David Floyd of Social Spider CIC and author of the 'What a Relief!' report into Social Investment Tax Relief (SITR) reveals why the incentive has not lived up to expectations and where improvements are needed.
Charities and social enterprises need risk finance but struggle to find it. Many individual investors are keen to invest into organisations that create positive change but are put off by the financial risk involved.
Both these statements are widely assumed to be true within the social investment sector so when the UK government launched Social Investment Tax Relief (SITR) in 2014 there were high expectations that it would have a significant impact.
SITR offers individuals 30% of the value of unsecured investments into charities, CICs and Community Benefit Societies off their next income tax bill to mitigate their risk. These kinds of tax breaks have their critics but, alongside the practical need for new finance, there was also a question of fairness. Investors making high risk investments into early stage mainstream businesses already received tax breaks through the EIS and SEIS schemes, so SITR was seen as a way of levelling the playing field for charities and social enterprises.
My new report, commissioned by Social Investment Business, looks at the story so far. It provides an overview of why SITR was needed in the first place, how different actors within the social investment market have attempted to use it and what’s happened as a consequence.
It would be an understatement to say that the early results have been disappointing. At launch, the Treasury predicted that SITR would be used to support £83.3 million worth of social investment in its first three years of operation. The actual figure turned out to be £5.1 million with just 35 deals completed.
Dealflow has since quickened from snail-like to tortoise-esque. As of November 2018 – over four years after the relief was launched – Big Society Capital’s open source database showed £9.5 million worth investment raised via the 53 deals for which full information was available.
Government is significantly to blame for what has (and hasn’t) happened. While SITR can, in theory, be used to support most trading activities undertaken by charities and social enterprises, there is a list of ‘trades’ that do not qualify for the relief. That list features property, energy and leasing: some of the business activities most relevant for social investment.
The (sensible) aim of these restrictions is to avoid the relief being misused to support non-social speculative activity but the crude method used means that activities such as community-owned housing and energy schemes are excluded in the process.
The poorly designed rules have so far been compounded by a confused and inefficient process. Some charities and social enterprises applying to HMRC for Advance Assurance that their investment offer is eligible for SITR, report waits of 9 months or more. This far exceeds the time taken for the same process using EIS and SEIS.
However, while some charities and social enterprises have found the process of using SITR frustrating, for others, even in these difficult early stages, the relief has opened up sources of finance that would not have been available had it not existed.
The reality of risk finance is that investments are not always successful. While many of the organisations who have taken on SITR such as our report case studies, Future Wolverton and Shofar nursery, are doing well, the energy supplier Our Power - which raised £1.5 million using the relief in 2017 - recently ceased trading.
This is terrible news for the team running the business and the investors that put money into it, however it also illustrates one of the key functions of SITR. The investors that took a risk on investing Our Power’s social mission will at least get some of their money back.
It is important that charities and social enterprises are able to take big financial risks when there is potential to create significant social impact as a result – and SITR makes it possible for more of this finance to come from individuals rather than government or philanthropic agencies.
My report argues that the practical challenges with SITR are clear but so is the need to fill the gap in the finance landscape for charities and social enterprises that it is (however imperfectly) designed to fill.
If the government is still interested in making it as easy as possible for charities and social enterprises who could make use of risk finance to do so, it will take practical steps to improve SITR. But, even if it doesn’t, there is still plenty that funders and infrastructure organisations can do to support the more effective use of the relief in its current form. While initial expectations may have been optimistic, SITR still has a useful role to play.
You can access the full report ‘What a Relief!’ via the link below. If you have any questions about the research please contact: firstname.lastname@example.org