No more business as usual

Monday and Tuesday of next week, anyone who is anyone in social enterprise will be in Cardiff enjoying Voice 10; the national conference for the #socent movement. I expect there will be the usual array of Government Meddlers, Hawkers, Consultants, Loan Sharks and (if you’re lucky) the occasional social entrepreneur. I don’t expect there to be “real” business people (non-socent business people); or certainly not many.

Which is exactly what the conference is about – how to move beyond business as usual and broaden the range of social enterprise into the wider community. Social Value Tax Credits may just be one answer to that problem – SVTCs would give real incentives to all businesses to do social good. Financial tax incentives are something old-school business understands; the airy-fairy notion of responsibility is something they mostly still struggle with.

So far in this blog I have considered the basic concept of the tax credits and also whether or not SROI is actually robust enough to be used for these purposes. I have since decided  it probably isn’t robust enough, we will probably need an expenditure-based credit rather than an impact-based one. Which raises some interesting points.

Use The Existing Structure

Relief from direct taxes is (broadly) already available to businesses; companies can take it as a deduction from taxable profits (relief for individuals is more complicated but very similar). All social enterprises could structure themselves so as to make use of this tax relief – any social business could set up a sister charity, which actually does the good work. This does involve considerable regulatory burden and costs (which quite possibly could eliminate the tax relief you are getting) but it is possible.

Cut Out Waste

The setting up of a sister charity does involve cost and hassle. I think there is a strong argument to be said for eliminating the need to give the money to a registered charity (especially for registered social enterprises). Relief for expenditure incurred directly by a social business on social good should attract tax relief at the moment; although it might be claimed by HMRC to not be deductible I would argue strongly that such expenditure forms part of the trade and so should be deductible. The correct status of such expenditure largely untested at present.

It follows, therefore, that the elimination of the need for a charity becomes stronger when enhanced deductions are available for such expenditure.

Enhance The Tax Relief On Donations

I think the existing relief should probably be taken one stage further – the amount of donations made to charities or registered social enterprises should be enhanced beyond the original donation (i.e. twice the amount donated is deducted from taxable profits) and to compensate society for loss of tax revenue, the rate of direct taxes should be increased by an ‘appropriate’ amount.

In many ways, such a system would merely reflect efficient economic reality – instead of needlessly funnelling the money through the tax system, through central government and into the charity’s hands to do good with, we’re cutting out the middle men.

Enhance Relief on all Social Cause Spending

Ideally, I would like to take the enhanced relief even further and bring in expenditure-based Social Value Tax Credits. All expenditure on social aims by any businesses should attract some sort of enhanced tax relief. Donations to charities would be eligible for tax relief at (say) 125% of the amount donated; whilst direct expenditure on social aims (by either businesses or the now-taxable charities) would attract 150% repayable tax relief. Suddenly charities are being performanced managed in way they never were before and all business has a real incentive to act in a socially responsible way.

Potential problems include defining which expenditure is for social aims and which isn’t (exactly what was that employee doing, for example). This also doesn’t include any measure of the efficiency of the expenditure (the impact) but to do so requires measuring the impact, which as we’ve established is inherently judgmental.

I need to think longer about the potential drawbacks of an expenditure-based relief and how best it could be implemented. I have also recently been asked about potential National Insurance based incentives to do good (hire disabled or disadvantaged people) and I will write about such possibilities in future.

As usual, any questions just ask @InspirateCIC or via the website inspirate.org. See you at #Voice10!

How to Measure Social Value

This blog is primarily used to open up discussion about what tax relief social enterprises should get (if any) and what form such relief might take. I am a Chartered Tax Adviser and also social enterprise practitioner – I know both sides of the fence.

Last time I explained the basic concept of Social Value Tax Credits; a mechanism which recognises the social benefit delivered by all organisations, gives them tax deductions for this social benefit, and also finances social enterprises and charities. This time I am going to explore one of the potential issues – measuring the social value.

