Open for business?
Ian Hempseed challenges the myth that charities cannot be social enterprises and that a separate entity has to be set up
KEY POINTS
- Charities can trade for a profit within their objects
- A social enterprise must be a viable business
- The majority of profits are reinvested or applied to community benefit
- Governing board skills are different
- Check public benefit rules
- Being more tolerant of risk is usually necessary
Too often the mantra is repeated by trustees that charities cannot be social enterprises. This view can lead to the establishment of wholly-owned trading companies, or indeed independent organisations, where there is no need. To destroy that myth, charities can run social enterprises and can trade for a profit within their objects.
Highly prominent charities, such as Turning Point with its community-led services such as Connected Care and the Eden Trust, which operates the Eden Project in Cornwall, do exactly that and promote themselves as social enterprises, as well as charities.
What are social enterprises?
There is no legal definition of a social enterprise and consequently opinions can differ on their essence. First and foremost, a social enterprise has to be a viable business. The primary aim which drives all its activities is to achieve social or environmental value from trading. At least a majority of the enterprise’s profits should be re-invested in the business for its aims or applied for community benefit.
Some consider that the social enterprise ethos should be reinforced by an asset lock to ensure that assets cannot be transferred out below their value and then used for a purpose unconnected with the original aims.
The Social Enterprise Coalition and RISE recently launched the Social Enterprise Mark to raise awareness of social enterprise. Details of this are set out in Figure 1.
Taking these cultural and operational parameters, it is clear that a charity could be able to describe itself legitimately as a social enterprise. Another useful source of information is the Social Enterprise Coalition (www.socialenterprise.org.uk).
Advantages of running a social enterprise through a charity
It has long been recognised by tax legislation that all or a substantial part of a charity’s activities can be trading to deliver its charitable objects.1
Any profits the charitable company makes from trading in furtherance of its objects are exempt from corporation tax as long as those profits are ploughed back to its objects. As a way of making their businesses more sustainable, social enterprises should be looking to negotiate contract prices which can generate a tax free surplus to be reinvested.
Charities may need to own premises to deliver their services. A charity has the advantage that relief from stamp duty land tax is available on the acquisition of freehold or leasehold premises. If the premises are subsequently sold, any chargeable gains would be exempt from tax. Also, charities are entitled to mandatory 80 per cent relief on non-domestic rates where the premises are used wholly or mainly for their charitable purposes and may be able to obtain discretionary relief for the other 20 per cent.
Becoming a social enterprise – organisational or cultural change?
A combination of organisational and cultural change may be required for an existing charity to turn itself into a social enterprise. In many cases, though, the trustees may be surprised to find that most of their efforts are concentrated on the ‘cultural’, as across the organisation from trustees to staff and volunteers they search out innovative ways to improve the value of what they can offer to their beneficiaries. Inevitably new ways are found of doing ‘business’.
This article now explores some of the issues which the trustees will need to consider if they are to transform their organisation into a social enterprise.
Governance structure
Trustees should check that their objects are wide enough. Any changes would require the consent of the Charity Commission.2 Trustees, particularly of charitable companies, may have more flexibility than they expect to do this. The Charity Commission indicates that it is prepared to consider material changes to the objects of a charitable company as long as they would not undermine or work against the previous objects.3 Some older governing documents contain a restriction on permanent trading which would need to be removed.
Where users of the charity’s services become trustees there may be a prohibition in the governing documents on them receiving any benefit in their capacity as a beneficiary. That would need to be removed with the consent of the Charity Commission. For an unincorporated charity this would be the time for the trustees to consider about incorporation if there are concerns about personal liability under trading contracts or the potential for a negligence claim in the delivery of services.
Leadership
Running a business may need a different set of skills on the board. The board should carry out a skills audit and then recruit against that. The charity will need an effective board which can take decisions efficiently and speedily, particularly where it is entering a new world of competitive bidding where the procurement timescales can be short and demanding.
The trustees should carry out a review to check that their current governing documents allow the new board set up. For example, many membership charities limit the trustees to the pool of members or only allow the members to nominate and elect without any formal assessment of the candidates.
Some boards may be able to co-opt external expertise but, on closer scrutiny, find that co-optees are not entitled to vote or indeed are second rate trustees because they serve a shorter time than others. The governing documents may require amendment, for example, to enable a panel to appoint after advertising the posts.
