SITR for social enterprises
SITR is the tax relief that investors can claim in respect of investments they’ve made in social enterprises.

Tax relief:

  • is available for investments made on or after 6 April 2014
  • can be given to the investor, only if certain conditions are met

The conditions affecting social enterprises and the nature of the investment are set out below. Those affecting investors are set out in the guide ‘Social Investment Tax Relief (SITR) – investors’.

All the conditions, for both the social enterprise and the investor, must be met for the investor to get – and keep – relief.


How an investment in a social enterprise qualifies for SITR
There are 2 stages to the conditions which the social enterprise and the investment must meet.

Conditions that:

  • apply only at the time of investment
  • must be maintained continuously from the date of investment and for the following 3 years

The social enterprise itself During the whole of the qualifying period for the investment (that is, not only at the point when the investment was made), the social enterprise must be 1 or more of the following:

  • a community interest company
  • a community benefit society, with an asset lock a charity – which can be a company or a trust


Conditions a social enterprise must meet at the time of investment

The social enterprise must have:

  • fewer than 500 full-time equivalent (FTE) employees (calculate the number of hours a year a full time employee in your business would normally work, and then divide that into the total number of hours per year worked by all your employees)
  • not more than £15 million in gross assets immediately before the investment
  • not more than £16 million in gross assets immediately after the investment

Shares and debt investments

Shares

The social enterprise mustn’t have shares or securities listed on the London Stock Exchange or any other recognised stock exchange.

It may become listed later and its investors won’t lose tax relief, unless it had arrangements to become listed at the time of investment. In that case, its investors would not qualify for tax relief.

Investments in shares mustn’t have a right to a dividend: of a fixed amount any part of which is at a fixed rate that’s fixed by reference to the amount invested at a rate that’s fixed for any reason that doesn’t depend on the enterprise’s financial success that’s more than a reasonable commercial rate.

Debt investments

A ‘debt investment’ is when an investor lends money to the social enterprise. The:

  • amount lent, and any interest on the lending, must not be secured on any assets
  • rate of any interest payable must not be more than a reasonable commercial rate
  • debt must rank below other debts of the social enterprise, except other unsecured debt, in the event of the social enterprise winding up

If the social enterprise also has issued share capital, a debt investment will only qualify for SITR if, so far as is possible, the debt ranks equally with the lowest ranking share capital in the event of the social enterprise winding up. This is likely to need a special clause in the investment agreement and you may want to consider taking legal advice on suitable wording.

This means that the investors can’t be guaranteed to get their money back before other shareholders or lenders, if the social enterprise fails.

We need to know when the investment is made, so that we can decide how tax relief should be given.

For qualifying debt investments, when the investment is considered to be made will depend on the investment agreement. The rules cover situations where:

  • the amount specified in the agreement is all paid over at 1 time
  • an investor may commit to lend a sum of money to a social enterprise but the social enterprise can draw down smaller parts at different times

Where either the investment agreement involves only 1 payment of money to the social enterprise or a payment is the first of several payments, then the investor makes the investment for SITR purposes when the enterprise issues the debenture or debentures to the investor. In the case of an investment agreement which does not involve anything being issued to the investor, then the investor makes the investment when the agreement takes effect between the social enterprise and the investor.

If the investment agreement involves several payments, then for each second and subsequent payment, the investor makes the investment at the time of each payment to the social enterprise. If the relevant debenture or debentures are issued, or otherwise take effect, at a date later than the date or dates each payment is made, the investor makes the investment on the date of issue or the date the agreement becomes effective.

For SITR, the term ‘debenture’ has a wide meaning and includes any type of investment instrument or agreement which creates or acknowledges indebtedness.

How to use investments

All money raised from that investment must be used solely for the chosen qualifying trade within 28 months of the date of the investment.

The trade must be carried on by either:

  • the social enterprise itself
  • a 90% social subsidiary of the social enterprise

If you don’t meet this condition, your investors will lose their tax relief.

If the social enterprise uses an insignificant amount for a non-qualifying purpose, it will still meet this test.

If it doesn’t use an amount which is insignificant compared to the whole investment, it will still meet this test.

The social enterprise or a 90% social subsidiary must use the money raised by the investment for either:

  • carrying on the qualifying trade that the money was raised for
  • preparing to carry on that trade which must start within 2 years of the date of the investment (this doesn’t apply to an accredited social impact contractor)

If the money you raise is used to buy shares or stock in a company, the legislation doesn’t treat this as being used for a qualifying activity. This doesn’t stop your social enterprise from investing the money raised from the investment in a 90% social subsidiary, as long as the money is used by the subsidiary for either:

  • a qualifying trade
  • activities preparing to carry on a qualifying trade
Subsequent changes
You must tell HMRC if the social enterprise stops meeting any of the above conditions.

The social enterprise needs to advise HMRC within 60 days of 1 or more of these conditions no longer being met. If you don’t tell HMRC in time, the social enterprise could be charged a penalty.

Investors who meet the investor conditions will be able to claim tax relief if the social enterprise meets all of the conditions (apart from the use of money condition) from the time the investment is made until the time the social enterprise sends us this form.

If the social enterprise stops meeting any condition, or doesn’t meet the use of money rule within 28 months of the investment, HMRC will withdraw some or all of the investor’s tax relief.

Conditions a social enterprise must meet continuously from the date of investment and for the following 3 years

The social enterprise can’t, over this period:

  • be controlled by another company, or by another company and a person connected with that other company
  • have arrangements in place for it to be controlled by another company or by another company and a person connected with that company
  • be a member of a partnership (the same restriction applies to its 90% social subsidiaries)
  • control another company that isn’t a qualifying subsidiary, and there must be no arrangements in place that would allow that to happen

If the social enterprise is the parent company of a group, for SITR, the group’s business is treated as 1 business. That business must not substantially consist of excluded trading activities or non-trading activities.

If the social enterprise is neither a charity nor the parent company of a group, it mustn’t carry on non-trading activities (this means activities not carried on either in the course of a trade, or in the course of preparing to carry on a trade).

It may not carry on excluded activities if they form a substantial part of the trade as a whole.

The social enterprise can have subsidiaries. If it does, it must hold more than 50% of the ordinary share capital in each subsidiary. The subsidiaries mustn’t be controlled in any way, by another company.