Download Social Investment Tax Relief Workshop

SOCIAL INVESTMENT TAX RELIEF
HOW SITR CAN WORK FOR FUND MANAGERS
AND ADVISERS
Big Society Capital and Neil Pearson Consulting
February 2015
PREFACE
The purpose of these notes
These notes were prepared to form the basis of a workshop for Social Investment Financial Intermediaries
(“SIFIs”) held at Big Society Capital’s offices on 27 November 2014 and given by Neil Pearson Consulting
Limited.
These notes are not a comprehensive review of the law relating to SITR. They are for information purposes
only to give the reader a better understanding of this area and have been produced by Big Society Capital in its
capacity as champion for the social investment market. Neither Big Society Capital nor Neil Pearson
Consulting Limited can give any advice in this area and will have no liability to any third party who may rely on
the contents of these notes.
Please also bear in mind that:
• These notes are based on Neil’s understanding of law and HMRC practice as at that date, save that we’ve
updated them to take account of recent changes in the Autumn Statement on 3 December 2014. All
information is current as of the date of publication, subject to change without notice, and may become
outdated over time
• This is a very new area of law, so very little custom and practice has yet been developed by HMRC or the
Cabinet Office. Policy and practice will develop over time. In some areas of these notes we have
speculated as to the position HMRC may take given the lack of precedents at the moment.
• The following notes are a simplification of a complex area of tax law
If you are looking at raising SITR funding, or you are an investor looking to claim SITR, you must seek your2
own independent advice from a suitably qualified professional adviser.
CONTENTS
The areas covered in these notes are as follows:
• Big picture – what is SITR?
• The tax reliefs and their limits
• The role of the SIFI in generating SITR investments
• What organisations can benefit from SITR investment
• The key terms and characteristics of an SITR investment
• Who can invest
• How (and when) the SITR money is spent
• Some practical issues around executing and delivering an SITR investment
• Examples/case studies
3
BIG PICTURE
What is SITR?
• Individual invests money into a social enterprise by way of shares or debt
• Individual claims tax relief on the amount invested
• The social enterprise uses the funds in a trading activity
• Patient capital. Investments are to be held for a minimum of three years. After three years (or
longer) the investment is sold or repaid.
4
THE TAX RELIEFS
• Income tax relief – 30% of the amount invested is deducted from the investor’s income tax
liability for the year in which the investment is made
• Carry back facility for investments made after 5 April 2015 (provided personal limit not used up)
• Capital Gains Tax (CGT) deferral – if a chargeable gain is re-invested into an SITR-qualifying
investment, the CGT liability on that gain is deferred until the SITR investment is disposed of.
That gain can then be re-invested again to make a further deferral of the tax liability (and so on..)
• Tax free gains – gains made on disposal are free of CGT. But:
o
o
This only applies to capital gains – e.g. on sales of shares
Interest and redemption premium on debt would be taxed as income, so it is not tax free
• Comparison to Enterprise Investment Scheme (EIS) and Seed EIS (SEIS)
o
o
o
Not as generous as SEIS
Same tax reliefs as EIS
But SITR allows for tax relief on debt (unlike SEIS and EIS)
• Investors must hold their investments for at least three years in order to qualify for the relief. If
they dispose of their investment within that three year period, SITR is withdrawn (although there
are rules allowing transfers to spouses and civil partners without triggering loss of the relief)
5
THE LIMITS
•
Individual limit of £1m per tax year (in addition to SEIS/EIS investments)
•
A social enterprise cannot raise more than around £275K in any rolling three year period (the cap
is calculated using a formula which depends on the GBP/euro exchange rate and the prevailing
tax rates)
•
Any “de minimis” State Aid counts towards that £275K limit
•
But the Government announcement on 3 December 2014 that it would seek to increase this by
introducing:
o
o
•
A £5m cap per social enterprise in any rolling twelve month period, but
Subject to an aggregate cap of £15m per social enterprise
These increases are due to take effect on 6 April 2015, but will be dependent on approval from
the EU Commission (which may take longer)
6
THE ROLE OF THE SIFI
•
Deal generation
•
SITR Funds have a key role to play for a number of reasons:
•
Investors can more easily find investment opportunities
o
o
o
o
•
Apparent reluctance, currently, of fund managers to raise funds in this space due to:
o
o
o
o
•
Lack of deal flow
The £275K limit per social enterprise is too low (note however that HMT intend to raise this limit)
Liquidity of investments
Reluctance to be first to market
Potential impact of proposed increase in limits:
o
o
•
Investors can spread risk by investing across a range of social enterprises
Social enterprises can find investors
Fund managers will add their expertise to the investee enterprises
It is easier for IFAs to recommend funds than individual investment opportunities?
