This article was featured in The Syndicate_, the magazine for the investor community. Read the full issue for free here._
Turn on the TV, visit any reputable website, talk to friends and colleagues, and you’ll see that the news isn’t good. The world is in a sad state of affairs and the negative impact that humanity is having, both on the planet and on each other, seems set to drive us to ruin. It’s odd and disturbing that this should be the culmination of tens of thousands of years of our unchecked progress… Or is it? Bad news surrounds us every day, so who can blame Joe Public for being so negative about where society currently resides? Good news is no news.
The truth is that good deeds and great people are all around, mingling with those who go out of their way to harm society and hog the column inches as a result. Perhaps it’s time that greater focus was put on investing in those who undertake ambitious social enterprise projects to repair and improve the lives of those around them.
There is no fixed definition for ‘social enterprise’, but Social Enterprise UK states the following criteria (and, really, who’s going to argue with them?):
- Have a clear social and/or environmental mission set out in their governing documents
- Generate the majority of their income through trade
- Reinvest the majority of their profits
- Be autonomous of state
- Be majority controlled in the interests of the social mission
- Be accountable and transparent
The case makes sense, not only from a social point of view, but also a financial one. The SEFORIS Report, published in September 2016, showed that the 135 social enterprises surveyed generated around £450m worth of revenues in 2014, and, of those, 65% had grown their revenues from the previous year… not bad, is it?
Clearly it’s not all martyrdom and self-sacrifice for the greater good. Investing in social enterprises also gives access to some savvy tax benefits, but before going into those benefits, it’s worth noting there are different structures that social companies can fall into – and luckily for us, SEFORIS covers those as well and I’ve detailed some relevant structures below.
This was the breakdown in the UK as of 2014:
- 8% – Private company limited by shares
- 10.5% – Community interest companies
- 36% – Charity
- 41% – Private company limited by guarantee
There’s one structure there that I’m sure many of us are comfortable with, however, it only makes up 8% of the social market, so first let’s tackle those in the majority. After that, we can return to the familiar waters of companies limited by shares.
Community interest companies
Community interest companies, or CICs, are fully regulated companies that are, importantly, asset locked, which ensures that the assets of the CIC are retained for the benefit of the community. What needs to be considered with all CICs is the structure of the company: they have to incorporate like any other. A CIC which is a company limited by guarantee without share capital has no shareholders. Likewise, A CIC which is a company limited by shares adopting Schedule 2 Articles may only pay dividends to specified asset-locked bodies, or other asset-locked bodies with the consent of the Regulator.
Now, I know what you’re thinking, not a strong start – but no jumping the gun, please. What we need to be looking at is the third alternative: a CIC company limited by shares adopting Schedule 3 Articles. CICs under this structure can pay dividends to investors who are not asset-locked bodies. However, these dividends carry a cap of 35%, which ensures that a minimum of 65% of the company’s profits are reinvested back into the community, which should help the social investor sleep even better at night.
CICs cannot benefit from the traditional SEIS/EIS schemes that we’re all used to, although they do qualify for Social Investment Tax Relief. A lot of you will be wondering what that is; keep calm, I’ll go into that later.
Charities and CICs look pretty similar from a passing glance, but the differences become apparent when you dig a little deeper. Charities must be established exclusively for charitable purposes; CICs can be established for any lawful purpose, as long as their activities are carried on for the benefit of the community (I know… clear, right?). Charities carry far more regulation than CICs, but can also benefit from a multitude of tax breaks. In comparison, because CICs are incorporated like any other company, they don’t benefit from these tax breaks even if their purpose has a charitable aim. However, they are able to operate more commercially than a charity.
Now, I know what a lot of you are thinking: ‘You don’t invest in a charity, you donate.’ Well au contraire, my friend, there are ways for individuals to invest in registered charities. Let us get one thing clear: charities cannot issue shares, so charities have to find other ways to raise cash. Charity bonds tend to be the most popular. These are tradable loans between a charity or social enterprise and a group of social investors. Investors are usually offered a fixed rate of interest. Generally, these bonds tend to be unsecured, but favoured because of their simplistic and transparent nature.
A good breakdown of the differences between charities and CICs can be found on the gov.uk website.
Private company limited by guarantee
Often formed by non-profit organisations, or as CICs as mentioned above, a private company limited by guarantee is owned by guarantors who agree to pay a set amount of money towards company debts. Most civil society organisations (CSOs), local sports teams and unions will be set up as such and this may be a reason these companies represent such a large part of the market.