Social Return on Investment

SROI is a methodology for measuring the social impact an organisation (or project or department) has on the world around it. The basic formula is

Social Return = Social Impact - (Attribution + Drop-Off + Deadwieght)

To measure the Social Impact you take the following steps:

1. Work out what impact your organisation has (the Outcomes on your Impact Map)
2. Decide what you will measure to record impact (the Indicators of a change in an Outcome)
3. Measure the Indicators (how much it changed by)
4. Calculate a financial Proxy as the value of a change in an Outcome
5. Multiply your Proxies by your Indicators
6. Deduct the Deadweight (an estimation of what would have happened anyway)
7. Deduct the Attribution (what happened because of the actions of others)
8. Extrapolate this value out for the expected time of impact
9. Deduct the Drop-Off (an estimate of the reduced impact of your actions over time)
10. Add the lot together
11. [Optional] divide the result by the costs of running the organisation for that year

This methodology is extremely sensitive to the assumptions made within it. The only known number is the measurement of each Indicator; the rest are all estimates (however well-calculated or sound the logic they are based upon). For example:

• What is the best Financial Proxy for better health:
  • What you would pay for Health Insurance; or
  • What it costs the NHS to keep each citizen alive?
• How long does the enhanced self-esteem of becoming employed actually last?
  • 3 months
  • Until fired
  • Forever ?
• Who is mainly responsible for an increase in recycling in an area
  • The local authority;
  • The local recycling project;
  • Central Government’s ad campaign;
  • Some Celeb in the media?

This subjectivity does make SROI not ideal for use in Social Value Tax Credits, as conceivably an organisation could make claims for someone else’s good work.

The solution to the subjectivity (in my opinion) is to significantly reduce the amount of credit available. If we reduce the Tax Credit claimable / £ of Social Good created, this will go some way towards rectifying the situation. As and when better models are developed for measuring the social impact of an organisation then the amount of credit given could be increased to recognise the more sound the calculation.

Perhaps we could even go as far as someone making an assessment of how sound the calculation was done, giving it a score, and this feeding into the amount of Tax Credit available? Or will this simply add another subjective measure to an already complicated calculation?

Measuring Social “Cost”

A methodology that would be far less open to subjectivity and probably be more comfortable for Government would be to allow a Tax Credit based on the amount an organisation spends on creating social good (rather then the amount of social good it creates). This is in line with the current R&D Tax Credit (upon which this Social Value Tax Credit is based) and also follows existing practice; in that company’s can usually claim a deduction of any donations made to charities.

The problem here is that using cost doesn’t take into account the effectiveness of the organisation in creating social good, perversely it benefits those who are inefficient at doing so. There is also still some subjectivity as you would have to decide why an expense was incurred – for the “business” or for the “social good”.

Summary

Social Return on Investment is not perfect, but it is a recognised methodology for measuring the social impact an organisation creates. It could be used as a basis for the calculation of the amount of Social Value Tax Credit available to an organisation, but the inherent subjectivity should be taken into account when the financial benefits of the Tax Credit is being decided upon.

Any questions or comments gladly welcome, especially on Social Accounting (which I know little about).

Social Value Tax Credits – The Concept

This blog is primarily used to open up discussion about what tax relief social enterprises should get (if any) and what form such relief might take. I am a Chartered Tax Adviser and also social enterprise practitioner – I know both sides of the fence.

I will now introduce my idea for Social Value Tax Credits (“SVTC”); the basic theory behind them and possible areas of impact / details that need further consideration at a later stage. I am writing this in layman’s terms as much as possible but inevitably there will be some “tax-speak”. If there’s something you don’t understand, tweet me @InspirateCIC

The Basic Concept

The underlying principle of this proposal is to build into UK tax legislation allowance for and recognition of the non-financial performance and impact of any business entity. The idea is to measure the social impact of an organisation and introduce specific legislation that allows the financial equivalent of this impact to be deductible from the taxable profits of the business. To whit:

Taxable Profits = Profits Before Tax – Financial Equivalent of Social Value Created

I strongly believe that these SVTC should be claimable by all taxable entities, to avoid any favouritism or protectionist allegations. I also believe that all businesses deliver some social value (and I am not alone in holding this belief), meaning that all businesses can and should be eligible to make a claim for SVTC. Some effects of this and the subsequent required changes are:-

• All businesses (including large plcs) would suddenly have significantly lower taxable profits and so to compensate for this and protect tax revenue the Mainstream Corporation Tax Rate would have to be significantly increased
• Charities will loose their tax exemptions; instead they will become taxable on their surpluses (the same as a profit-making business) but with the intention that their SVTC would eliminate their taxable profit

With these changes the financial effect for both business and charities has been minimal, their tax liabilities should remain roughly what they were before. However – the tax system now includes financial incentive to create social value as well as financial value. This is crucial in the wake of the current recession, to align the aims of capitalism with society’s aims for happiness and quality of life.