Increased deal flow
SISIs may show greater willingness to engage with this market
SIFIs doing SITR deals now may be better placed to exploit opportunities/raise funds when the
limit increases?
7
SITR FUNDS
•
The tax relief can only be claimed by individuals. As a result limited partnerships and other forms
of funds don’t work
•
You could set up a social enterprise to lend monies to other social enterprises.
 Investors get their relief “up-front”
− £275K limit makes that unattractive (unless you set up a lot of them)
o This may become more attractive if the limit increases (note however that HMT intend to raise this
limit)
•
Other than the above, any fund structure under existing legislation has to provide a mechanism
under which the underlying investment is made by the individual
•
Investments can be held in the name of a nominee.
o
•
For example, all SITR investments into an enterprise may be registered in the name of one person
or company (the “nominee”) but that nominee holds the investments on behalf of the underlying
individuals whose money was invested, and who will claim SITR
So most likely fund structures (as the law currently stands) are:
o
o
SITR Angel Networks
EIS fund model
8
SITR FUNDS CONTINUED
•
Tax relief is only available when the money is invested in the social enterprises (not when it is
paid into the fund). Fees and expenses charged in setting up and running the fund may reduce
the amount on which SITR is claimed
•
Fund managers need to decide whether to form a debt-only fund (where the investors will only
make loans to social enterprises) or to go for an investment policy which allows them flexibility to
invest in both debt and equity
•
It is also possible that fund managers may look to raise a “hybrid” EIS/SITR fund where investors
might invest in private company shares (through EIS) or debt or equity investments into social
enterprises (through SITR)
•
The Government also announced on 3 December 2014 that it will be consulting on whether or
not to introduce some sort of indirect SITR fund structure – such as Social Investment Venture
Capital Trusts
•
If so, this would allow investors to invest into a fund and claim SITR immediately on the whole of
the investment into the fund vehicle. The fund vehicle would then itself invest the monies, over a
period of time, into SITR-qualifying social enterprises. We expect to have more information from
HMT this year.
•
SITR funds could also co-invest alongside other funds or investors who were not looking to claim
SITR
9
WHO CAN RAISE THE MONEY?
• Must be a “social enterprise”
• Less than £15m “gross assets”
• Unquoted (i.e. not traded on a stock exchange)
• Cannot be controlled by another company
• Rules around group structure – all subsidiaries must be “51% subsidiaries”
• No more than 500 employees (FTE)
• Cannot be in a partnership
• Must meet the “trading requirements”
The next ten pages explore each of these issues in more detail.
10
DEFINITION OF SOCIAL ENTERPRISES UNDER SITR
• Charities. These can be a trust or a company
• Community Interest Companies. These can take any form of CIC
• Community Benefit Societies. These must:
o
o
Not be registered social landlords
Be a “prescribed” bencom (i.e. incorporate, in its rules, the asset lock)
• Accredited Social Impact Contractor. Typically a special purpose vehicle that will issue social
impact bonds to raise finance for a particular project.
• Any other body prescribed by the Treasury to enable the flexibility to extend the scheme in the
future
11
SOCIAL IMPACT CONTRACTORS
Requirements
• Must be a company limited by shares
• Will only be accredited by Cabinet Office if:
o
o
o
It has entered into a “social impact contract”
It was established solely for that purpose
The activities under the contract are not “excluded activities”
12
SOCIAL IMPACT CONTRACTORS CONTINUED
A social impact contract is one which meets the following requirements:
• One of the parties is a “contracting authority”
• Contract sets defined outcomes for “social or environmental purposes”, namely:
Relief for those
disadvantaged by age,
ill-health, disability,
financial hardship etc.
