Sustainable investment & philanthropy
A version of this article first appeared in Philanthropy Impact Magazine.
As charities look for ways to address the financial effects of the pandemic and its impact on charity fundraising, the need for a tax system that encourages and incentivises philanthropists and social investors to use their wealth for positive impact becomes even more important.
It was timely, therefore, that the recent Budget included an extension of Social Investment Tax relief (SITR) for a further two years.
This piece explains what SITR is, how it works, reviews why it has not proved more popular so far, and considers what now needs to change to allow it to have greater impact.
Background and how it works
SITR was first introduced in the UK in 2014  and then expanded in 2017. At the time, it was hoped to provide a significant boost to social enterprise.
SITR allows investors to deduct 30 per cent of the value of qualifying investments for income tax purposes, to defer a related capital gain and to benefit from relief from capital gains tax on the eventual disposal of the investment.
There are complex eligibility requirements. The investment must be made to an eligible “social enterprise”  which must be carrying out a “qualifying trade”, have fewer than 250 full-time equivalent employees and have gross assets not exceeding £15 million immediately before the investment is made.
The investment can take the form of equity or debt but must be used either for a “qualifying trade”  or for preparing to carry out a qualifying trade, which must start within two years of the investment.
SITR is a form of state aid and so, while the UK was a European Union member state, was capped, originally at a rolling limit of €344,000 over a three-year period, subsequently amended in 2017 to a lifetime cap per institution of £1.5 million.
SITR was introduced with an inbuilt “sunset clause” which meant that, without further action, the scheme would have come to an end in April 2021.
SITR so far
To date, use of the relief has been limited. In May 2020 HMRC reported  that, in the period since launch, 110 charities and social enterprises had raised funds of £11.2 million through the scheme – far less than was originally envisaged.
This limited uptake, in addition to financial pressures caused by the current pandemic, led many to fear its discontinuation by the government after April 2021.
A 2019 report  written by David Floyd of Social Spider CIC, for Social Investment Business, identified some particular challenges:
- There was a lack of awareness of SITR among charities and social enterprises.
- The pace of legislative change had moved slowly (the 2017 changes took a year to implement).
- SITR was not sufficiently tailored to the needs of charities and social enterprises. In particular:
- the definition of “qualifying trade” excluded activities for which potential investees could otherwise look for investment, such as property development, energy generation and the provision of nursing and care homes (although for the latter, an accreditation scheme was subsequently introduced to allow those carrying out these activities with a social purpose to prove their eligibility); and
- the restrictions on employee numbers and turnover excluded many larger charities and social enterprises altogether.
- The process of seeking SITR from HMRC was complex.
- There appeared to be a mismatch between supply and demand, with many more investees seeking advance assurance from HMRC to check eligibility for SITR than the number that went on to receive it.
In 2019, the government announced a “call for evidence” to inform a decision about the future of the relief. This closed in July 2019.
The Chancellor’s decision to extend SITR until April 2023 means that the immediate prospect of losing it altogether has been avoided – at least for now. The two-year extension has been welcomed by many as a positive step. Big Society Capital, along with Social Enterprise UK, Resonance and Co-ops UK, had campaigned to retain and develop SITR.
SITR still has significant potential to stimulate investment in charities and social enterprises, providing much-needed, affordable investment to these organisations. The extension does, however, beg the question of what reforms are now needed to allow SITR to take off.
Now that a decision about SITR has been made, the government’s response to the 2019 consultation will be published. It is to be hoped that this leads to adjustments to the scheme to allow its potential to be harnessed – in particular:
- To allow a wider range of charities and social enterprises to be eligible by removing the restrictions that exclude larger charities;
- To allow a wider range of activities by extending the accreditation scheme for nursing and care homes to cover other excluded activities; and
- To take advantage of the opportunities offered by the post-Brexit landscape (and here the Government is currently consulting on a replacement state aid regime  offering the hope that SITR may have greater flexibility in the future).
These reforms should also be accompanied by a concerted effort to raise awareness of SITR, ensuring that charities and social enterprises who wish to raise investment, philanthropists and social investors who wish to invest, and their respective professional advisers, have a greater understanding of the opportunities it offers.
It remains to be seen how philanthropists, social investors, charities and social enterprises will respond to the very significant challenges that lie ahead as we emerge from the pandemic.
What is also clear is that the next two years will bring both a need for charities and social enterprises to look for new sources of finance. With the right reforms, SITR is a potentially powerful tool to allow philanthropists and social investors to use private wealth for public good.
 The scheme is set out in Part 5B of the Income Tax Act 2007 (“ITA 2007”) and is modelled on the Enterprise Investment Scheme (EIS).
 As defined in s257J ITA 2007 – broadly a charity, community interest company or community benefit society that is not a charity.
 As defined in s257MP ITA 2007 – and excluding a wide range of activities.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.