Social Enterprises will also be eligible to make claims for SVTC (of course) meaning that any who make profits will be given credit for the social value they create and pay a lower tax bill on their financial profits. However, many social enterprises (and social firms in particular) do not make profit so their SVTC will simply increase their losses carried forward for future relief against profits. This is where the repayable element of the SVTC comes in.

Following the precendent set by the existing Research & Development Tax Credit Claim, organisations would be able to surrender their SVTC to the Government in exchange for a repayment of their PAYE and NI liabilities for the period. The R&D claim supports loss-making companies by giving governmental financial support to encourage their activities. SVTC will do the same thing, by providing financial support to social enterprises to encourage and support them with creating further social value in the future:

Tax Refund Due = SVTC % Rate  * (Social Value Created – Profits Before Tax)

The actual formula would be more complex and have certain safeguards and restrictions built into it, but this is the essential idea.

Areas for Consideration

• Profit making busineses will relish the idea of getting a tax deduction for the social value they create and inevitably will aim to exploit this credit to the full. Are any of the current measures of social value creation (such as Social Return on Investment ["SROI"] ) robust enough to stand up to this exploitation?
• Will SVTC encourage the creation of social value, or merely the exploitation of these credits?
• As Social Value is so difficult to measure, should a tax credit based on the costs of the organisation’s social activities be introduced? Would this be more robust against exploitation?
• The implementation of SVTC would be intended to be fiscally neutral for business as a whole, but inevitably some businesses will fare better than others. Arms Dealers may find themselves facing a tax bill, Tescos might not. What pitfalls should we be aware of ? How much social value does an investment bank actually create anyway?
• HM Revenue & Customs will suddenly become the Judge and Jury over the amount of social value created by an organisation – is this a good thing? It would be a significant change in culture and widening of scope for them.
• Unless charities create more social value than the financial resources they consume, they will suddenly be facing a tax bill. On the plus side this will push them to ensure they are actually creating social value and so encourage better performance, on the down side I expect they will resist these changes tooth and nail.
• Social enterprises will now enjoy direct financial support from Government for the social value they create, do they have the capability to make use of this?
• Should Individuals also be given SVTC to take into account any volunteering or social value they create?
• Should the credits also be available to those who are self-employed or in a business partnership of some kind?
• SROI is a long process to accomplish – will SVTC be worth the regulatory burden?

Summary

If society wishes organisations and Government to work together to build happiness and quality of life as well as financial growth, we need to incentivise and measure the social value they create. Tools such as SROI give us good but not infallible measures of social value creation, what is currently completely lacking is an real incentive for old-school capitalist organisations to create social value.

SVTC will give a deduction from taxable profits for the social value an organisation creates. The credits will be refundable, meaning a tax refund can be claimed to assist with the costs of running the organisation.

Social Value Tax Credits give business reason to create social value, in terms old-school capitalists understand – tax savings. The credits will also incentivise charities to perform better and create more social value. The refundable element of the SVTC will support social enterprises on an on-going long-term basis.

 

Please let me know your initial thoughts on Social Value Tax Credits, either by commenting here (or on one of the forums I’m using) or tweeting @InspirateCIC or emailing me on alastairirvine@inspirate.org

Future editions of this blog will concern the areas of consideration above, respond to feedback received on the concept and develop the idea into something workable. I will also comment on some of the other ideas concerning tax support for social enterprises as they emerge.

Social Enterprise Tax – Where We Are Now

This blog is primarily used to open up discussion about what tax relief social enterprises should get (if any) and what form such relief might take. I am a Chartered Tax Adviser and also social enterprise practitioner – I know both sides of the fence.

Where We Are Now

When it comes to your tax status, being a social enterprise is completely irrelevant. HM Revenue & Customs will not have a clue what that means, it is not a status. The first key to tax relief is your legal form, as social enterprises can take on a variety of these and still do nice things.