Relief or prevention of
poverty
Promotion of
employment, culture,
heritage or sport
Advancement of
training or education
Prevention of crime
Environmental
protection
Social housing or the
relief of the homeless
The provision of
community facilities
The promotion of
social inclusion and
cohesion
Advancement of
citizenship or
community
development
Improvement of
physical or mental
health
Provision of long term
care in relation to any
infirmity
Any other areas that may reasonably be regarded as analogous to, or within
the spirit of, any of the above
• Those outcomes must be capable of being objectively measured (and method of measurement
must be in contract)
• Progress must be assessed at intervals throughout the life of the contract
13
• At least 60% of payments must be conditional on achieving the defined outcomes
GROSS ASSETS
• Must be less than:
o
o
£15m immediately before the investment is made, and
£16m immediately afterwards
• Snapshot test i.e. only at time of investment
• Gross assets means any asset that would appear on balance sheet if one were drawn up on the
date of the investment in accordance with its usual accounting practices and policies – ignore all
liabilities
• If there is a group structure:
o
o
o
Aggregate gross assets
Ignore rights against other group companies
Ignore values of holdings in subsidiaries (e.g. goodwill arising on consolidation)
• If there is a risk of going over £16m immediately afterwards it is possible to have a split
completion (so SITR money goes in first, and non-SITR money goes in later)
14
UNQUOTED
• Unlikely to be an issue
• Means none of the shares or securities are:
o
o
o
Listed on a “recognised stock exchange”
Listed on a designated exchange outside the UK
Dealt in outside the UK by such means as may be designated by HMRC
• AIM is OK. It is also likely a listing on the social stock exchange would also comply
15
INDEPENDENCE
• The social enterprise cannot be a subsidiary of another company
• The social enterprise cannot be controlled by:
o
o
A company, or
A company plus persons connected with that company
• Cannot have in place (at any stage during the three year holding period) any arrangements by
virtue of which this requirement may be breached. So we need to check all other documentation
or arrangements to which the enterprise is a party to make sure of that
• “Company” here includes a trust:
o
o
A trust has control of another body if the trustees (or any of them) have control
A person has control of a trust if that person:
 is a trustee and:
 can exercise some of the powers of the trustees either alone, or with persons connected to
him/her
• This means that in a group structure the SITR money must be invested into the top company in
the group structure
• If the social enterprise has any members that are “companies” for these purposes, we need to
look at risk of “connection” with other members. This is particularly an issue if funds are investing
• Step-in rights i.e. in articles of association could be an issue
16
CONTROL OF OTHER COMPANIES
• If the social enterprise has holdings or interests in any other company or enterprise, we need to
make sure that the enterprise cannot control any other company (either on its own or in
conjunction with persons connected to the enterprise) unless:
o
o
that other company is a “51% subsidiary”, and
no other person could exercise control over that other company
• Cannot have in place at any stage during the three year holding period, any arrangements by
virtue of which this requirement may be breached
• Interests in joint venture companies can be an issue (especially 50:50 JVs)
17
NUMBERS OF EMPLOYEES
• The enterprise cannot have the equivalent of more than 500 full time employees
• Snapshot test on the date of the investment only . As a result it does not matter if this limit is
breached after the investment is made
• If there is a group structure it is an aggregate of employees of all subsidiaries
• Include directors
• Part-time employees count as a fraction on a “just and reasonable” basis
• Ignore employees on maternity or paternity leave, or students on vocational training
18
NO PARTNERSHIPS
• The social enterprise cannot be a member of a partnership
• Any subsidiary of the social enterprise that is at least 90% owned cannot be a member of a
partnership
19
THE TRADING REQUIREMENTS
• If the enterprise is a single company, its business cannot consist of either:
o
o
Non-trade activities, or
Excluded activities
• If the enterprise is a parent company, the business of the group as a whole cannot consist
of either:
o
o
Activities other than in the course of a trade, or
Excluded activities
• There is a materiality test to apply.
o
o
Less than 20% of overall activity is usually accepted by HMRC.
However in testing the materiality of any non-qualifying activity there is no one test or
benchmark. HMRC would look at the overall activity so might look at capital employed, assets
employed, numbers of employees or amount of management time dedicated to one activity over
another, profit, turnover etc.
