised £270,000 through the initiative. In doing so, the club created a home for its community activities.

There are many more examples of SITR in action too. Big Society Capital is creating a database of SITR deals to date. And, in doing so, it shows you how it could help your organisation too.

What if SITR aren’t right for me?

SITR can be a great fit for eligible organisations and their investors. But what if that isn’t you? Does that mean all your funding options are closed off? Not at all. At Nucleus, we specialise in helping the UK’s smaller businesses. With our types of funding products, there’s every chance we might be able to help you too. All it takes is for you to tell us what you need.

Get in touch and talk to one of our specialists. We tailor all our solutions to the exact needs of our customers. If we can help you, we can make it work for you. So, why not give us a try?