Being able to offer tax relief on community shares has shown a demonstrable increase in the amount of investment in societies. The size of the relief (in the case of EIS and SITR, 30% of the amount invested in community shares can be offset against the investor’s tax liabilities, or in the case of SEIS, 50%) plus the relatively straightforward way to apply, makes this an attractive option for societies and it is worth spending the time exploring whether your offer may qualify for tax relief, learning about the restrictions, and factoring the application process for advance assurance into your time-scale.
Enterprise Investment Scheme (EIS)
Although EIS is primarily targeted at private companies limited by shares, societies are also eligible, subject to the same restrictions that are imposed on companies, requiring share capital to be fully at risk, without any guaranteed or pre-arranged exits for the investor. This means that a society must have the powers to suspend or refuse applications to withdraw share capital.
In order to be eligible for EIS, enterprises must be engaged in a qualifying trading activity. Most trades qualify, but some do not and these are referred to as “excluded activities”. Among the excluded activities are some which are very popular with community enterprises, such as farming, market gardening, woodland management, and property development.There is a restriction preventing the investment funds from being used to acquire existing businesses or business assets. This means that many community led buy-outs of existing enterprises such as shops, pubs and football clubs are not eligible for EIS.
There are other restrictions too, that you need to be aware of, so for detailed guidance please visit https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction
Seed Enterprise Investment Scheme (SEIS)
The rules for SEIS have been designed to mirror those of EIS because it is anticipated that enterprises may want to go on to use EIS after an initial investment under SEIS. The same rules apply to the definition of qualifying trades, restrictions on connected persons, relationships with subsidiary entities, and the period shares must held for. As with EIS, shares must be held for a minimum of three years, must be paid up and fully at risk, with no preferential rights to any form of financial return or withdrawal.
The enterprise must have been trading for less than two years when the SEIS shares are issued, currently held gross assets must not exceed £200,000 in value, and there should be no more than 25 employees. The tax relief available through SEIS is 50% and the annual maximum amount an individual can invest in SEIS shares is £100,000. Investors who are reinvesting gains are exempt from capital gains tax for half of the reinvested gain, up to the annual maximum of £100,000.
There is a maximum cumulative investment per company/society for SEIS of £150,000, whereas the limit for EIS is £5 million. This means that for new societies issuing share offers with targets at or above the £150,000 mark, some careful thought has to be given as to which scheme to go for. For detailed guidance, see https://www.gov.uk/seed-enterprise-investment-scheme-background
Social investment tax relief (SITR)
SITR was launched in April 2014 with the aim of encouraging investment in social enterprises by unconnected individuals. The rules for SITR mirror those of EIS and SEIS in some but not all areas. SITR is available for both debt and equity investment in social enterprises. The eligibility of debt finance makes SITR radically different from EIS and SEIS, both of which only apply to equity investment.
SITR defines social enterprises as charities, community interest companies and certain types of community benefit societies (those that have an asset lock). Other eligibility criteria include a requirement that the social enterprise must not have more than 500 employees or more than £15m in gross assets.
The tax relief for eligible individual investors is set at 30% and there is a maximum amount a social enterprise can raise, calculated by a formula based on state aid de minimus rates - at current tax relief rates, this works out as €344,827, or just over £280,000.
As with SEIS and EIS, the scheme is administered by the SCEC, including the provisions for advance assurance.
For detailed guidance, see https://www.gov.uk/government/publications/social-investment-tax-relief-guidance-for-social-enterprises
EIS is administered by the Small Company Enterprise Centre (SCEC) at HMRC. The SCEC is responsible for deciding whether an enterprise and its share issue qualify for the scheme. It does this by checking that the enterprise’s accounts, governing document, business plan and other documentation relating to the share issue, comply with the requirements of the Scheme. The SCEC operates an advance assurance scheme, whereby an enterprise can submit their plans and documents in advance, using the form EIS(AA), and the SCEC will advise on whether or not the proposed share offer is likely to qualify. Advance assurance is not mandatory; an enterprise and its investors can still qualify for the scheme after the shares have been issued, but potential investors are likely to take comfort from advance assurance when deciding whether to invest.
Full details of how the schemes are administered can be found on the government website, and the Community Shares Handbook has an entire chapter on tax treatment for societies, with more detail on all three tax schemes: http://communityshares.org.uk/resources/handbook/introduction-4