Charities

Whether a company or a trust, if you are a registered Charity broadly your income will be exempt from direct taxation (income or corporation taxes) unless you:-

• Do something naughty,
• Trade outside your authorised limits (subject to certain exemptions) or
• Start dealing in land (more common than you might think)

Charities can also claim Gift Aid on money (or sometimes goods) donated to them by tax-paying individuals. A useful guide to charity taxation is published by HMRC here.

Companies

If you are a company (regardless of whether you are Limited by Shares or By Guarantee and being a Community Interest Company is also currently irrelevant) you basically suffer corporation tax on your income unless you manage to convince HMRC that you either

• Do not trade with a view to making a profit (which, if this is the case, would ask me to question whether or not you actually are a social enterprise as social enterprises should be about More Than Profit not Not For Profit)
• Only trade with your members (mutual trading)

Both these scenarios are extremely rare, but I have advised on both so do get in touch if you think they might apply to you

As a trading company, social enterprises are eligible for Enterprise Investment Scheme relief (or, more accurately, people wishing to support a new social enterprise company should be able to claim Enterprise Investment Scheme relief on the amount invested) but cannot claim Gift Aid on any money given to the company like a charity can.

Sole Traders or Partnerships

It is unlikely but possible that a social enterprise is legally a sole trader (a one-man band doing nice things), or a partnership (lots of people doing nice things together) or even a Limited Liability Partnership (lots of people doing nice things but with restricted financial risk). The individuals involved in all these variations are subject to normal Income Tax rules – any nice things they do are essentially ignored unless they make a financial donation to charity.

Clever Structures

It is fairly easy tax planning to set up a more complex structure involving both a charity and a trading company, to take advantage of the benefits of both, but this leads to double regulation nightmares and the associated fees. There is an argument to say that it should not be necessary for a social enterprise to structure in this costly manner and as such it is only of interest to organisations of a certain size.

There is precedent within Corporation Tax for HM Treasury to introduce legislation where tax can be easily avoided (albeit in a time consuming manner) so that the same tax avoidance can be achieved through the legislation without paying the solicitors, so this is an area that will be kept under review for future blogs.

Other Taxes

The above only really concerns direct taxation (tax on profits) but there are, of course, other taxes that are applicable to the Third Sector. Both Charities and Companies pay Employer’s National Insurance on any amounts paid to Employees, for example. Both are subject to VAT, although there are special rules for charities.

Consideration of other taxes will be considered in due course, for now I wish to concentrate on the tax on profits of social enterprises and tax relief to encourage investment.

Next time I will introduce the concept of Social Value Tax Credits, explain the basics of how they might work, who they could apply to and invite feedback on the basic idea before going on to examine specific areas of their implementation.

DISCLAIMER: All the above is an extremely simplistic view on a wide variety of tax issues, take proper advice, preferably from me

Social Value Tax Credits

I am an experienced social enterprise advisor and also a Chartered Tax Advisor, specialising in Corporation Tax and Charities Taxation. My mission is to blend these two worlds to further the cause of social enterprises around the world and encourage their growth, expansion and success.

This year there has been some discussion about whether or not the UK tax system should be amended to support social enterprises. Eddie Finch of Buzzacotts recently wrote an article on the subject and the Social Enterprise Coalition also recognises the possibility of tax reform as does the Scottish Social Enterprise Coalition. I have also been pushing hard for social enterprises to make use of existing tax reliefs to encourage investment here and here.

The question is – what form (if any) should tax relief for social enterprise take?

To have a hope of answering this question we first need to understand where we are now, the base line from which we wish to move. That will be the subject of my next blog.

Future blog entries will introduce the concept of Social Value Tax Credits, examine the benefits of such a scheme (both for social enterprise but also wider capitalism and society), examine the pitfalls for certain social enterprises and charities and invite comments on how such problem areas could be avoided.

We will also examine other tax reliefs or areas of concern of interest to social enterprises as and when they come up.

New Website Launched

Inspirate CIC today launched its new look website thanks to some nifty work on iWeb. The new look is designed to make our mission clearer – profits from accounting services that will be used to support disabled entrepreneurs.

We now also have a blog which we will be mainly using to encourage debate and engage in consultation concerning how the tax system can or should be amended to reflect the good work that social enterprises carry out and encourage their further growth.