Social enterpreneurs, not investors, need tax breaks

Rodney Schwartz of ClearlySo says hyping the sector further could actually delay its necessary path to sustainability

Rodney Schwartz
Rodney Schwartz

In 2010, I wrote a piece in Third Sector arguing against tax incentives for the social enterprise sector, saying they were ineffective, complex and unfair.

I have added elsewhere that they are distortive. Such advice seems to be falling on deaf ears - our sector, and the world of social investment generally, is very much in favour, and this government is committed to providing further encouragement through fiscal incentives.

Despite the fact that ClearlySo might be a beneficiary of state largesse, I remain opposed to such incentives. Hyping the sector further could actually delay its necessary path to sustainability. Supporting a sector already predicted by Boston Consulting Group and others to grow at more than 35 per cent a year is unnecessary, wasteful and likely to have unintended consequences.

In the likely event that my advice is ignored, I would urge the government to target the incentives on social entrepreneurs rather than social investors, for three reasons. First, social enterprises and the positive social outcomes they generate are what we seek to encourage, rather than social investment, which is a means to an end. Government incentives should be targeted at intended beneficiaries of any programme, and the best way of doing this is by incentivising the creation of social enterprises directly.

One problem with my approach is that there is no single category of social enterprise. However, community interest companies, industrial and provident societies and cooperatives could be suitable beneficiaries. Another approach could be to reward the desired social impact itself. In this way, many social businesses, structured as limited companies, could also benefit from the scheme. I appreciate that this approach involves complexities, but they are not insurmountable. Government would identify those outcomes it seeks to support and the credits could reflect anticipated savings in public services budgets commensurate with the outcome achieved. This is similar to payment-by-results structures, but might cost less to implement.

The second attractive aspect of this proposal is that, if done cleverly, it could enable capital markets to amplify the impact of such subsidies and credits. Imagine if the government announced credits to reward the generation of easily identifiable social benefits and made it clear that more would be forthcoming. The capital markets would favour social businesses and enterprises that generate these social impacts and incorporate estimates about future policy changes, thereby lowering the cost of capital to many social enterprises. Even today, capital markets value social impact - for example, in anticipating punitive charges on polluters.

The third argument against incentives for social investment is that they would only benefit the rich, as only they have meaningful savings to benefit from fiscal incentives. A recent report by Lloyds Bank said that 30 per cent of UK households have no savings and a further 19 per cent have savings of less than £1,500. That's half the population unable to benefit from these incentives.

I am as keen as any practitioner to help ensure the social sector grows faster, but we need to be careful of what we wish for, aware of practical issues about implementation and mindful that this is not the time to be creating loopholes for the well-off.

Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital

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