Financing the future: Social investment

This blog is NOT intended or designed to provide legal or financial advice. The content on our blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our blog.

Investment in social enterprise makes an economic difference by employing two million people and contributing £55 billion to the economy. It also makes a social impact by helping social ventures expand the work they do. However, the social investment market is still in its infancy. In the December 2013 Autumn Statement, chancellor George Osborne announced that the UK would lead the agenda for responsible recovery through the introduction of a new tax relief designed to promote investment in social enterprises. The relief, ‘Social Investment Tax Relief’ (SITR), became available in April 2014.

Today’s post looks at why social investment is important, how it works and what benefits it may be able to offer you as a business owner or investor.

Why introduce Social Investment Tax Relief?

Following the economic recession of 2008 social enterprises have experienced difficulty in raising capital from private investors and commercial lenders. Recent cuts to public services, however, have made the demand for capital investment higher. SITR therefore aims to make investment into social enterprises for private investors more appealing by offering competitive tax benefits. For social enterprises, it opens up alternative channels of funding.

What are Social Enterprises?

The Finance Act 2014 defines a ‘social enterprise’ as a community interest company, community benefit society or charity (which can be a company or a trust). Not all social enterprises will therefore qualify. SITR does not apply to co-operatives, or non-charitable companies limited by guarantee or companies limited by shares.

The enterprise must trade with social objectives at its core, and may operate in a variety of sectors, including healthcare, sport and leisure. The enterprise must have fewer than 500 employees and assets of no more than £15 million before the investment, and £16 million following the investment. To qualify for investment, these conditions must be met continuously from the date of investment for the following three years.

What are qualifying investments?

Investment into qualifying social enterprises will take the form of a subscription for new shares or by purchasing debt (i.e. a loan) in the social enterprise. It is anticipated that there will be scope in the future for indirect investment in social enterprises, whereby investors can pool their funds to support a variety of social enterprises. The investments must be paid for in full, and in cash, at the time the investment is made.

It is not possible to invest in a social enterprise of which you are an employee, partner, trustee or paid director. Shareholders with over 30% of the share capital or voting power are also exempt from investing in the social enterprise in which the shares are held.

How does the tax relief apply?

You should always receive financial advice before taking out an investment and ensure you understand the risks of the investment.

For a helpful infographic on how the tax relief works in practice, have a look at Big Society Capital’s website.

How much can my social enterprise receive?

Broadly speaking, eligible enterprises will be able to receive a maximum of around £290,000 over three years. This is to bring the relief in line with the restrictions on the giving of state aid. Restricting the scheme to this limit means that the relief can be offered without the Government having to seek approval from the European Commission. In the longer term, the Government has indicated its intention to seek clearance for a ‘larger tax relief scheme’.

How can I register my social enterprise?

Firstly, you should check that your enterprise meets the terms of the SITR legislation. If you are satisfied that it does, you will need to complete a Compliance Statement and send it to HMRC but you should always seek financial and legal advice before taking any steps. You must complete and send a new Compliance Statement each time the social enterprise receives new investment. The Compliance Statement is necessary to ensure investors receive tax relief.

Other forms of social investment and funding

If SITR is not available or compatible with your business, other sources of potential investment may be available to you.

  • Community development investment relief (CITR): The CITR scheme provides a tax incentive to investors in Community Development Finance Institutions (CDFIs). CDFIs provide financial assistance to enterprises within disadvantaged communities. The tax incentive is a form of tax relief, which reduces the investor’s income tax or corporation tax liability. The relief is worth up to 25% of the money invested, spread over five years.
  • Social venture capital trusts: In the 2015 budget, the government announced details of a new Social Venture Capital Trust (Social VCT), which will attract tax relief at 30%. Investors will pay no tax on dividends received from a Social VCT or capital gains tax on disposals of shares in Social VCTs. The government will legislate for Social VCTs in a future Finance Bill.
  • Crowdfunding: there are numerous online crowdfunding websites which social enterprises can use to raise finance for their ventures. This avenue may be welcome for enterprises that do not qualify for investment through more traditional routes.
  • Grants: any form of enterprise is able to accept a grant. However, charities tend to find funders more receptive due to the guarantee that all funds will be applied exclusively for its charitable purposes. Common sources of grants are charitable foundations, government and EU funds.

Risk Warnings

Tax advantaged schemes which invest in small and medium enterprises are likely to display above average levels of volatility and financial advice should always be sought before making any investments.

This blog was written by Ana Speed. Ana is a trainee solicitor within the Student Law Office and has spent the last six months working in the business clinic. Ana has particularly enjoyed working for social enterprises and advising clients on intellectual property disputes. 

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Doing good: an introduction to social enterprises

This blog is NOT intended or designed to provide legal advice. The content on our blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our blog.

What are social enterprises? 

If you have ever purchased a copy of the Big Issue or shopped at the Co-op you should already be familiar with the concept of social enterprises. Social enterprises are businesses which operate with a social or environmental purpose; they want to change the world for the better.

Today’s post looks at the different legal structures that are available to social entrepreneurs and the factors that may influence your decision to choose one legal form over another.

Setting up a social enterprise

Social enterprises can be unincorporated associations, incorporated organisations and/or charities. There are a number of factors which need to be carefully considered before you decide which legal form may be most appropriate for your enterprise.

Tax: certain tax reliefs and benefits may be acquired by adopting charitable status.

Finance: some legal structures may experience more barriers in securing finance than others.

Management: most forms follow a power structure in which a small group of individuals are responsible for the management and running of the organisation. However, this may not be appropriate for your enterprise and you may wish your stakeholders to have greater involvement.

