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SITR could be a game-changer for social enterprises like mine. But it needs to be simplified
Action Homeless CEO Mark Grant writes why he believes simplifying Social Investment Tax Relief (SITR) could be a game-changer that would allow them to raise flexible, patient and risk-tolerant capital, which they could use to provide more affordable housing to people affected by homelessness.
Action Homeless in Leicester provides housing to 500 individuals each year. Over the past 5 years, we have brought 20 empty properties back into use, with the aim of providing good quality, affordable housing and giving people the security of a permanent home.
Our initial purchases were funded through grants and surplus reserves and as these ran out we started to look at how social finance could help us. But, of course, keeping rents affordable also means we were limited in the returns that we could offer investors.
Why Social Investment Tax Relief (SITR) is attractive to social enterprises like mine
We had seen the emergence of commercial residential property investment funds, which are invested into directly by the public. They provide potential investees with patient capital and uses rental payments to give investors a good return. Similarly, Social Investment Tax Relief can be used by social enterprises and charities to raise investment from individual investors that offers a window of at least three years before repayments start.
However, the biggest draw of SITR was that it could subsidise investment returns, enabling us to meet our main objective of keeping rents affordable to tenants. It does this by offering investors a 30% tax break on their investments therefore off-setting the risk of investing.
Despite its advantages, why the restrictions around SITR led us not to use it
There are a number if restrictions around the use of SITR. Most pertinent to our case is that SITR can’t be used against residential property investment.
But! We aren’t actually buying properties to sell on… Rather, we are acquiring them as assets for us to deliver our core business: supporting homeless people. Indeed, we intend to retain the properties in perpetuity.
With this argument, we proceeded to have discussions with HMRC. However, they still considered our business to be split into two: receiving and paying rents; and providing services. The advice they offered was that the services part could be a “qualifying trade” under SITR, but we would have to apply for advance assurance to get an opinion. Advance assurance is the process organisations who want to use SITR can go through if they want to test and check that investors will be able to claim the tax relief.
Another restriction of SITR is that there is a cap on how much organisations older than seven years can raise using it. This is set at £270,000 due to rules around State Aid. Taking this into account, we decided it simply wasn’t worth the risk given the amount of time needed to set-up and the level of investment we could raise.
Frustratingly, the number of commercial crowdfunding and peer-to-peer platforms like Property Partner have continued to grow, demonstrating that there is real demand for such a scheme. And we have spoken to a number of investors who feel that an ethical vehicle would be very attractive.
SITR needs to be flexible enough to benefit more organisations who want to grow their impact and enable more investors to do good with their money
We believe SITR could be a game-changer. But it needs to be simplified and take into account the core social purpose of what the investment is being used for, rather than applying rules designed for property speculators. This would then allow us, and other charitable housing organisations, to scale up our impact by creating more new homes to tackle the homelessness in our communities.
Incentives like SITR must be flexible enough for us to compete. If not, we will never get any meaningful level of public investment into our sector and we will never achieve any real impact. Are we asking for preferential treatment? Yes we are!
Many social enterprises are frustrated that the social investment market seems to be focused on offering us expensive loan finance. But the current government consultation on SITR is a chance to influence it and make it a much more flexible and cost-effective way of raising investment direct from the public.
Consultations always seem like out of reach, central government-motivated processes. We might even be cynical enough to believe our views won’t make a difference but we can’t protest yet do nothing.
So, at Action Homeless, we will be taking the time to let government know our views and if you have a strong opinion on being able to access cheaper, riskier and patient investment, I would encourage you to take ten minutes of your time to do the same with the hope this will be time well spent.
Learn more about SITR and what you can do to make it work better
Big Society Capital is gathering evidence to inform the government’s consultation on SITR. If you’re a social enterprise or charity, respond to our short poll about your trading plans & finance needs. You will also be able to access a template response form to the consultation.
If you are an investor, you can also find a template response form here.
The consultation period closes on 17 July 2019. To see the consultation in full, visit: Social Investment Tax Relief: Call for Evidence.
To find out more about how SITR works, eligibility and the resources available around it, visit GET SITR.