• Charities and social impact contractors are exempt from this requirement.
o
This exemption simply allows charities to carry on other activities which are not qualifying trades
although they must still ensure that the trade in which the SITR money is to be employed is a
qualifying trade (provided none of the SITR money is applied in those other activities).
20
WHAT IS AN EXCLUDED ACTIVITY?
• Dealing in land, in commodities or futures or in shares, securities or other financial instruments
• Banking, insurance, money lending, debt-factoring, hire-purchase finance or other financial
activities
Lending money to other social enterprises is allowed.
Also “other financial activities” is not as wide as it may sound. It would involve financial
transactions in which the enterprise took part or all of the financial risk. But advising on, or
arranging, financial activities may be OK. So, for instance, acting as a SIFI may well qualify.
• Property development
This means the development of land where the social enterprise has (now or at any time in
the past) an interest in the land, and with the sole or main object of realising a gain from the
disposal of an interest in the land when it is developed.
Look at the intention of the parties – what is the purpose of holding that land?
The purchase of a property out of which the enterprise will trade is not property development
However buying a larger property and letting parts of that property out may well be a problem
– for tax purposes property letting is not a “trade” at all
Selling a property for a gain where that property has been used in the trade of the social
enterprise is not, automatically, property development
21
WHAT IS AN EXCLUDED ACTIVITY? CONTINUED
• Activities in the fishery and aquaculture sector
• Primary production of certain agricultural products (those covered by the CAP)
• The generation or export of electricity which is subsidized by the feed-in-tariff (or equivalent
subsidy overseas)
• Road freight transport for hire or reward
• Providing services or facilities to another business where that other business would not qualify for
SITR, and there is more than 30% common ownership of both the social enterprise and that
“other business”
22
WHAT CAN YOU INVEST IN?
Shares
• Look at:
o Returns on the shares
o Rights on a winding up
o When and how they are paid up
• The SITR shares cannot carry a right to a return which (either partly or wholly):
o
o
o
o
Is a fixed amount
Is at a fixed rate
Is otherwise fixed by reference to the amount invested
Is fixed by reference to a factor other than the successful financial performance of the social
enterprise
o Exceeds a “reasonable commercial” rate of return
• On a winding up:
o
o
Monies due to the holders of the SITR shares must rank after all debts (except debts where the
lender claimed SITR)
The SITR shares cannot rank above any other shares - so can rank alongside other shares and
also other SITR debt
• But what does it mean for a debt to rank alongside a share? How much does the shareholder
receive in comparison to the debt holder?
• SITR shares must be fully paid up in cash when they are issued. Late payment (even of part) = no
SITR. An undertaking to pay up the shares is not payment
• Date of issue here means the date the company’s register of members is updated to record the
share issue. Take care as the three year holding period runs from this date
23
WHAT CAN YOU INVEST IN?
Debt
• Cannot be charged or secured on any assets
• Rate of return cannot be greater than a “reasonable commercial” rate of return
• On a winding up all monies due to the holders of SITR debt must:
o Be subordinated to all other debts (other than, presumably, other SITR debts)
o Where the social enterprise has a share capital, rank equally with the lowest ranking class of share
• Again, the cash must have been advanced when the loan agreement becomes effective –
unless there are a series of drawdowns permitted under the loan agreement. Not clear
whether back-dating interest would be an issue – does that mean the debt was created
before the cash was received?
• Again, it’s not entirely clear how, on a winding up, debt ranks alongside shares
• It’s also not clear how this ranking, between debt and shares, would be documented.
Obviously, the debt instrument itself would contain a subordination clause to that effect. But
may also include something in:
o The articles of association
o Any shareholders or members agreement
o A deed of priority with other key creditors (e.g. bank)
24
OTHER KEY TERMS
No Pre-arranged Exits
• You cannot have in place any arrangements for the investment to be redeemed, repaid,
repurchased, replaced or otherwise disposed of within three years
• “Arrangements” is very widely defined, and includes non-legally binding understandings. So nothing
in side-letters, emails, conversations etc.
