With government reforms driving more investment capital into social enterprises, it’s high time charities considered developing more trading income, says Stephen Lloyd
This year will see a new dawn for social enterprises – by which I mean entrepreneurial charities undertaking trading activities and non-charities such as Community Interest Companies (CICs) and Community Benefit Societies with an asset lock (“Bencoms”).
Most social enterprises using this definition are charities – about half of all charities according to an NCVO survey rate themselves as social enterprises. What is changing is the availability of tax reliefs for investments in social enterprises, which can cover unsecured loans to CICs Bencoms and charities and investment in shares in CICs limited by shares and Bencoms. The maximum amount raised will be capped at approximately £600,000 per organisation. Only organisations with fewer than 500 employees and assets less than £15m are eligible. Investors will get income tax, capital gains and inheritance tax relief.
The government has also said it will loosen controls on CICs, abolishing the 20% individual dividend cap and increasing permissible performance related interest to 20% p.a.
These reforms should help drive new investment capital into social enterprises. That said, and despite these tax reforms, I do not think that all charities can move to developing trading income. It all depends what market they are in. Many charities will want to retain purely voluntary income on the basis that this fits what they do and they are able to collect sufficient donations – voluntary income – to support their efforts. If they can, the model ain’t bust.
On the other hand, we have to recognise that there has not been a great growth in voluntary income, even though the country is much wealthier than it was a generation ago. The state is looking to charities to deliver more and more services. At the same time, it has cut back on giving grants to charities and now requires them to operate under prescriptive contracts. Those contracts inevitably limit charities’ freedoms. But this is the world in which we live. In an era where the state wishes to retreat and do less and get third parties to do more, it would be a wasted opportunity for charities to fail to step up to the mark and seize the opportunities that contracting and the new social investment tax relief offer. Charities can bring the public service ethos to these arrangements, which private sector contractors cannot. Ultimately, there is a huge difference between the charity sector and the private sector. The charity sectors’ profits have to be recycled to their beneficiaries. For the private sector, profits are necessary in order to honour their legal obligations to their shareholders. When push comes to shove, the legal duty to shareholders in a private sector company caps all other duties.
If charities are to develop further, given the constraints on generating voluntary income, they need to develop more trading income. That can come from contracts with the state but also in the wider commercial market as well. One of the key factors that charities will need if they are to move into more trading is to have appropriate governance for growth. That means having boards of trustees who see their role not as mere custodians of what they have inherited but as rather dynamic partners in helping change organisations with new and developing revenue sources and that are willing to adapt as markets demand. Such thinking is a challenge to many traditional boards but if charities are to increase their trading income, in my view, governance reform is an essential first step.
Stephen Lloyd is a Partner and Senior Counsel at Bates Wells Braithwaite