Social Investment Tax Relief (SITR) for Social Enterprises

Social Investment Tax Relief (SITR) is a scheme that allows social enterprises to attract investment by offering tax reliefs to their investors. If you run a community interest company, community benefit society, or charity, SITR can help you raise up to £1.5 million over your organisation's lifetime by making your investment opportunity more attractive through tax breaks for those who back you.

What is SITR?

Social Investment Tax Relief is a government scheme designed to help social enterprises raise money for their trading activities. The scheme works by giving tax relief to investors who either buy shares in your organisation or lend you money. In return for these tax benefits, you must follow certain rules for at least three years after receiving the investment.

SITR is classed as state aid, which means it counts towards your overall limit for government support. The scheme closed to new investments on 5 April 2023, so you can only apply for SITR compliance statements for investments made on or before that date.

Which organisations can use SITR?

Three types of social enterprise can use SITR:

• Community interest companies
• Community benefit societies with an asset lock
• Charities (whether structured as a company or trust)

You or your subsidiary must use the money raised for a qualifying trade, or for preparing to carry out a qualifying trade (which must start within two years of the investment).

Eligibility requirements

Your organisation must meet several conditions when the investment is made:

Size and structure limits:

• No more than £15 million in gross assets immediately before the investment
• Fewer than 250 full-time equivalent employees
• No more than £16 million in gross assets immediately after the investment
• You cannot be controlled by another company

Restrictions for three years after investment:

• You cannot be controlled by another company
• You cannot be quoted on a recognised stock exchange
• You cannot be in a partnership
• You cannot control another company unless it's a qualifying subsidiary

Qualifying subsidiaries

If your organisation has subsidiaries, they must be "qualifying subsidiaries" to use SITR. This means:

• Your enterprise must own more than 50% of the subsidiary's shares
• No one else can control the subsidiary
• There cannot be arrangements that would give someone else control

The subsidiary must be at least 90% owned by your enterprise if the trading activity you're raising money for will be carried out by that subsidiary, or if the subsidiary's business mainly involves property or land management.

Qualifying trades

Most trades qualify for SITR, but you must be trading commercially and aiming to make a profit. Your trade doesn't need to be based in the UK.

However, your enterprise may not qualify if most of your trade involves:

• Leasing activities or letting ships on charter
• Receiving royalties or licence fees
• Dealing in financial instruments, commodities, futures, shares or securities
• Dealing in land or property development
• Running nursing homes or residential care homes
• Banking, insurance, money-lending or other financial activities
• Fishery, aquaculture or agriculture
• Energy production or electricity generation
• Road freight transport for hire

You also cannot qualify if you provide services to another business that carries out excluded activities, and the same person controls both organisations.

How much you can raise

The maximum you can raise through SITR over your organisation's lifetime is £1.5 million. This includes money received by any subsidiaries, former subsidiaries, or businesses you've acquired.

SITR investments also count towards limits for other venture capital schemes if you use them later.

State aid categories

Depending on when you made your first commercial sale and what you're raising money for, you'll receive either GBER state aid or de minimis state aid.

If it's been less than seven years since your first commercial sale:

You'll receive GBER state aid and can raise any amount up to the £1.5 million lifetime limit.

If it's been more than seven years since your first commercial sale:

You'll receive GBER state aid if you previously used SITR within seven years of your first commercial sale and you're raising money for the same trading activity.

Otherwise, you'll receive de minimis state aid, which limits you to €344,827 (or the equivalent in pounds) over a three-year period, including any other de minimis state aid received during that time.

What types of investment qualify?

Investors can support your organisation in two ways:

Shares

If investors buy shares, these must:

• Be new shares (not existing ones)
• Be paid for in full and in cash when the investment is made
• Not be preference shares

Any dividends cannot be guaranteed.

Debt investment (loans)

If investors lend you money, the loan must:

• Be a new debt investment
• Be made in cash (in one or several payments)
• Not be secured against any assets
• Not be repaid for at least three years after the investment
• Not carry an interest rate higher than a reasonable commercial rate

Restrictions on investments

When you issue shares or receive a loan, there cannot be any arrangement to:

• Guarantee the investment or protect the investor from risk
• Sell or buy back shares during or at the end of the three-year period
• Repay the loan during the three years after investment
• Structure activities to let investors benefit in ways not intended by the scheme
• Create reciprocal investments where you invest back in an investor's company
• Raise money for tax avoidance purposes (the investment must be for genuine commercial reasons)

You cannot use the investment to pay off an existing loan.

How to apply

For investments made on or before 5 April 2023, you need to complete a compliance statement (form SITR1) after you've issued shares or received the debt investment. Submit this form to HMRC.

Complete a separate statement for each share or debt issue.

If you received advance assurance from HMRC before the investment, provide copies of any documents that have changed since that assurance was given.

If you didn't get advance assurance, you'll need to provide:

• Your business plan and financial forecasts
• A copy of your latest accounts (if available)
• Details of which enterprises or companies will use the investment
• Information about all trading activities and how much you'll spend on each
• A list of previous investments under SITR or other venture capital schemes, with amounts and dates

Sources

• Use SITR to raise money for your social enterprise

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.