The Law Commission's consultation Social Investment by Charities, which closes next week, proposes a new statutory power for charity trustees who make social investments, saying that this would provide clarity about existing legal powers.
The paper has been well received by law and finance experts. "It's a clear, well thought-out piece of work," says Jonathan Brinsden, a partner at Bircham Dyson Bell. "In many ways the Law Commission has nailed it in setting out the uncertainties in existing law."
There is also strong agreement that the major question arising from the paper is the tax implications of social investments. Many purely financial investments made by charities are exempted from tax by law; separate legislation ensures that grants are not of interest to HM Revenue & Customs. But there are concerns that social investments - something of a halfway house between the two - might not qualify as tax-free under either rule. "My worry is that if a social investment is deemed non-charitable expenditure, the charity might have to pay tax," says Sylvie Nunn (left), a partner at Wrigleys.
Nunn is keen for HMRC to assuage the doubts arising from a new power, especially as all the signs suggest that the government wants to increase the uptake of social investment. "Trustees need to understand how to be tax-compliant," she says.
Brinsden agrees. "If something were to happen as a result of this consultation - and I sense it will be acted on - it will have a downstream effect on the Charity Commission's CC14 guidance, which would have to be revised, and HMRC would have to rethink," he says.
In its paper, the Law Commission acknowledges the tax implications, alongside non-legal matters such as accountancy and trustee attitudes; but it says these are not for consideration by the current consultation.
Among the matters that are covered, says Julian Smith (left), a partner at Farrer & Co, there is nothing very surprising - an exception being the legal position on using permanent endowment for social investments.
"I think practitioners believed it was difficult to use permanent endowments, but the Law Commission seems to be more comfortable with it," he says.
The consultation also deals with the thorny issue of a social investment potentially resulting in private benefit. "In anything a charity does, the trustees have to have regard for private benefit, and it will be more pressing in some aspects than others," says Smith. "Where there is a possibility of people making a profit, it will be a bigger concern."
Another issue, according to Sarah Woodfield, policy and public affairs support officer at the Charity Finance Group, is how charities' accounts would record these investments. "The commission needs to be clear about the impact that the introduction of the power would have on reporting requirements for charities, in particular those under the new Sorp," she says.
Woodfield says she is pleased that the consultation concludes there is no need for the "fastidious quantification of the anticipated impact of the social investment", which would have required charities to put a monetary value on investments' social returns. "But we would not want the recommendation to discourage charities from making and communicating impact assessments of their investments where appropriate," she says.