Are Trust Engines the key to unlocking the potential of Social Investment Tax Relief?

Over the next two weeks lawyers, accountants, social investors and wannabe social investors across the land will be frantically delving into the minutiae of Nominee Funds, capital gains deferral and anti-abuse measures in preparation for their responses to the Treasury’s consultation on Social Investment Tax Relief (SITR).  Yet - perhaps more than any other - one conundrum still stands out: namely “what kind of companies should represent eligible investments for SITR?”  

 

Yes, this is the age-old debate about definitions in social enterprise.  But now the debate has added teeth.  Because, in order to get the Treasury on board, clear binary distinctions are absolutely critical.  Definitions suddenly matter more than ever.  In the words of Nick O’Donohoe: ‘We need to be able to define more specifically what should count as social investment.’

 

The SITR is designed to encourage new investors to the sector.  Currently the proposed position is that the relief be applied when investment is made into a charity, Community Interest Company or Community Benefit Society.  Yet everyone in the sector knows what we represent is much wider than these three legal structures.  But it is in the fuzzy areas on the edges where the definitions debate is fiercest.  Without these regulated legal forms, many important stakeholders question whether the original social motivation of a founding team is enough to carry their company through a minefield of challenges over its lifetime.  Management and board members change; new investors come on board; new revenue opportunities present themselves. Simply trusting the directors to keep the focus on social mission isn’t always enough. 

Is it possible to build into the company itself a set of measures that formalise and lock this social purpose in, allowing external stakeholders to hold it to account?  And, in doing so, to demonstrate that Companies Limited by Shares or Companies Limited by Guarantee that offer a clear social purpose and deliver tangible social value can be included as recipients of SITR?

 

In this context, UnLtd and Big Society Capital hosted a roundtable earlier this month to explore the concept of ‘Trust Engines’: mechanisms that allow social entrepreneurs to articulate, evidence and then protect the social value and social purpose of their organisations.  In attendance on the day were representatives from the Social Stock Exchange, Social Finance, Nesta, Bates Wells Braithwaite, Business in the Community, a Local Authority commissioner, the CIC Regulator plus a number of Angel Investors and Social Entrepreneurs.  We think Trust Engines have a much bigger role generally to play in unlocking value in our sector.  But we think they may play a role in unlocking the potential of Social Investment Tax Relief too.

 

 

 

Our goal at the roundtable was not to discuss the SITR per se, but to try to better define the parameters of the debate around Trust Engines with a view to further consultation and awareness-raising of the issues discussed.

 

The debate focused on three key areas: 

 

Firstly, which Trust Engines are also ‘Growth Engines’ – i.e. which ones act as a competitive advantage in the marketplace and which hamper business growth or put off potential investors?

 

Secondly, the recognition that Trust Engines vary depending on the nature of the organisation: its revenue model (does it sell directly to the beneficiaries?), the stage of development (can it realistically evidence its social impact at an early stage?) and the sector it works in.

 

Thirdly, the tension between ‘simple decision making’ and ‘intelligent decision making’.  Should we all have the freedom and flexibility to make a judgement call on social value or is the need for binary distinctions increasingly more important?

 

In the context of the SITR consultation, the answer to the third question is clear: we need black and white positions.  But to achieve this and satisfy the first two points is much harder.  For many stakeholders, it may require an independent body that can give simple reassurance to external stakeholders AND make intelligent decisions on a case by case basis: a ‘Protector’ that can judge the necessary balance between social purpose and evidenced social value creation - at an appropriate level for the stage of the company’s life and the nature of the business and social model.  In which case, the challenge becomes to find who this could be and what tools, skills and information they would need to effectively fulfil this role.