We are delighted to see that the government has created a level playing field between commercial and social enterprises by setting a rate of 30% income tax relief for the Social Investment Tax Relief (SITR). This is the same level as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
How can the social investment market utilise this relief?
By working with established commercial players! The social investment and finance intermediaries (SIFIs) are comparatively strong at origination of SITR investment opportunities. We are comparatively less strong in distribution, however.
The commercial market participants already highly active in EIS, Seed EIS and VCTs are not particularly familiar with SITR. They tend to call it Social EIS (a better name actually!).
We need to find partners in the commercial world to enable effective utilisation of the SITR. We have three important constituencies to engage with:
- Seed EIS firms: Given that currently the amount on which SITR is available for an eligible investee (c. £290,000) is on the same level as for Seed EIS (£150,000), investment firms in the Seed EIS space have a wealth of experience of how to sell and manage small investments with a tax wrapper. Notable companies in the Seed EIS space are Jenson Funding Partners, Mercia Fund Management, and Oxford Technology, to name only a few. We need to team up to combine origination with distribution.
- EIS firms: Whilst Seed EIS is only a couple of years old, EIS has been running for almost 20 years by now, and the market is estimated to be just short of £1 billion in size. Highly regarded players in this space would include big firms like Octopus Investments, but also smaller managers like MMC Ventures and Ingenious Media. With the amount eligible for relief increasing through the EU application and approval process, these houses will take note of SITR. We need to team up to combine origination with distribution.
- Crowdfunding: Equity crowd funding sites are the newest category of intermediaries making use of the Seed EIS and EIS tax wrappers. At the moment there are three authorised platforms with an emerging track record of aggregating funds over the net for enterprises: Crowdcube, Seedrs and SyndicateRoom. Given that SITR will be applicable to unsecured debt products as well, peer-to-business loan platforms should also take note of SITR. The tax relief should enable loan platforms to provide an important stimulus (30% upfront discount!) on loans to eligible social enterprises. Leading names in the loan crowdfunding space are: FundingKnight, Assetz Capital and reinvestingsociety.com.
In nature, there are many examples of symbiotic relationships, i.e. situations where different species live in mutually beneficial relationships with each other. For instance, ants milk aphids for honeydew and in return ants protect and enhance aphids’ living environment.
We SIFIs, the ants of the investment world, need to milk the aphids (i.e. EIS, Seed EIS and crowd funding types) for their distribution capacity. In return, we ants can enhance the aphids’ world by providing more origination deal flow. Long live mutually beneficial relationships!
By Annika Tverin, Director (and insect enthusiast) at Social Finance