The United Kingdom moved forward with legislative change
designed to incent social enterprise – with the introduction
of "Community Interest Companies" in 2005 – long
before Canada saw similar legislation being introduced in both
British Columbia and Nova Scotia.
The UK has taken another step to its support for social
enterprise. Tax relief for social investment has been previously
discussed in the UK, but this month Chancellor George Osborne of
the U.K. Government announced in Budget 2014 the rate for the
previously proposed tax relief for social investment. In its
Budget documents, the government stated:
The government wants to encourage new investors to put money
into social enterprises. The government will set a rate of 30%
income tax relief – the same as the rate for the Enterprise
Investment Scheme (EIS) and Venture Capital Trusts (VCTs) –
for the Social Investment Tax Relief (SITR). This rate will allow
eligible social enterprises to receive a maximum of around
£290,000 investment over 3 years.
Key to this announcement is the definition of eligible social
enterprises. The proposal limits the benefits to investments
in community interest companies, community benefit societies and
charities. Co-operatives registered as industrial and
provident societies (IPSs) or companies limited by guarantee (CLGs)
will not generally be considered "eligible social
This investment tax credit is similar to other tax credits
available to investors under the UK tax regime.
According to some UK groups who are very supportive, the measure
could unlock billions and fuel UK's growing social economy.
Others are concerned about the restrictions attached.
Certainly, the new 30% tax relief has the potential to boost
investment in social enterprises and trading charities.
Social enterprises around the world have been looking for this
kind of tax incentive to add to the various mechanisms that
governments are introducing to provide incentive for triple bottom
line activities. Proponents of social enterprise in Canada
have long stated that without appropriate tax incentives,
legislation to allow for new corporate structures such as the
community contribution company (in BC) or community interest
company (in Nova Scotia) will not be successful. This
argument will now be put to the test.
The UK Tax Credit is limited in scope. The rules introduced
provide that to qualify for the SITR, an investment must be in an
eligible social enterprise, for an eligible activity, and by way of
an eligible investment. More particularly:
1. An eligible social enterprise must be in a community
interest company, community benefit society or a charity.
Investment in certain carefully structured social impact bonds will
2. An eligible activity will be the carrying on of a
trade other than a specific list of excluded trades which includes
dealing in certain types of assets and commodities; property
development; certain financial activities; certain agricultural
activities; and road freight transport; and
3. An eligible investment will be investment in equities
or high risk debt which satisfy a number of criteria, including
that the investment would:
not be secured or guaranteed;
not have priority and must be the lowest-ranking on winding-up
of the social enterprise;
not provide investors with rights to require early repayment;
not offer returns that exceed a commercial rate of return.
As noted above, the maximum amount that can be raised by the
social enterprise by way of qualifying investment is £290,000
investment per organisation over a three year period.
Canadian governments are interested in finding new ways to solve
old problems. Many of the provinces and the federal
government are currently spending time reviewing the existing
corporate legislation to consider whether a new form of corporation
is needed in this sector to promote social enterprise. In
addition, ongoing government cutbacks are requiring long standing
organizations to consider how to do things differently.
Tax incentives have long been discussed as a tool to assist the
growth of social enterprise activity. Whether it will work
without creating a significant shift of funding from the existing
non profits and registered charities to a new form of entity is
difficult to determine. What we know is that the pendulum has swung
in favour of this approach. The UK is the first government to
formally announce this form of tax credit for investors. We
expect other governments will be watching this initiative.
Time will tell us whether this is an effective tool or too
cumbersome to make a significant difference.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).