• Beware references to “third anniversary” – should be three years and one day
• For shares:
o If the shares are redeemable or withdrawable, the first date for redemption or withdrawal should be
three years and one day from issue
o Compulsory transfer provisions (e.g. on bankruptcy, termination of employment etc.) are usually
acceptable to HMRC
o “Drag and tag” rights are also usually acceptable to HMRC
o Anything in the shareholders or investment agreement around seeking some form of sale or listing
needs to be reviewed carefully
• For debt:
o Maturity date should be a least three years and one day after issue (and each drawdown must follow
that rule)
o Beware any default provisions – HMRC may accept solvency related default events but nothing more
than that (this will need testing with HMRC whose policy on what, if any, default events are
acceptable has yet to be clarified)
25
OTHER KEY TERMS
No Risk Avoidance
• Cannot have in place any arrangements to provide partial or complete protection for the investor
against what would otherwise be the risks attached to making the investment
• This would include:
o Third party guarantees
o Anti-dilution rights
o Any indemnity for loss of tax relief if SITR were withdrawn
• This does not include actions taken by the social enterprise which it might reasonably be expected
to do in “normal commercial circumstances” e.g. insurance
• Tax avoidance cannot be one of the main purposes of the investment
26
WHO CAN INVEST AND CLAIM SITR?
• Must be an individual – although investments can be held on behalf of an individual by a
nominee. There is nothing to stop other entities investing at the same time but they would not be
able to claim SITR
• Cannot have already claimed another relief on the same investment e.g. SEIS
• There are restrictions on being an employee, partner, trustee or paid director summarised on the
next page
• The investor cannot have a material interest in the social enterprise. See page 28 for more detail
27
INVESTORS WHO ARE EMPLOYEES, PARTNERS, TRUSTEES OR PAID DIRECTORS
• The investor cannot be:
o
o
o
o
An employee
A partner
A trustee (in the case of a charity that is a trust)
A paid director
of the social enterprise (or subsidiary)
• But there is an exception for a paid director who:
o Only becomes a director after he or she first invests in the enterprise
o is paid remuneration that is no more than reasonable for the services provided
• This would allow a paid director to be an employee (but an employee who was not also a director
could not be eligible). Contrast this with the position of an unpaid trustee of a charitable trust, who
cannot qualify for SITR
• This also catches “associates” of the investor – this includes spouse or civil partner plus parents,
grandparents, children, grandchildren, and also business partners
28
INVESTORS WITH A MATERIAL INTEREST IN THE SOCIAL ENTERPRISE
• The investor cannot have more than 30% of:
o The ordinary share capital of the social enterprise
o The loan capital of the social enterprise
o The voting power in the social enterprise
• Reference to loan capital means all loan capital – not just the SITR round of funding
• Loan capital does not include overdraft facilities
• Ordinary share capital is calculated by reference to the nominal value of the shares, not the
number or the amounts paid for them
• Include any investments held by the investor’s “associates” – beware investors who may also be
business partners in another business
• Also include anything which the investor (and associates) is entitled to acquire in the future (e.g.
under options)
• Have to check out the history here – you have to go back to the later of the date the enterprise
was first established, and the date falling twelve months before the proposed SITR investment. If
the investor has breached this 30% test at any time in this period, he or she will not be eligible for
SITR
• Also – could get caught out if other debt is repaid during the three year holding period (leaving an
investor with more than 30% of remaining loan capital)
• Finally – overriding requirement that the investor cannot control the social enterprise
29
ONCE YOU HAVE RAISED THE SITR MONEY, HOW CAN IT BE USED?
• Who can use the money?
• What can you use it for?
• How long have you got to spend it?
The next three pages summarise the rules in each of these three areas.
30
WHO CAN USE THE SITR MONEY?
• The money must be employed either by:
o the social enterprise that raised the money, or
o a “90% social subsidiary” i.e. a subsidiary that is:
 also a social enterprise, and
 at least 90% owned either by the enterprise itself or an intermediate holding company
• 90% ownership of a subsidiary here means that the social enterprise:
o Owns at least 90% of the share capital
o Can exercise at least 90% of the voting power
o Would, on a winding up, be entitled to receive 90% of all assets available for distribution to equity
holders
o Is entitled to receive 90% of any profits available for distribution to equity holders
• We also have to ensure that:
o No other person has the ability to exercise control over that subsidiary, and
o There are no arrangements in place by which we would fail any of these conditions in the future
• Need to check for complex group structures – we cannot have more than one intermediate
holding company in-between the enterprise that raises the SITR money and the subsidiary that
uses the money
• If a subsidiary will use the money, typically this would be loaned to it by the parent by way of an
inter-company loan
31
WHAT CAN YOU USE THE MONEY FOR?
