Proposed tax incentives for investment in social enterprise


At the same time as taking on high profile multinational companies in respect of what is seen by some as morally questionable tax avoidance the Government have also launched a consultation on proposed changes which, if enacted, will encourage a new form of “socially acceptable” tax avoidance.


The proposed changes relate to encouraging individuals to provide financial support for Not for Profit organisations such as Charities, Community Interest Companies and Community Benefit Societies. The encouragement is in the form of new income tax incentives for providing the financial support.


The consultation on Social Investment Tax Relief proposes that investors in Social Enterprises such as Community Interest Companies, Community Benefit Societies and also Charities will be able to claim a tax relief on the amounts that they invest. This proposed new relief will be similar to that which already operates for venture capital investment under the EIS and SEIS schemes and will allow the individual to claim income tax relief on the investment.


However, the SITR proposals differ from EIS and SEIS in two key ways.


Firstly, as many Social Enterprises have either minimal share capital or are Limited by Guarantee (rather than shares), an equity based investment may not be relevant. To address this, the consultation proposes that a qualifying investment will be capable of being in the form of a broader range of securities than just equity, such as debt or quasi-equity.


The second key difference is that the range of activities which the Social Enterprise can carry out is proposed to be wider than the activities allowed under EIS or SEIS, so potentially allowing Social Enterprises to receive investment for projects which EIS and SEIS companies cannot such as property based businesses including residential care.


At present there is increasing awareness that EIS and SEIS can be used to assist certain Co-Operatives to raise funding via SEIS and EIS and many community based renewable energy projects are now structured to qualify for EIS. It would be reasonable to assume that once enacted the reliefs offered by the provisions would be taken up in a similar manner.


The logical conclusion of the proposals are that such a tax relief would be likely to encourage investment into Social Enterprise by providing a tax based incentive to do so and so will be likely to be of interest to people who want to assist socially worthwhile projects but still want to receive a return on their support. Crowdfunding platforms similar to Kickstarter, Seedrs or Crowdcube could be used to provide a platform to raise investment from a broad range of investors and could promote the fact that the investments are “tax efficient”.


These proposed changes should be considered not just by new Social Enterprise projects, but existing qualifying organisations so that they are aware of both the potential opportunities the proposals create and also the potential negative impacts. For existing Charities for example, it is accepted by the Government that the changes could divert funding away from outright donations into term based funding which has to be repaid.


The consultation closes on 6th September 2013.