Defining social enterprise for tax purposes

In the wake of the A4e fiasco and the Salesforce attempt to trademark ‘social enterprise’, it’s been suggested that social enterprise needs definition for tax purposes. So lets start with what the DTI said in 2002

“‘a social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’

So let’s take that apart

a) A social enterprise is a business

That to most means something that offers products and services in an open market with the aim of generating a surplus.

Should that include trading organisation which are part supported by private donations or public grants, which are governed by charity laws.

Should it include business which has been created from dissolution of public services under preferential conditions?

b) A business with primarily social objectives

Immediately we see a difficulty. What do they mean by primarily?  Is an objective defined by a mission statement? Can we weigh the social objectives of a given business against its more negative intentions?

Perhaps we should forget that one, since as it has been argued that most business has some form of social objective.

On the other hand, in 2013 when the Public Sector (Social Value) Bill takes effect a social enterprise will be expected to define the social value it creates.

c) Surpluses are principally invested for that purpose into the business or the community, rather than being driven by the need to maximise profit for shareholders and owners..

Vagueness again. What do they mean by principally.- More invested back into the business or the community than distributed as dividends to shareholders? Does that perhaps mean more than 50%?

Does this relate to a community of interest which may be outside our shores?

Does that mean for example that a co-operative, to qualify as a social enterprise, must not exceed this limit in distributing surplus to members?

Observations

The extent to which a business declares good intentions  has little relevance compared to its social behaviour.. Did it deliver a tangible social impact or simply declare conformity? In Henry Ford’s words “You can’t build a reputation on what you are going to do”

We might certainly reward business which demonstrates social impact, perhaps a “pay for performance” reward as is being offered to “impact investors”.

Now, for tax purposes, on the annual tax return it might simply be a case of weighing the dividend or surplus distribution as a percentage of surplus revenue.

There are already tax incentives, like CITR, setting a precedent for community re-investment and perhaps a social enterprise could benefit in the same way..

For a community of interest overseas, it might be reasoned that if government has already created a precedent in international development, that this community is equally valid. We have laws which limit the potential for this being used to create ‘slush funds”

Isn’t this rather simple if we think in terms of what can be measured, the proportion of social investment

Are we a social enterprise?

A question I asked myself in 2004, which I also bounced off the DTI, referring to the business model described in our 1996 paper. It says:

“This business model entails doing exactly the same things by which any business is set up and conducted in the free-market system of economics. The only difference is this: that at least fifty percent of profits go to stimulate a given local economy, instead of going to private hands.”

“If a corporation wants to donate to its local community, it can do so, be it one percent, five percent, fifty or even seventy percent. There is no one to protest or dictate otherwise, except a board of directors and stockholders. This is not a small consideration, since most boards and stockholders would object.  But, if an a priori arrangement has been made with said stockholders and directors such that this direction of profits is entirely the point, then no objection can emerge. Indeed, the corporate charter can require that these monies be directed into community development funds, such as a permanent, irrevocable trust fund. The trust fund, in turn, would be under the oversight of a board of directors made up of corporate employees and community leaders.”

“Clearly, profits can be used very effectively in ways other than traditional investment and profit outcomes. Moreover, this is not charity, it is business–good business.”

‘There is nothing wrong with individuals becoming wealthy. It is only when wealth begins to concentrate in the hands of a relative few at the expense of billions of others who are denied even a small share of finite wealth that trouble starts and physical, human suffering begins. It does not have to be this way. Massive greed and consequent massive human misery and suffering do not have to be accepted as a givens, unavoidable, intractable, irresolvable. Just changing the way business is done, if only by a few companies, can change the flow of wealth, ease and eliminate poverty, and leave us all with something better to worry about. Basic human needs such as food and shelter are fundamental human rights; there are more than enough resources available to go around–if we can just figure out how to share. It cannot be “Me first, mine first”; rather, “Me, too” is more the order of the day.’

In 2004, our business plan described how this approach which had been proven in Russia would stimulate impoverished communities by means of information technology infrastructure investing surplus  into Community Development Finance Institutions, such that others would have access to capital for creation of social enterprise.  The BENCOM model being seen as the most appropriate legal structure for what we cal People-Centered Economic Development.

The P-CED Business Plan

Drawing attention to both the moral and strategic need to tackle poverty, it warned of the risk of uprisings, asserting that

“The emerging Information Age will provide an unprecedented opportunity for outreach and communication at local community levels by way of the Internet. Given the opportunity to communicate and research global resources, communities will become able to assess their own needs, identify resources to meet those needs, and procure those resources. In that sense, the information economy can work to the advantage of impoverished people in a way never before possible.”

And

“Traditional capitalism is an insufficient economic model allowing monetary outcomes as the bottom line with little regard to social needs. Bottom line must be taken one step further by at least some companies, past profit, to people. How profits are used is equally as important as creation of profits. Where profits can be brought to bear by willing individuals and companies to social benefit, so much the better. Moreover, this activity must be recognized and supported at government policy level as a badly needed, essential, and entirely legitimate enterprise activity.” 

Today we have a call for creating a million jobs.  Are we any further forward?

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4 thoughts on “Defining social enterprise for tax purposes

  1. pakimom says:

    THANK YOU for setting one thing right – a social enterprise is a business and not charity … 50% of its “profits” go towards social good. Have been crying myself hoarse to young ppl interested in the idea but hesitating coz they are afraid it means a NFP that they must treat it as any other business where the bottom line of course is profit and scalability. One thing they gotta be wary about is that their business has to aim to solve a significant social problem.

    • jeffmowatt says:

      Thank you too, pakimom

      You’ll understand that this was not described as a social enterprise until after verification from the DTI. In fact, some have insisted that we’re not a social enterprise. In 2006, having joined the Social Enterprise Coalition, I was told that our work was outside their current focus.

  2. MJ Ray says:

    “Does that mean for example that a co-operative, to qualify as a social enterprise, must not exceed this limit in distributing surplus to members?”

    Errr, no. The members of a co-operative are its users, which will often be the business (producers or workers) or the community (customers or tenants or beneficiaries). Therefore, any surplus distributed to business or community members is usually being reinvested in the business or the community by definition. That’s a point that was overlooked by some newbies setting up “social enterprise” groups, excluding one of the oldest types.

    I agree that spending surplus on social goals should be a principal part of the constitution or charter of the enterprise. That’s probably the defining characteristic of social enterprise. I don’t agree that any particular level need be met, whether as percentage or total, because they are all playable if the executive chooses to mess around (see below), but there should be some reinvestment in society.

    You can often blur the line between surplus and salaries or between surplus and rebates/discounts by moving figures around in the accounts. That’s more often done to the detriment of the public purse by reducing tax paid, but you could just as easily do it to meet any arbitrary % definition of social enterprise. But is it social to reduce tax paid like that? You can say that your social goals are more important than the nation’s goals, but why should a social enterprise trump the nation’s democracy?

    • jeffmowatt says:

      Agreed MJ, The shielding of profit from taxation would be to diminish social contribution and our own position on that is clear. There is however a democratic precedent for business to be encouraged toward investment in CITR and EIS tax relief. It was David Floyd’s who’d suggested in his blog that the rise of the social investment market gave reason to define social enterprise for tax purposes.

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