EXCLUSIVE GUEST ARTICLE: Investing For Good - Impact Investing And New UK Tax Relief

Greg Moss Bond Dickinson Senior Wealth Advisor 19 May 2015

EXCLUSIVE GUEST ARTICLE: Investing For Good - Impact Investing And New UK Tax Relief

A new form of tax relief is designed, proponents hope, to drive what is known as impact investing in the UK, but how effective will it be and how should investors approach it?

The UK government has recently brought out another form of tax relief – Social impact tax relief, or SITR, which is designed to encourage what are called social enterprises to benefit from tax exemptions enjoyed by other, more conventional organisations. In this article, Greg Moss, a senior wealth advisor at Bond Dickinson, the law firm, looks at the changes. This publication welcomes reader responses and they can contact the editor at

Social impact tax relief (SITR) is a recent addition to the world of tax advantaged investments. It is effectively a spin-off of the enterprise investment scheme (EIS) rules, and allows social enterprises to benefit from similar tax incentives to those which have been available to commercial organisations under that scheme.

The similarities extend to the mechanisms and rates of tax relief. Tax relief is available to investors at a rate of 30 per cent, claimed through self-assessment.
One key difference between SITR and EIS relief is that the former is available on debt as well as equity investment, creating more flexibility for investee organisations and potentially more product choice for investors.

Who can benefit?
There are strict rules around which organisations can use the scheme to attract investment. They must be structured as either a registered charity, an industrial and provident society (IPS), a community benefit society, or a community interest company. As with the EIS regime, certain activities are excluded, principally:

-- Banking and insurance related activities;
-- Dealing in land, commodities and certain types of property investment;
-- Energy generation or exportation which qualifies for feed-in tariffs (FITs).

On the investor side, the rules are simpler and the relief is open to any individual paying tax in the UK, who invests directly or via a nominee arrangement.

Take up so far
It is fair to say that the regime, and the market it has created, are in their infancy. To date, just four deals have been announced.

There is reason to believe, however, that the marketplace will become busier during 2015. In particular:

-- The original legislation was only introduced in April 2014, and was initially very restrictive in terms of both the limits on SITR funding for investee organisations and the types of investment structure available;

-- Following a public consultation last year, funding per organisation will increase significantly, from £275,000 to £15 million, subject to EU state aid clearance;

-- The scheme is due to be expanded to include social investment venture capital trusts (VCTs), a form of collective investment, paving the way for a more diverse supply of products;

-- David Cameron’s re-election suggests that there will be a degree of political will behind the development of this market, tied as it is to the "Big Society" project, which Cameron has previously described as his “great passion”.



Where do SITR qualifying investments fit in for investors?
From the perspective of investors (and their advisors), while social investment is a really exciting third way between philanthropy on the one hand and investing for financial returns on the other, it should be treated with a degree of caution.

Without the ability to properly factor the expected risks of these products, or their correlation with the other moving parts of a portfolio, they should not be relied on as part of an investor’s strategy to support core financial planning goals. The risk and returns are simply too unknowable at this point in time.

For that reason, such investments should still be seen as a separate asset class, which should not be relied on for financial returns. The motivation for investing should be the cause first and the financial return second.
Once the market has developed more fully, has a track record which advisors can number crunch, and once the relationship between the availability of SITR, the cost of capital for organisations and the risk for clients is clearer, then this position may change.

Profit or purpose?
The big underlying issue for SITR is the separation and complementarity of profit and social impact. Paul Harrod is the founder of Bristol Together CIC, and he argues convincingly that the two goals, whilst being separate, can at least complement one another.

Bristol Together is a social enterprise partnership which employs ex-offenders on projects which aim to restore empty and unused properties in the area, which are then sold on at a profit. Harrod makes the point very well that the profit-generating nature of these projects is essential not only to the viability of the partnership, but also to its overarching aim of reducing reoffending. In his view, an extra sense of purpose and focus is created by its commercial goals.

There will always be a debate about how separate social impact and commerciality are, but Bristol Together is another good example of a successful project which has found a way to combine elements of both.

For social enterprises, the message is clear. SITR in its new expanded form has the potential to become a major source of funding.

Many will be keen to capitalise on what will be seen as an attractive new tax reducer, in an era where tax planning outside the mainstream is not for the faint hearted, not to mention high-risk from a reputational perspective.

For investors, particularly those with ethical and philanthropic goals, SITR products represent a new and intriguing option which sits somewhere between investment for profit and pure philanthropy. The fly in the ointment, at this stage, is the inability of advisors to determine where precisely on that spectrum they sit.

For now, on a precautionary basis, investors should probably be prepared to lose anything they throw at SITR qualifying investments, except the tax relief, and should certainly not rely on expected returns from such holdings to support their broader goals.

With that caveat established, many investors will still be very attracted to the prospect of diverting some of their wealth into organisations and causes with which they are genuinely engaged, through investment which is not only boosted by government subsidy but which has at least the potential to produce returns, which can then be ploughed back into similar endeavours in the future.

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