Where do charities sit within social enterprises?

Where do charities sit within social enterprises?

Posted by: Jonathon Henderson / 10 August 2018

 

By Robin Fallas

Partner, MacRoberts LLP

OK, let’s start with the bad news! If after reading my previous blog you were interested in attending the Social Enterprise World Forum in Edinburgh in September, I’m sorry (but also happy) to say it is sold out! Still, there are plenty of opportunities to keep up with what’s happening in this area.

I’ll now pick up where I left off last time when I was saying:

  • Social enterprise spans a spectrum of ways in which trade is done for social good.
  • Across that spectrum, you go from the “fully asset locked” (see below) and regulated charity, through to businesses trading without any specific legal “asset lock” on surplus/profits/proceeds, but have a strong ethos and internal commitment to social purposes).
  • Much has changed in the last 10 years

So, let’s now take a look at the charity end of the spectrum through the lens of the last decade. If we’re talking about charities, then in short: the pace of change – away from charities simply being involved in hand-outs from the well-meaning – has increased exponentially over the last 10 (let alone 40) years.

The “Asset Lock”

With a charity, everything that it does is geared towards the “charitable purpose” for which it was set up. A charity’s constitution locks this in legally, which is why we talk in terms of an “asset lock”. Surpluses generated need to be used towards the charitable purposes and if assets are disposed of, the value is realised and applied to the charitable purpose.

In Scotland, the Office of the Scottish Charity Regulator (OSCR) polices this asset lock – regulating it to ensure, amongst other things, that charities are not used for private gain or mismanaged. The ‘taxman’ sits as another gate-keeper, as charities receive advantageous treatment on the premise that their activities are in pursuit of their charitable purpose. This general concept is mirrored in regimes around the world – India being one such example. Also mirrored across the world is a greater duty on those running a charity to avoid risking the assets that are locked in, again policed by regulators. This is a very relevant consideration within the social enterprise spectrum.

An Increase in Trading

For a number of charities in Scotland, the last 10 years have seen more “trading”. The 2017 Social Enterprise in Scotland Census records that 1 in 5 charities in Scotland are undertaking enterprise activity and that 75% of social enterprises in Scotland are charities.

There has been significant progress in understanding where charities fit, in terms of spheres of economic activity, into the social enterprise picture. The Census also reveals that the biggest slice of social enterprise income in Scotland is achieved in housing with 44.2% of the total income across the social enterprise sector. In terms of numbers, housing associations accounted for £1.21 billion of enterprise activity. It also shows that significant activity is also carried out in the health and social care sector, achieving 26.3% of the total income across the social enterprise sector in Scotland. Both of the above areas involve a significant number of charities.

For charities, there are rules about trading; in essence any significant trading must be in furtherance of charitable purposes. For example:

  • Housing associations – where the core trade “in furtherance of charitable purposes” would be the trade of providing social housing and receiving rent payment.
  • Social care, where the core trade would be being paid for delivery of, for example, care of the elderly services.

In the past 10 years, shifts towards more charities trading have included the social care sector. The reason/driver has often been associated with reducing public sector budgets or perceptions around requirements to move away from grant funding. In short, charities have seen grant funds replaced by competitions for service contracts. Whilst the detail is for another blog, the drivers of that shift have often been on the grey and misty side of clear but with substantial implications within the charity sector (in terms of VAT considerations, contractual risks of delivery and costs and effect of tendering).

Funding for Charities

The other area in which there has been significantly more involvement of charities in “trading” has perhaps been most driven by austerity and general reductions of funding. In short, charities have had to look for new income streams to support their activities. Traditionally this was the charity shop. In the past 10 years, you can add to that the charity windfarm, consultancy business, health spa, commercial delivery arm, holiday let division….the list goes on.

Broadly speaking, where substantial trading activity of this type is entered into, the charity forms a separate legal vehicle. This “charity + legal vehicle” model also falls within social enterprise, where the purpose is to generate funds for the social good (or “public benefit”) for which the charity operates. In the past 10 years there has been a significant increase in this sort of activity in Scotland, including an increase in the number of collaborative or jointly owned legal vehicles. Not all of it has worked, but there are plenty of examples of success.

Going back to the global theme, and again taking India for example, you see the same sort of general regimes in place. Interestingly, in the past few years, we have seen an increase in the number of Scottish / overseas charity collaborations around such social enterprise initiatives – an exciting development and in no small part bolstered by the likes of SEWF.

No doubt there will again be a large number of charities at SEWF this year. There will, however, also be a large number of social entrepreneurs who operate outwith the charity sector. This may be because their social objective was not deemed charitable or perhaps because they sought greater freedom to take entrepreneurial risk or mix social and private gain. My next blog will take a closer look at this next group of social entrepreneurs as we move through the social enterprise spectrum.


MacRoberts is a Bronze sponsor of SEWF 2018