• The SITR monies must be used in a qualifying trade, or the preparation for a qualifying trade.
This applies to all social enterprises (including SIBs and charities)
• The SITR monies must be used for the purposes for which they were raised (or, in the case of a
social impact contractor, in carrying out the social impact contract)
• Money cannot be used in acquiring shares or stock in another entity or enterprise
32
HOW LONG HAVE YOU GOT TO SPEND IT?
• Social impact contractors have 24 months to spend all of the SITR money
• All other social enterprises have 28 months
• If there is a concern the social enterprise may not employ the money within these time limits,
consider holding the SITR monies in a separate bank account to provide evidence as to how, and
when, that money was employed
33
INVESTOR PROTECTIONS
• Investors claiming SITR might want to protect their position by seeking warranty cover, and also
imposing obligations on the social enterprise in the investment documentation
• This may include obligations such as:
o
Not to do anything which would result in the SITR being withdrawn or reduced such as:
Changing the nature of the trade
Redeeming shares or returning value to
investors
Ceasing to be a “social enterprise”
Amending constitution or loan documents to
breach rules on ranking or subordination
Acquiring interests in other group companies
in circumstances which breached the
subsidiary holdings rules
Repaying SITR debt within three years
o
o
To spend the SITR monies only in the qualifying trade and within the relevant time limits
To file the claim for SITR with HMRC (the “compliance statement”) as soon as possible, and to
deal with any responses from HMRC
o In the case of social impact contractors:
 Not to amend the social impact contract in a way which would breach the requirements of
SITR
 To comply with all reporting requirements to Cabinet Office
o To provide regular reporting both on financial performance and also on social impact/outcomes
achieved
o If necessary, that the SITR cash be held in a separate bank account so as to be able to prove
exactly how, and when, that cash was spent
• Investor can also seek the “normal” protections (not SITR specific) such as:
o
o
The requirement to obtain investor consent for certain key reserved matters
The right to appoint a director/trustee to represent the interests of the investors on the Board
(but be careful if that representative is also an investor – it may disqualify them)
34
PROCESS
• Term sheet
• Draft investment documentation
• Seek advance assurance from HMRC
• Complete the investment (making sure monies are all advanced on the day of completion, unless
the loan agreement provides for drawdown in tranches)
• Submit compliance statement to HMRC
• HMRC issues compliance certificates (one for each investor) to the social enterprise
• The social enterprise completes these and issues them to the investors
• Investors include details of the investment in their self-assessment tax return (bear in mind right
to carry back to previous tax year)
• Social impact contractors also need to seek accreditation from the Cabinet Office (see page 36
for more detail)
35
ADVANCE ASSURANCE FROM HMRC
• Not compulsory. But highly advisable because:
o
o
o
o
o
Mistakes cannot be put right
Some of the issues here depend on HMRC custom and practice which can change (without
warning)
This is a new tax relief, so custom and practice will evolve and some aspects of the legislation
will need clarifying
Investors likely to insist on it as a pre-condition of investing
Makes the post-completion process (submitting compliance statement etc..) easier
• HMRC will usually accept that they are bound by their response. But only to the extent that the
information provided was accurate and complete and did not omit anything which might have a
bearing on the rules for eligibility for the relief
• Make it as complete as possible. If not, it isn’t worth the paper it’s written on
• Include all of the investment documentation. Given the complexity of the rules it is always
worthwhile. For example you’d want to ensure that nothing in the investment documents might be
taken as some form of “risk avoidance” (i.e. the investors are taking too much protection)
• Make sure you include details of the group structure and identify clearly how, and by whom, the
SITR money is to be spent
• Submit by email. It takes three to four weeks for a response
• Build that into your timetable
• HMRC will not usually comment on the circumstances of an individual investor. Individuals may
need their own independent advice
36
COMPLIANCE STATEMENT
• Having an advance assurance from HMRC does not entitle any investor to claim the relief
• To do this, the enterprise must submit a “compliance statement”. This is a form which sets out
details of the investment, and the investors. It is in a standard format available on HMRC’s
website
• For social enterprises other than social impact contractors, the trade must have been carried on
for at least four months before the form can be submitted. Social impact contractors can submit
the form immediately following completion
• The form must be submitted no later than two years after the end of the tax year in which the
investment is made. So if an investment were made today, the last date for filing the statement
would be 5 April 2017
• That time period is longer if the trade has been running for less than four months, or has not yet
commenced, by the end of the tax year in which the investment is made. In those circumstances,
the two year period to file the form runs from the end of the first four months of trading. So if an
investment were made today, but the qualifying trade did not begin until, say, 1 May 2015, the
last date for filing the statement would be 31 August 2017
• The legislation does not contain any “reasonable excuse” for late filing. And without the filing, the
tax relief cannot be claimed.
• If there are multiple drawdowns of debt, a compliance statement is needed for each drawdown
37
SOCIAL IMPACT CONTRACTORS
Accreditation
• In addition to all of the above, social impact contractors also need accreditation from the cabinet
Office. Without it, they are not “social enterprises”. And if they are not “social enterprises”, investors
cannot claim SITR
• Regulations and guidance were published on 7 November 2014
• Difficulty is that the accreditation can only be given once the social impact contract has been
signed. But the contract will only be signed once all the funding is in place. And investors are
unlikely to complete the funding until they know for sure that the accreditation is in place
• No perfect solution to that problem
• HMRC have confirmed that they will give advance assurances that are conditional on getting
subsequent accreditation.
• Cabinet Office have also confirmed (verbally) that they are willing to look at the paperwork in
advance of completion and would be willing to give some sort of comfort that if the documents are
signed in the form submitted to them, the accreditation will be given. However that is non-binding.
So there will be an element of risk
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SOCIAL IMPACT CONTRACTORS CONTINUED
Accreditation
• Could de-risk that if there are other investors who are not seeking SITR. Could complete that
funding round first, and then have a second close of SITR funding after accreditation is given. But
this still leaves the risk of a funding gap if accreditation is refused
• Application for accreditation must be made within twelve months of signing the social impact
contract. Please bear in mind that in the accreditation process you must provide written evidence
that the social outcomes will have a long term impact. It is not enough that a Govt. Department
believes that it will, you have to show it
• Accreditation can be back-dated
• The social impact contractor must provide an annual report to the Cabinet Office confirming it still
meets all requirements for accreditation and there have been no material changes to the contract or
the activities of the SPV
39
CASE STUDIES
• In the remaining pages of these notes we have set out two case studies. Both are hypothetical.
• In each case we have set out the suggested facts and then describe the issues that need to be
considered in deciding whether or not the social enterprise in question may qualify for the relief.
• Again, these are not complete “answers”. Nor do we claim to describe every issue that might
arise on an SITR investment. But we hope you find practical examples helpful.
40
CASE STUDIES
Case Study One
• Company A is a community interest company limited by shares
• Company A has a 75%-owned subsidiary (a company limited by shares) that has a contract with
the local authority to provide debt management and financial advice to the less well-off. The local
authority owns the remaining 25%.
• The subsidiary needs £350,000 to purchase the freehold of the office building which it currently
occupies under a lease
• The subsidiary decides to raise this money by way of an issue of shares on the following terms:
o
o
The shares are issued at £1 a share
They are non-voting shares. However they convert into voting shares if:
 Company A fails to redeem them on the agreed date, or
 Any change is proposed to the right attaching to the shares
o They carry a preferential right to an annual dividend equal to 10% of the profits
o The shares are redeemable at £1 a share on the third anniversary of the date they are issued or, if
earlier, on a winding up
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CASE STUDY ONE
Issues To Think About
The issuer:
• The subsidiary cannot raise the finance as it is controlled by another company.
• Company A must raise the finance. It will then transfer the money by way of inter-company loan
The limit:
• Exceeds the cap
• Could issue £275K under SITR and balance with no tax relief
Trading activity:
• The subsidiary is getting paid by the LA, so probably OK
• This is not “financial activities”
Preference on a winding up:
• Not allowed
Guarantee of value on redemption:
• Not allowed
Return of 10% of profits:
• Probably OK, but check with HMRC they regard this as reasonable
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CASE STUDY ONE
Issues To Think About
Repayment date:
• The fact that the shares are redeemable is OK, provided the date for redemption does not fall within
the three year holding period. So need to extend this by one day.
