U. K. Government Announces Tax Relief for Social Investment

March 31, 2014 | Susan M. Manwaring

The United Kingdom moved forward with legislative change designed to incent social enterprise – with the introduction of “Community Interest Companies” in 2005 – long before Canada saw similar legislation being introduced in both British Columbia and Nova Scotia.

The UK has taken another step to its support for social enterprise. Tax relief for social investment has been previously discussed in the UK, but this month Chancellor George Osborne of the U.K. Government announced in Budget 2014 the rate for the previously proposed tax relief for social investment.  In its Budget documents, the government stated:

The government wants to encourage new investors to put money into social enterprises. The government will set a rate of 30% income tax relief – the same as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) – for the Social Investment Tax Relief (SITR). This rate will allow eligible social enterprises to receive a maximum of around £290,000 investment over 3 years.

Key to this announcement is the definition of eligible social enterprises.  The proposal limits the benefits to investments in community interest companies, community benefit societies and charities.  Co-operatives registered as industrial and provident societies (IPSs) or companies limited by guarantee (CLGs) will not generally be considered “eligible social enterprises”.

This investment tax credit is similar to other tax credits available to investors under the UK tax regime.
According to some UK groups who are very supportive, the measure could unlock billions and fuel UK’s growing social economy. Others are concerned about the restrictions attached.  Certainly, the new 30% tax relief has the potential to boost investment in social enterprises and trading charities.

Social enterprises around the world have been looking for this kind of tax incentive to add to the various mechanisms that governments are introducing to provide incentive for triple bottom line activities.  Proponents of social enterprise in Canada have long stated that without appropriate tax incentives, legislation to allow for new corporate structures such as the community contribution company (in BC) or community interest company (in Nova Scotia) will not be successful.  This argument will now be put to the test. 

The UK Tax Credit is limited in scope. The rules introduced provide that to qualify for the SITR, an investment must be in an eligible social enterprise, for an eligible activity, and by way of an eligible investment.  More particularly:

1.         An eligible social enterprise must be in a community interest company, community benefit society or a charity.  Investment in certain carefully structured social impact bonds will also qualify.

2.         An eligible activity will  be the carrying on of a trade other than a specific list of excluded trades which includes dealing in certain types of assets and commodities; property development; certain financial activities; certain agricultural activities; and road freight transport;  and

3.         An eligible investment will be investment in equities or high risk debt which satisfy a number of criteria, including that the investment would:

  • not be secured or guaranteed;
  • not have priority and must be the lowest-ranking on winding-up of the social enterprise;
  • not provide investors with rights to require early repayment; and
  • not offer returns that exceed a commercial rate of return.

As noted above, the maximum amount that can be raised by the social enterprise by way of qualifying investment is £290,000 investment per organisation over a three year period. 

Canadian governments are interested in finding new ways to solve old problems.  Many of the provinces and the federal government are currently spending time reviewing the existing corporate legislation to consider whether a new form of corporation is needed in this sector to promote social enterprise.  In addition, ongoing government cutbacks are requiring long standing organizations to consider how to do things differently. 

Tax incentives have long been discussed as a tool to assist the growth of social enterprise activity.  Whether it will work without creating a significant shift of funding from the existing non profits and registered charities to a new form of entity is difficult to determine. What we know is that the pendulum has swung in favour of this approach.  The UK is the first government to formally announce this form of tax credit for investors.  We expect other governments will be watching this initiative.  Time will tell us whether this is an effective tool or too cumbersome to make a significant difference.


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