18/05/2010
The social enterprise sector is growing - there are thought to be 62,000 social enterprises contributing some £24bn per annum to the UK economy. However, many ambitious social entrepreneurs struggle to raise the funds needed to make their businesses viable in the medium to long term.
Tax incentives can compensate for the lower returns to investors, but the legal forms commonly adopted by social enterprises often make them unable to take advantage of the available reliefs. The restrictions, particularly limits on relief to equity investment, can leave those social enterprises, which are unable to issue share capital by their choice of legal form, dependent on grants and loans.
In a new report for the Centre for the Study of Financial Innovation, supported by the National Endowment for Science, Technology and the Arts (NESTA), Vince Heaney (freelance writer and former deputy editor of the Financial Times' Lex column) explores the existing tax incentive schemes for enterprise and their applicability to social enterprises. This provides an invaluable manual for policymakers, entrepreneurs and their backers.
Heaney argues that the existing system of tax incentives aimed at mainstream businesses is ill suited to the needs of social enterprise. Instead, social enterprises, with backing from Social Venture Capital funds are taking a more innovative approach to their funding requirements. This has led to the emergence of a growing number of "hybrid" social enterprises, which are run commercially but which have embedded social objectives.
Several success stories are cited, amongst them HCT Group, a community transport business, which has raised capital through a combination of fixed rate loans and 'social loans'. These are a quasi-equity revenue participation agreement offering investors benefits linked to turnover but protection if HCT fails to meet specified social impact targets.
Heaney argues that more should be done to promote social enterprise through tax incentive schemes, but that the focus for relief should be through the currently under-utilised Community Interest Company legal form. Incentives should be linked to achieving social impact targets and eligibility extended to include 'hybrid' social enterprises, as well as quasi-equity and loan investments.
The report places tax incentives in the wider context of the development of the social enterprise sector. The long-term sustainability of the sector will depend on engaging private sector capital and the report examines the need to develop supporting market infrastructure, products and intermediaries to encourage those inflows.
With additional research by Katie Hill.
The full report is available at www.csfi.org.uk or www.nesta.org.uk
About CSFI
The CSFI is a not-for-profit think-tank, set up in 1993, which looks at emerging threats and opportunities in the financial services sector. Chaired by Sir Brian Pearse, it is supported by around 70 public and private-sector organisations.
Jane Fuller
Director
CSFI
About NESTA
NESTA is the largest independent endowment in the UK. Its mission is to support innovation to drive economic recovery and solve some of the UK's major social challenges.
NESTA is a world leader in its field and is in a unique position to support and promote innovation through a blend of practical programmes, policy and research and investment in early-stage companies. www.nesta.org.uk
For further information, contact:
Andrew Hilton or Jane Fuller at the CSFI
CSFI
5 Derby Street
London
W1J 7AB
020 7493 0173 or 020 7491 8666
info@csfi.org.uk
Or Vince Heaney: 0208 789 9209
T +44 (0)20 7438 2500
F +44 (0)20 7438 2501
Nesta Operating Company, a company limited by guarantee registered in England and Wales with company number 7706036 and charity number 1144091. Registered as a charity in Scotland number SC042833.