Regulation: business structures may be regulated by Companies House, the Charity Commission, the Financial Conduct Authority, the Community Interest Company Regulator or a combination of these governing bodies. Other legal forms are unregulated.

Unincorporated associations

An unincorporated association is an organisation that is set up to perform a particular function, for example, to run an after school club. An unincorporated association has a wide membership, is governed by a constitution, and is managed by a management committee. Unincorporated associations do not need to be registered and are free to set up.

Unincorporated organisations do not have a legal identity in their own right therefore the members of the management committee are personally liable for its debts and liabilities. The main advantage of being an unincorporated organisation is that it benefits from relatively ‘light touch’ regulation.

Incorporated organisations

An incorporated organisation is a separate legal entity which is responsible for their own debts and liabilities. This limits the personal liability of individual management committee members. Incorporated organisations have the following features and benefits:

  • As a separate legal entity, the enterprise can enter into contracts and employ staff.
  • Incorporation limits the personal liability of the individuals responsible for the management of the enterprise.
  • The regulation that comes with incorporation may increase public confidence in the organisation.
  • Most financial institutions will only provide loan and equity finance to incorporated organisations.

There are a number of different options for those considering incorporating their social enterprise.

Limited companies

Companies may be limited by shares (CLSs) or guarantee (CLGs). CLSs have a ‘share capital’ and this refers to the shares held by the company’s shareholders. The shareholder puts money into the company, and in return the company gives it a percentage of ownership, in the form of shares. The price of an individual share can be any value although usually the ‘nominal’ value of a single share will be £1. With a CLG, there are no shares, hence there are no shareholders. Instead, the company will have ‘members’. The members of a CLG are bound by a guarantee in the company’s articles of association, which requires them to pay the company’s debts up to a fixed sum, usually £1, in the event of winding up the company.

Setting up as a CLG or CLS is relatively inexpensive and easy to do. Both structures will be managed by directors in accordance with the governing constitution. The companies will be registered with Companies House. Profits may either be distributed to members or reinvested back into the company. Once the annual income of a CLS or CLG is £5,000 or above, they can register as a charity with the Charity Commission. 

Community interest companies (CIC)

A CIC is a limited company, which has registered to carry out a particular “community purpose” and wants to use their profits and assets for the public good. The primary purpose of a CIC is to benefit the community and not its shareholders, directors or employees. A CIC has a lock on its assets, which prevents profits from being distributed to members other than in limited circumstances.

CICs are regulated by the CIC Regulator. CICs are also companies and must therefore comply with the principles of company law. They can be registered with Companies House however a CIC cannot have charitable status. CICs are required to file a community interest report each year, which includes details of how it has pursued its community interest.

 Co-operative and community benefit societies (CBS)

Co-ops and CBSs are registered societies (rather than companies) which are regulated by the Financial Conduct Authority (FCA). The key difference between the two structures is that a co-op is set up to benefit its members whereas a CBS is established to benefit the community more widely. Co-ops and CBSs may also apply to the Charity Commission for charitable status.

 Limited liability partnerships (LLP) 

An LLP is similar to an ordinary partnership, but it also offers reduced personal responsibility for its business debts. Partners are liable in the winding up of an LLP up to the amount they have agreed (which may be nothing). LLPs have the advantage of being tax ‘transparent’ which means that the members are subject to income tax directly in their capacity as the individual in accordance with their tax status. In terms of management, the LLP is a single tier structure. The LLP partners are the equivalent of directors of a company.

An LLP can be straightforward to incorporate and the rights and duties of members are set out in the LLP’s governing document, the LLP agreement. The LLP agreement can be used to set out the social mission of the enterprise. LLPs have strict disclosure requirements; accounts must be prepared in accordance with the relevant accounting rules and filed at Companies House.

 Social enterprises as charities

Many (although not all) of the business structures outlined above can also apply for charitable status. Key features of having charitable status include:

  • Public recognition and trust: charities are widely recognised as existing for social good. This can assist with fundraising.
  • Asset lock: the charity’s assets and profit must be used in furtherance of the charity’s purposes.
  • Tax relief: charities do not pay corporation tax on profits from trading in the course of delivering their charitable aims. Charities receive discounts on business rates.
  • Funding: some sources of funding are only open to organisations with charitable status.
  • Gift aid: gifts to charities by companies and organisations which pay Corporation Tax are tax deductible. Donations by individuals who pay income tax attract Gift Air relief.
  • Regulation: most charities in England and Wales are regulated by the Charity Commission. The Charity Commission is often viewed as relatively ‘heavy’ regulation as it exercises considerable scrutiny over charities. Charities with an annual income of over £10,000 have to file annual reports, accounts and an annual return. 

Charitable incorporated organisations (CIOs)

CIOs combine the benefits of being a corporate body, with a separate legal identity and limited liability for its charity trustees and members. All CIOs are registered charities and are regulated solely by the Charity Commission. CIOs are relatively simple and inexpensive to establish. They are governed by a constitution and, for ease, the Charity Commission has produced two forms of model constitutions. CIOs are required to comply with accounting requirements and must file an annual return, report and accounts with the Charity Commission. 

The Student Law Office may be able to advise you on the type of legal structure which may be most appropriate for your business or social enterprise. To find out more about making an enquiry, please click here.

This blog was written by Ana Speed. Ana is a trainee solicitor within the Student Law Office and has spent the last six months working in the business clinic. Ana has particularly enjoyed working for social enterprises and advising clients on intellectual property disputes. 

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