Will govt proposal on tax relief for investors in social enterprise create first legal definition of social enterprise?

The government has just launched a consultation exercise on the setting up of a new tax relief scheme for private investment in social enterprise.  If adopted, the scheme would become operational from 2014. Further information hereThe consultation document here.

The consultation is open until the 6th September 2013). Nominations to an official working group are also being sought by 20th June 2013.

Lots of social enterprises will consider speculative investment an almost complete irrelevance to  what they do and how they operate. For many, what they do is so hard and so commercially challenging that no one in their right mind is ever going to consider them an investment opportunity. Others will object to the very principle of paying dividends to private investors.

These are perfectly valid views and ought to be part of this debate. However, the real significance of this tax relief proposal I believe is an almost accidental one: it could result in what eventually becomes the first legal definition of social enterprise.

Here’s why. The government recognises (p.12, 3.6) that in order to be a fair, the legislation must ensure that those receiving tax relief are investing in bona fide social enterprises. As no legal definition exists it therefore proposes that the tax relief legislation should define “social enterprise” by reference to three specific  legal structures where business regulation already exists:

 

This could be a good thing, adding weight and public credibility to the social enterprise “model”and distinguishing it more clearly from other kinds of not-for-personal-profit organisations.

But should charities be included? (It would seem likely that even many charities won’t think they should be given disagreements in the charity sector regarding social enterprise — see this post). The consultation document  raises very valid concerns regarding the advisability of including charities in the definition.

I think it would be better if the definition excluded charities.

This would encourage those charities with significant social enterprise activities (i.e. trading activities) to establish these separately (probably as Community Interest Company trading arms), thus making a much clearer distinction between their charitable and their trading activities. This would be helpful for the social enterprise sector, healthy for charities and clearer for the public. It would also address the concerns identified in the consultation paper.

Following this logic, charities would remain part of the wider social economy, but not all charities would be social enterprises. And those that are would have explicitly chosen a legally recognised structure for all or part of their business accordingly.

It seems win-win to me — at least until the legal specialists demolish this argument…

 

Birmingham UK. Freelance research, evaluation and policy consultant specialising in social enterprise and the third sector. I maintain the BSSEC blog and website
  1. Heidi Harris Reply

    I totally agree – would be great to treat charities separately – but for different reasons…..charities get relief from corporation tax on any trading activities providing they are primary purpose trading ie linked to their charitable objects, or if it isn’t they can generate up to £50,000 of income from other trading activities without paying any corporation tax. Compare that to a CIC, which is trading and has to pay corporation tax on any surpluses it generates at 20%. Not a level playing field for pricing services or costing contracts is it?

    Charities would still be able to get around paying tax, as they would potentially Gift Aid any profits in their CICs back to the charity arm, but it would give clarity about their charitable activities and their trading activities.

    Another issue in having a definition is that sole traders, schools, universities and other legal structures who class themselves as social enterprises would be excluded. This may prevent people from doing things for social, economic or environmental good if they are forced to have a specific legal structure. There are around 7,000 CIC’s and fewer IPS’s, so with a definition that excludes all other legal structures the social enterprise sector goes from around 70,000 social enterprises to about 11,000 overnight, making it a tiny niche sector within what was already a small sector!

  2. Alun Severn Reply

    Thanks, Heidi — excellent points. Personally, I do wonder whether a smaller sector (or, to be accurate, a ‘definitionally smaller’ sector) would necessarily be a bad thing….

Leave a Reply