The Law Commission has made a number of recommendations, the most important being:

• a new statutory power for charities to make social investments
• a proposed set of statutory duties for trustees when making social investments
• amending CC14, the Charity Commission’s guidance for charities making investment
• asking HMRC to create a system for charities to receive prior approval on the tax treatment of social investments

This is only likely to apply to a small number of charities that have the resources to make investments, but here is a quick overview of the changes proposed by the Law Commission.

A new power for social investment

The Law Commission’s report makes clear that in most cases charities already have the power to make social investments. However in some situations, social investments cannot be justified under existing powers to spend or invest.

In order to make the situation clear and to remove any barriers for charities that wish to make social investments, the Law Commission is recommending that a specific power is created for charities to make social investments. This power will apply to all charities unless they expressly exclude the power in their governing documents.

NCVO supported this proposal in our consultation response. Social investment should be a tool available to charities when they consider how best to use their resources. The new power should provide charities and their trustees with the confidence to make a social investment, if they believe that it is the best way to fulfil their charitable objectives.

Clear duties for trustees

The Law Commission’s report recommends three statutory duties for charity trustees when making social investments.

Trustees must:

1. Be satisfied that it is in the best interests of the charity to make a social investment, having regard to the expected overall benefit to the charity, comprising the mission benefit and financial return

2. Review the charity’s social investments from time to time and whether they should be varied

3. Consider taking advice when making a social investment or reviewing an existing social investment.

NCVO supported clear statutory duties for trustees in our consultation in order to give trustees certainty about their responsibilities and to ensure that all social investments received appropriate due diligence. We also supported the duty for charities to consider advice.

In the complex world of social investment, it is right that trustees consider whether they need external support in making a decision – although they should not be forced to take advice. The duties that the Law Commission has proposed are proportionate and will provide a solid framework for trustees making decisions on social investment.

These duties will also override the duties for trustees of charitable trusts that are governed by the Trustee Act 2000 – duties that were created before the growth of the social investment market.

Updating CC14 for changing times

The Law Commission has recommended that the Charity Commission update the guidance for trustees making charitable investments in order to provide additional considerations for trustees beyond the statutory duties described above. It also asks for the Charity Commission to explain that charities should assess the expected financial return and mission benefit from an investment and the costs from making an investment (such as forgone financial return or mission benefit). However this assessment does not require trustees to place a monetary value on forgone financial return or mission benefit.

The Law Commission further recommends changes to guidance on private benefit rules, clarifying that social investment can be made by purchasing shares in private companies. In addition, the report recommends that guidance includes worked through examples of permissible social investments made by charities.

NCVO and CFG recommended that CC14 was updated to reflect the modern social investment market and help trustees in using any new power to make social investments.

The Law Commission’s proposals for CC14 are welcome and will provide extra support for trustees in stewarding their charity’s resources. The clarification that trustees do not need to assign a monetary value to forgone financial return or mission benefit is important and should reduce the administrative burden for trustees wishing to make social investments.

Certainty in the tax system

Over the course of the consultation a number of concerns were raised that HMRC may refuse to recognise social investments as eligible for charitable reliefs because they are neither pure financial investments covered by existing legislation or charitable grants. In response to this, NCVO and CFG recommended that HMRC provide clarity on the tax status of social investments.

NCVO supports, therefore, the Law Commission’s recommendation that HMRC should create a system for charities to receive prior approval on the tax treatment of social investments. This should give certainty for trustees although the Law Commission notes HMRC is opposed to the introduction of such a system because of administrative and cost implications.

Facilitation, not imposition

Perhaps the most important part of the Law Commission’s report was not any of its recommendations but a statement made on the proposed new power. It said that the new power was there to “facilitate social investment, not impose it; whether charity trustees wish to exercise the new power will be a matter entirely for them to decide.”

It is important that charity trustees feel free to make the right decision for their organisation. Charity trustees should not be pressured into making social investments and should treat this new power as one of the options they have for making a difference for their beneficiaries.

The Law Commission’s report will provide welcome clarity for trustees on social investment and NCVO will monitor the implementation of these proposals closely.

Andrew O'Brien, senior policy advisor NCVO. Photo credit: NCVO

This piece was written by Andrew O'Brien, it was originally published by NCVO – the largest umbrella body for the voluntary and community sector in England. The NCVO is currently in the process of merging with Charity Evaluation Services – a leading provider of support and advice on quality and evaluation systems for the voluntary sector in the UK.

Earlier this year Luke Fletcher, senior associate at leading charity law firm Bates, Wells & Brathwaite​, looked at what mighty charity investors could mean for social enterprise.

Photo credit: NCVO London