Why social entrepreneurs should be celebrating today
Every year budget day reminds me of my early career in one of the big accounting firms. Clients were invited, food and drink arranged, it was a major event. We stood around big screens and watched all of the Chancellor’s speech – the tax guys actually got animated! It’s a bit different now, most of the news is trailed in advance and we are rarely surprised.
But this year I am excited again because today’s budget is really important to the world of social investment and the social entrepreneurs it backs. That’s because we’ll find out the rate of the Social Investment Tax Relief – that might not sound exciting but is has the potential to be a major landmark for investment in social impact organisations.
In the last 20 years over £8.7 billion has been invested in more than 20,000 businesses through similar schemes such as the Enterprise Investment Scheme (EIS), with tax incentives catalyzing a flow of private capital. So, imagine if the same capital flowed into charities or social enterprises.
So who exactly will this tax relief benefit?
The specific measures will focus on registered social sector organisations; CICs, community benefit societies and charities and although the schemes are starting small they will grow. It’s been glaringly obvious for some years that we needed to bridge the gap between tax reliefs on charitable donations and small company and venture capital reliefs. If taxation can be used to incentivise socially useful behavior, isn’t starting a social enterprise at least as good as starting a small private company?
It’s vital that early stage investors who want to drive impact can invest in any sort of organisation without their investment allocation or investment decisions being swayed by tax advantages. This new tax relief will start to level the playing field and make investing in charities and social enterprises as attractive as investing in small private companies.
When an entrepreneur builds a business focused on social impact they don’t wake up every day thinking about the corporate form of their organisation or about tax incentives for investors. They think about the difference their product or service can make to people’s lives. When Ben Allen the CEO of Oomph! formed his company to provide exercise classes in care homes, his primary motivation was to improve the lives of elderly residents. He is committed to making a real social impact.
Ben set up his organisation as a limited company and his early investors benefitted from the EIS scheme before we then invested £200,000 from the Nesta Impact Investments fund. If Ben had set up as a CIC two years ago, raising money might have been more difficult. Importantly, the tax changes in this budget should make raising capital for the Bens of the future easier if they decide to take a different route.
Although some may disagree, it really shouldn’t matter what corporate form is used to drive social impact – a private company where management is motivated by social impact, a board that supports that mission and investors that want to maximise impact and grow scale can be a really powerful force for change.
But while we welcome today’s announcement on tax relief, we’d still like to see the government do more.
Initially the new measures only apply to small investments of around £150,000 and the range of types of qualifying investments will be restricted. It will be fascinating to see how these limits affect the early take up of the scheme. Although our impact fund can provide debt and other instruments like revenue share arrangements, most of the early stage impact investments of around £150,000 haven’t been in charities or other registered social sector organisations. We really hope that the new incentives, even with their restrictions, will encourage a flow of capital to help scale some great social innovations and ideas.
Finally, we hope the government follows through on their intention to broaden the scheme as announced in their Social Investment Roadmap. Although this may take 18 months to work through European legislative bodies, this should increase the amounts of relief and scope of investments, which will build on the first steps being taken this week. Further work on indirect investment into funds by individuals, social impact bonds and increasing the qualifying amounts could also make a real difference to the sector.
So, while I think the days of partying to budget announcements are long gone, today the sector should be celebrating what could prove to be a real landmark moment for social impact investing.
Matt Mead - Chief Investment Officer, Nesta