The third sector has been campaigning for a number of years for a tax incentive which would encourage individuals to make 'social investments' in social enterprises and similar entities, offering a financial return and the prospect of social impact. The Finance Bill, which was published last week, contains legislation to introduce a new Social Investment Tax Relief which is intended to achieve that objective. The relief should also help to raise the profile of social investments and social enterprise with individual taxpayers.
The Social Investment Tax Relief, which is subject to final state aid approval, will apply to investments in social enterprises made after 6 April 2014. For the purposes of the relief a social enterprise is a community interest company, a community benefit society or a charity.
The mechanics of the relief will resemble those of the existing Enterprise Investment Scheme. Qualifying investors who subscribe for shares in, or provide a debt to, a qualifying social enterprise should be entitled to claim to reduce their income tax liability by an amount equal to 30% of the amount socially invested. At present, each social enterprise will be able to raise around £290,000 over a three year period through the relief. The UK Government hopes to raise this limit once state aid approval is obtained.
As well as income tax relief, an individual who makes a qualifying investment will be able to defer a capital gain into the qualifying shares and, provided that income tax relief was available on the initial investment and the investment has been held for three years, any gain which is attributable to the growth in value of the social enterprise will not be subject to capital gains tax.
The UK Government hopes that the new relief will enable social enterprises to access previously unavailable funding. This is clearly very welcome for the social economy. However, just as under the existing Enterprise Investment Scheme, both the investor and the social enterprise will need to meet a number of not entirely straightforward conditions at the time of investment, and to continue to do so for at least three years after that date, in order to obtain the new Social Investment Tax Relief. So, welcome as the new relief is in principle, it may not be as simple for investors to obtain this tax relief as many in the sector would have hoped.