The board may also need to review their approach to risk and be prepared to manage a higher level of risk inherent in contracting, service delivery and obtaining new sources of funding.
The integrated board
Many social enterprises want to have an integrated board on which the senior management team can be responsible for strategy and risks in the same way as the other directors. This has been one of the attractions of social enterprises setting up as community interest companies which allow the whole of the board to receive reasonable remuneration.
However, for charities the norm remains that the senior management team do not also serve as trustees. There are, though, exceptions where charities have obtained authority to allow this. Charitable companies typically prohibit in their articles of association a trustee from receiving any salary and the removal of that prohibition would require consent from the Charity Commission.
Where an employee subsequently becomes a trustee, the Charity Commission acknowledges that their employment remuneration will not be a benefit arising from their trusteeship, although that could become so if, after appointment, any increases in their remuneration package go beyond the agreed employee pay structure.
Leaving aside the problem of the prohibition in the articles, the Charity Commission has explained when it considers regulator approval is needed or advisable for an employee to become a trustee.4
Refreshing staff skills
The coalition government has recognised many of the problems facing social enterprises when bidding for public sector contracts, such as the disproportionate risk in some contracts, the complexities of the bidding process and a concentration on project costs rather than contract price.5
The charity will need to have staff equipped to meet these challenges. The board should arrange training for staff to develop skills in handling, negotiating and managing contracts.6
Pricing
When a charity is charging for services which form a significant part of its charitable activities, it must ensure that the level of charges is not so high as to fail the public benefit requirement.
Charity law does not stop a charity charging for fees to deliver services within its objects, or indeed to make a profit from doing so. However, it will become a public benefit issue if the level of fees is so high that many people cannot afford them. Trustees would then need to ensure that there is still a sufficient opportunity for those people to benefit in a material way from the charity’s other work which is related to its aims.7
Engagement with stakeholders
For social enterprises to deliver the maximum social impact, they will need to work out what is the most effective way to hear the voice of their stakeholders. That voice can help in the design of their services so that they best meet the actual needs of their beneficiaries rather than what a provider perceives them to be.
Charities have just as much flexibility as other social enterprise organisations in doing this. There is no model for engagement and each board needs to work out what will work best for them. At one level the board could listen to stakeholders through advisory groups.
At a higher level, stakeholder representatives could participate in decision making either as a trustee or a member of a committee with delegated executive power.
For some social enterprises, it is equally important that engagement also embraces accountability and, therefore, in ‘stakeholder led’ charities the stakeholders might be members of the charity with the power to elect trustees from the stakeholders.
The ultimate accountability comes with the power to remove trustees which, in the case of charitable companies, is a statutory non-removable right of the members under section 168 Companies Act 2006.
Funding
Charities should recognise that, as well as the traditional funding routes through grants and gift aid, trustees should be prepared to look at other financing opportunities which may require a higher tolerance of risk. Negotiating robustly with commissioners to obtain the possibility of a contract surplus may require a change in culture. Although charities cannot raise equity finance, there are some social enterprise investors offering quasi-equity in a form of debt finance for higher risk investments where their return would be obtained on the charity reaching agreed profit or turnover performance levels.
1. See Pesh Framjee’s article ‘A charitable trade’ in Caritas, issue 31, June 2010, page 13.
2. Section 64 Charities Act 1993 (for charitable companies).
3. Charity Commission Operational Guidance OG 47 B1.
4. Charity Commission’s ‘Trustee Expenses and Payment - CC11’.
5. The Green Paper ‘Modernising Commissioning: Increasing the role of charities, social enterprises, mutuals and cooperatives in public service delivery.’ www.cabinetoffice.gov.uk/ news/modernising-commissioning-green-paper-published
6. See also Ruth Lesirge and Hilary Barnard’s article ‘Governance – where is your board heading?’ in Caritas, Training and Development Guide 2010, page 13.
7. Charity Commission’s ‘Public Benefit and Fee-Charging’.
Author: Ian Hempseed
Ian Hempseed is a partner and head of the third sector team at the law firm Hempsons and specialises in advising charities and social enterprises on their governance and trading.
He was a co-author with the Social Enterprise Coalition of Healthy business – a guide to social enterprise in health and social care.
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