In the run-up to the election there have been lots of promises from political parties about what they will do to improve the lot of social enterprises. This week Nick Hurd, shadow charities minister, suggested the Conservatives were thinking of using tax breaks to boost the social investment market.
If this is the case, it is good news. But where to apply it, and what form should it take?
There’s a very interesting illustration of the social investment space, produced by the social lender Venturesome, which seems to offer some clues (you can find it on page seven of this report). It shows a continuum between private, wholly-for-profit business, and wholly not-for-profit charity, with social enterprise occupying a space in between.
On one side, a tax-free legal form – the charity. On the other, a legal form with no tax reliefs – the plc. The space in between is crying out for a reduced-tax legal form which can make some profit, but is required to recycle most of its profit into the community.
There is an obvious candidate, in an existing but currently under-utilised legal form – the community interest company (CIC). At present, five years on from the creation of the CIC form, it’s not really clear what its purpose is. It seems to offer many limitations, and few opportunities.
Notoriously, the form had trouble attracting investment, thanks to the strictness of its asset lock and the fact it offers investors no advantage over other legal forms. Many people who have formed one say they regret it, because they cannot attract outside finance.
The strict asset lock, which acts as a guarantee of social purpose, ought to be good for attracting preferential funding from people with a strong social conscience. But there is little publicity about the model to make that clear, and little good information for potential investors, making it a very hard sell, even to the ethically committed.
The situation became marginally better earlier this year after the CIC regulator announced it was loosening the dividend caps that govern how much profit you can take out. But it is still too hard for investors – and social entrepreneurs themselves – to construct an exit strategy. Other social forms remain more attractive.
All of this would change with a tax break. A reduced-tax regime seems to have been the original intention behind the CIC, given in exchange for its strict asset lock and limitations on what business it can pursue. But that part of the model died the death of a thousand cuts during the journey through Parliament, and the CIC came into existence neutered, with the reason for its creation removed.
It ended up with all of the disadvantages of greater regulation and none of the advantages of lesser taxation. Its existence has been an embarrassing curiosity ever since. Whoever wins the election should provide a sensible tax incentive for the CIC and restore its potency.