ARTICLES Tax breaks for doing good?

Tax breaks for doing good?

There are 165,000 charities in the UK, and the number continues to grow. Despite challenges over recent years, charity continues to be seen by the public with respect and action, with a quarter of the population regularly volunteering and over £10bn in annual donations.

What’s the deal with charities?

Charities are regulated institutions in the UK. They must have objectives which are for public benefit, must show they are delivering public benefit, and any personal benefit must be no more than incidental. No profits are distributed, and any surplus goes back into the charity to do more of its public benefit work. Yes, there are some oddities in the system – the debate on private schools, high pay for a handful of the biggest charities – but it is a system which overall has high public recognition and public trust.

So what tax breaks do they get? Charities receive gift aid when a taxpayer donates money – typically 25%; on top of that, the donor may get a personal tax break if they are higher tax bands. There are tax breaks on inheritance tax if at least 10% of a deceased person’s estate is donated to charity. But then investors putting money into loans on social enterprises can often get a tax break too – Social Investment Tax Relief is there to help new and growing social enterprises to expand their work. Come to that, there is a similar tax break for investors putting equity investment into young growing companies – the Enterprise Investment Scheme, and more recently the Seed Enterprise Investment Scheme, can sometimes be even more generous, balancing the risk investors take with early stage companies.

There are differences – donations to any size of charity attract the tax breaks, for example – but it’s in the same ballpark.

What is really different is corporation tax: charities don’t pay it, and that’s pretty much unique. You could argue that charities don’t distribute profits, so why would there be a tax on profits? But companies may have to pay corporation tax even if they don’t share the profits through a dividend. The argument is that any surplus in a charity goes back into helping the charity do more social good.

Three pillars

Should this be unique for charities? There are arguments to say that other kinds of organisations that do good should get at least some kind of benefit on this tax. After all, a company that does social benefit is probably reducing government costs somewhere down the line, and we would want companies to be incentivised to do good.

But the Treasury would have major concerns: you can draw a line between a regulated charity and any other kind of organisation doing good, whereas it would be very difficult to say how much good is “good enough” for a company to get additional tax breaks.

So charities get unique tax advantages because they have a clear, defined, regulated status. They are bound by their constitutions to do good; they are locked in forever to continue doing good; they are social first, with any financial benefit modest and incidental. