SITR: a brief guide for charities and social enterprises

17 May 2017

Recent improvements to SITR mean that it is likely to be particularly attractive to social enterprises and operational charities seeking investment.

Social Investment Tax Relief (SITR) was introduced in 2014 to encourage individuals subject to UK tax to invest in charities and social enterprises (CSEs) through equity investment or unsecured loans in a tax efficient manner. Further improvements to the scheme have been announced to widen its approach, albeit subject to certain conditions. Due to the nature of the conditions, SITR is likely to be particularly attractive to social enterprises and operational charities (i.e. those engaged in some form of primary purpose trading activity) seeking investment.

If all conditions are satisfied, an individual who makes a qualifying investment can deduct 30% of the amount invested (up to a maximum annual investment of £1m) from their income tax liability in that tax year. There is no Capital Gains Tax (CGT) on gains arising from the disposal of an SITR qualifying investment. Furthermore, the reinvestment of gains, which would otherwise be chargeable and that arise during the period 6 April 2014 to 5 April 2019, into SITR investments can defer a CGT charge until the SITR qualifying investment is sold, cancelled, redeemed or repaid. Any deferred gain will also crystalize if the CSE ceases to meet the requirements of the scheme.

To obtain these tax advantages both investors and the CSE must satisfy a number of conditions. We have set out some of the key features below, but please note that this list is not exhaustive and expert advice should be sought on your own particular circumstances. 

Investor conditions

Three year holding requirement: tax relief is withdrawn if the individual investor does not hold the investment for at least three years. 

No connection: investors and their associates (which includes a business partner, a spouse, parent, grandparent or child (amongst others)) must not:

  • be a partner or trustee of the CSE or any of its subsidiaries, an employee of the CSE or any of its subsidiaries or a paid director of the CSE or any linked company; or
  • control or hold more than 30% of the ordinary share capital, voting rights or loan capital of the CSE or any company which is or has, at any time during that period, been a 51% subsidiary of the CSE, during the period from the date on which the CSE was incorporated or established or, if later, one year before the investment is made until the end of the three year mandatory investment period.

CSE conditions

  1. Qualifying CSE: the CSE must be a charity (including a charitable trust), a community interest company, a community benefit society or a company limited by shares that has been accredited as a social impact contractor.
  2. Not listed: the CSE must not have securities listed on a recognised UK exchange or designated overseas exchange. AIM listed companies may qualify as AIM is not a recognised exchange. 
  3. Maximum gross assets: the CSE must have no more than £15m in gross assets immediately before and no more than £16m after the investment is made.
  4. Maximum number of employees: it was announced that the CSE must have 250 or fewer employees (not including volunteers) from the 6 April 2017 (reduced from 500). However, due to the upcoming election the legislation making the change has not become law at this stage although we assume that it will do if the government remains the same. 
  5. Qualifying purpose: the investment must have been made to raise money for a qualifying trade, which must be run on a commercial basis with a view to profit and not consist of any excluded activity (see below) to a significant degree. The qualifying trade must be carried on by the CSE or its 90% subsidiary, provided that the subsidiary is also a qualifying CSE. This requirement means that charities that are not engaged in any primary purpose trading activities themselves and either do not have a trading subsidiary or have a trading subsidiary that is structured as a normal company (rather than a community interest company, for example) will not be able to qualify for SITR. For this reason we believe that social enterprises, operational charities directly engaged in primary purpose trading*, and charities which have social enterprise subsidiaries engaged in trading activities, are more likely to benefit from the relief. * Primary Purpose trading is trading (i.e. providing goods or services on a commercial basis) that directly furthers the charitable purposes of a charity, and can therefore be carried out by the charity with the benefit of exemptions from tax on the trading profits. Examples of primary purpose trading include a charitable independent school charging pupils, or a theatre charging for admission to its performances.
  6. Excluded activities: include, amongst other things, finance, property development and energy generation activities.
  7. Independence requirement: the CSE must not be a member of a partnership nor be controlled by, or be a 51% subsidiary of, another company or another company and persons connected with it. 
  8. Qualifying subsidiaries: the CSE must not control any company that is not its 51% subsidiary from the date when the investment is made until the end of the mandatory investment period of three years. 
  9. Maximum investment qualifying for SITR: it was expected that the Finance (No. 2) Bill would introduce from 6 April 2017 that a CSE can receive £1.5m over its lifetime if its first investment is raised no later than seven years after trading commercially for the first time. This amendment has now been removed from the bill however we expect this change to be introduced in due course if the government remains the same after the election. The current maximum amount that a CSE can receive in SITR investments therefore remains at the previous level of €344,827 in any three year rolling period.

A CSE can seek advance assurance from HMRC that it satisfies the necessary conditions. When seeking advance assurance it is important to provide full information and, if the situation is likely to alter, you should notify HMRC of such proposed changes before putting them in place. We have been informed by HMRC that due to the election next month they are limited with regard to the assurances that they can provide as they too are waiting on the outcome. 

Further guidance on SITR is available on the HMRC website.

This article is designed to highlight the key features of SITR and is not intended to be a comprehensive guide. The rules can be complicated and professional advice should be sought. For further information on SITR, please contact Karl Pocock, Head of Corporate Tax, and for further information on charity trading or other charity law and regulatory queries, please contact Liz Brownsell or another member of Birketts' Charities and Social Enterprise Team

The content of this article is for general information only. Law covered as at May 2017.


Liz Brownsell

Senior Associate, Co-Head of Charities and Social Enterprise

+44 (0)1473 406383

+44 (0)7525 735802