A private company limited by guarantee carries many of the benefits of being a limited company, such as its attitude towards debt responsibility, but it cannot issue share capital. Like charities, it can issue loan capital, but that’s about it – and it probably won’t be high up on the agenda for most investors.
Less scary stuff
Relax, put your feet up, it’s all going to be ok – we’re turning left onto Easy Street. Companies limited by shares is a format that the vast majority of investors will be comfortable with. And you’ll be thrilled to hear that even in this familiar format, there are ways for you to invest your money into social causes.
Private company limited by shares
This is the standard format for most companies incorporated in the UK, and the sole format that SyndicateRoom has worked with to date. Not all companies that have a social impact have to be registered in a fancy new way – some can be both profit motivated and socially motivated. A good way to find these sorts of businesses can be through platforms such as ClearlySo or Mustard Seed, who do great work towards promoting profitable, socially motivated companies. These platforms have their own criteria for socially motivated companies and can be a great way of making sure your investment hits the right spot.
Now, B Corps. These are special organisations that are both profit and socially motivated. As an investment proposition, they will be far more familiar to a sophisticated investor because, from a legal point of view, they are no different to other companies limited by shares.
The B Corp label is an official label awarded by a great organisation called B Lab UK. In order to qualify for B Corp status, among other criteria, a company has to meet rigorous standards of social and environmental performance, accountability and transparency. In legal terms, it acts the same as any other UK limited company and can take investment, and issue shares, in the same way. This means it can benefit from EIS and SEIS, which might make those of you interested in tax efficiency take a hard look at your portfolios.
There are many companies, some very well known, that operate as B Corps. These include One Water, Mustard Seed, Rubicon, Triodos Bank and a little ice cream company set up by two socially motivated entrepreneurs: one called Ben, the other called Jerry. And who wouldn’t want a scoop of that?
In this world, nothing is certain, except death and taxes.
These are overwhelmingly the stars of tax incentives that UK investors can benefit from. SEIS and EIS – the ‘seed enterprise investment scheme’ and regular ‘enterprise investment scheme’, but you already know that – offer generous tax rebates when investments are offset against income tax. These are designed to mitigate risk for investors and encourage them to invest into early-stage companies.
These are two of the most generous tax relief schemes in existence, with EIS offering up to 30% tax relief on your initial investment – and SEIS offering up to 50%. SEIS is only available for the first £150,000 of investment into a company, but this still means that, in a simple sense, from a £10,000 investment into an SEIS-qualifying company an investor risks losing a maximum of £5,000 – and that’s not taking into account loss relief or capital gains relief, which puts investors in an even better position. This relief is available only to UK incorporated companies that can issue ordinary shares. As such, it’s applicable to B Corps and other social interest companies that may not yet carry the official title, which means that you, as an investor, are not put out of pocket for investing in a socially responsible company over one that is motivated purely by profit.
For more information on EIS tax reliefs, including an EIS cheat sheet featuring examples of the tax reliefs on offer, download SyndicateRoom’s latest report for free: Tax-efficient investing in a digital world.
Tax-Efficient Investing in a Digital World
Download your copy of the report today
Social investment tax relief
Very much the tinned peaches at the back of the tax incentives cupboard – sweet but widely unused – Social investment tax relief (SITR) allows social enterprises and charities to raise finance from individual investors, who in return benefit from a 30% tax relief on loan or equity investment that they contribute.
Initially modelled on its more illustrious brother, EIS, SITR shares many of the qualities and criteria. SITR is available on investments made after 6th April 2014. A good guide to SITR can be found within the Essential guide to social investment tax relief from the Big Society Capital. If you’re looking to make an investment into any charity, community benefit society or CIC (looking better and better), then do check to see if SITR is an option.
Another thing you’ll notice is that SITR is applicable to loans as well as equity (take that S/EIS!), which means that these sorts of social investment may be as good for your liquidity as they are for your soul. There are obviously criteria around this, and I encourage all investors to make sure you’re comfortable with these before investing any capital.
If you take anything from this article, let it be that social investing is both necessary and complicated. If you haven’t grasped that then I’ve done a horrible job here. I’ve purely scratched the surface of social investing, giving investors something to think about and explore further.
Social investing is something that requires research and due diligence, and it should never be assumed that socially motivated companies will be acting in the same way as those who are not socially motivated. However, social impact is something that none of us should be shying away from and we do have a duty to our communities to invest wisely. Opportunities in this sector, especially charities or CICs, are very few and far between. However, B Corps and organisations such as ClearlySo and Mustard Seed represent a great way to start your journey into social investing, with the certification of a social goal. SyndicateRoom encourages you, as an investor, to diversify your portfolio… I hope you think about socialising it in the process.