The Revenue is making social impact enterprise look more like a hindrance than a genuine incentive for HNWs, writes Colin Senez
It’s been five years since David Cameron introduced the Big Society plan to encourage social investment, but the agenda isn’t exactly going to plan. It would seem unlikely that HNWs would knowingly turn down the opportunity to take advantage of a statutory tax relief, but that is what appears to be happening with the Social Investment Relief (SITR) which Cameron introduced in 2014. The government wants to find out why this might be and published a ‘call for evidence’ (an open consultation) on how it has been used to-date, and why take up has fallen significantly short of what has been expected, despite the deadline being extended in 2017, from 5 April 2019 to the end of 2021 tax year.
SITR was introduced to ‘kickstart the market for social investment’ by encouraging individuals to support social enterprises (e.g. charities, community interest companies, community benefit societies and the like) and helping them access new sources of finance.
Broadly, in order for this tax relief to work, an individual must invest in an enterprise that has a social impact. An investor can invest up to £1 million in social enterprises and can deduct 30 per cent of the cost of their investment from their income tax liability. However, the relief is quite unwieldy. Usually, the process for a taxpayer is that they must self-assess after the end of the relevant tax year. For social investment relief to apply, the organisations will also need to apply to the government to confirm that both they and the investment they have received meet the conditions of the scheme.
Statistics published for the scheme show that around 50 social enterprises have raised £5.1 million of investment through this tax relief. If tax relief was claimed on all these investments, the fiscal cost of the scheme to the Treasury would be less than £2 million in total. Costings published in the 2014 Budget assumed the relief would cost £10 million in 2015/16, rising to £35 million in 2018/19. These figures show that it is quite clear that the tax relief is not having the impact the government hoped it would have. It may be that it simply hasn’t shown up on the radar to incentivise individual philanthropists or that the various restrictions for social enterprises are too much of a disincentive.
In my view, tax reliefs and exemptions can be split into two categories. One category being a relief or exemption which the government would deem otherwise to be unsuitable, disproportionate or unfair to deny. For example, spouse exemption that exempts inheritance tax on transfers between spouses (provided that they are both either domiciled in the UK or neither is domiciled in the UK). If you consider the dramatic scenario where a surviving spouse has to sell their family home because there is not enough cash in the estate to pay the inheritance tax that would otherwise be due, this would, in my view, be a disproportionate approach and happily current legislation reflects this and allows transfers between spouses to be exempt from inheritance tax.
On the other hand, there are reliefs which have been introduced to incentivise taxpayers to act in a certain manner, or spend their money in a certain way. For example, Entrepreneurs’ Relief reduces an individual’s (or in certain circumstances a trustee’s) capital gains tax exposure when they sell their (qualifying) business. This, in part, has been created in part to motivate individuals to create and grow businesses in the UK, which are an instrumental component of a thriving economy.
SITR has the dual (and laudable) aims of generating a positive social return as well as a positive financial return. Let us hope responses to the call for evidence shed light on the reasons for its lack of popularity.
Tax laws are subject to frequent change (much to the dismay of both client and tax adviser), and it is possible that this exemption will be placed on the scrapheap if it is not having the intended effect.
Photo credit for article on Big Society reliefs: Foreign and Commonwealth Office @Flickr
Colin Senez is an associate at boutique private wealth law firm Maurice Turnor Gardner LLP