• Need to check with HMRC that the right to redemption on a winding up within three years is not a
“pre-arranged exit”
• Also, just consider the position if the social enterprise raises further SITR funds at a later date – the
redemption of shares by a company can cause withdrawal of SITR for investors who invest at a
later date
Subsidiary:
• Must be 90% owned
• Must, itself, be a social enterprise
Is this Property Development?:
• No
Voting rights:
• Shares do not need to be voting shares to qualify for SITR
• But if they do carry voting rights we’d need to check that they do not inadvertently:
o
o
Disqualify any investor form claiming the relief (under the 30% rule) or
Result in a breach of the “independence requirement”
43
CASE STUDIES
Case Study Two
• Charity B is a trust. Its objects are the relief of poverty, particularly focusing on the homeless.
• Although charity B is predominantly a grant-making charity, it runs a café out of the ground floor of
its freehold headquarters in which the homeless are given apprenticeships and training in order to
help them get back into the workplace. The Charity Commission has accepted that this is primary
purpose trading by the charity.
• The café’s kitchen is in need of refurbishment. The charity decides to fund the refurbishment by
raising £200,000 through the issue of loan stock on the following terms:
o
o
o
o
o
o
o
o
o
Obligations to repay are unsecured
A local company that regularly supports the charity has offered to guarantee repayment of the
principal
Interest is payable at 8% p.a. six-monthly in arrears
The principal is repayable after four years, with a redemption premium of 10%
The loans become repayable earlier if:
 The charity becomes insolvent or any other borrowings become repayable early
 SITR relief is withdrawn in respect of the loan stock
 The charity fails to pay interest when due
Loan stock holders will have the right to appoint one representative to the Board of Trustees
If the charity fails to repay the loan stock on the due date, they will have the right to appoint a
majority of trustees to the Board
The loan stock is freely transferable
The loan stock is stated to rank behind all other creditors of the charity, and can only be repaid
when all other unsecured creditors have been repaid in full
44
CASE STUDY TWO
Issues To Think About
The fact that it's loan stock:
• Irrelevant – can be loan stock or a simple loan agreement with multiple parties
Trading activity:
• The fact the charity engages mainly in non-trading activities does not affect SITR eligibility
(because it is a charity)
• The trade itself is qualifying
• The money will be employed in the chosen trade
Rate of return:
• Must be no more than commercial – 7% plus 10% redemption premium likely to be OK (but need to
test with HMRC)
Guarantee supporter of charity:
• No. This is a “risk avoidance” measure
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CASE STUDY TWO
Issues To Think About
Repayment terms:
• OK
• Except for one of the default events (withdrawal of SITR)
• But could have early repayment if that event occurred in year 4
Subordination:
• Subordination only applies on a winding up. This clause is impossible to enforce as drafted.
Right to appoint trustee representative:
• OK provided the trustee who is appointed is not also an investor (mismatch here with companies)
Right to swamp the Board on a default:
• May be OK. Need to check whether that breaches the “independence requirement” (which will
depend on whether or not HMRC accept the default events that might allow step-in) or whether any
one investor (plus associates) breached the 30% limit
Transferability:
• Irrelevant – although an investor who sells within three years would lose the relief
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CONTACTS
Big Society Capital
Simon Rowell
Strategy and Market Development Director
t: +44 (0)20 7186 2525
[email protected]
Neil Pearson Consulting Limited
Neil Pearson
Tax Consultant, specialising in SITR and the venture capital schemes
t: +44 (0)203 700 4056
m: +44 (0)776 999 4210
e: [email protected]
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www.bigsocietycapital.com
Big Society Capital Limited is registered in England and Wales at Companies House number 07599565. Our
registered office is 5th Floor, Chronicle House, 72-78 Fleet Street, London EC4Y 1HY. Big Society Capital is
authorised and regulated by Financial Conduct Authority number 568940.
These notes do not constitute an offer or an invitation to buy or sell or a solicitation of an offer or invitation to
buy or sell or enter into any agreement with respect to any security, product, service or investment. Any
opinions expressed do not constitute investment advice and independent advice should be sought where
appropriate.