Editorial: Social business blurs the boundaries

As the space between charities and social businesses gets smaller, Stephen Cook asks if the tax regime should be reconsidered

Stephen Cook, editor
Stephen Cook, editor

As economic austerity threatens to become permanent, many charities are doing all they can to diversify income and become less reliant on grants and fundraising. That often means moving to a more commercial, social enterprise model.

This can, however, cause problems. If the commercial activity is part of their charitable purpose and passes the public benefit test, all well and good. But sometimes it might not be related to the charitable purpose - running a cafe, for example - or may fall foul of the public benefit test, perhaps because the service provided is beyond the means of the less well off.

The traditional solution is to set up a trading company that Gift-Aids its profits to the charity. But this means jumping through a series of hoops, with the charity and trading company under different VAT regimes and even different branding. Practically and managerially it can get very complicated. One specialist charity accountant has summarised it as "all a bit of a mess".

To avoid the complexities, some new third sector organisations are choosing not to be charities, doing without the exemption from most forms of taxation that comes with charitable status. Yet they may be pursuing a socially beneficial purpose - Dame Suzi Leather referred last week to the blurring of boundaries between charities and some social businesses. It gets harder to see why one lot gets the tax breaks and the other does not.

How does this relate to government policy? Charities are responding to ministerial encouragement to be more enterprising, but are ministers doing their bit? One of the government's key pledges is to make it easier to run a charity, something that might actually be getting more difficult in the sense described above.

Lord Hodgson's review of the Charities Act 2006 is due to report next month, and it would be welcome to see some progress with this conundrum. One way forward might be to look at conferring some tax advantages on genuinely social businesses that decide not to be charities.

- Read our interview with Arvinda Gohil, chief executive of Emmaus UK, who is banking on a social enterprise model for developing the homelessness charity 

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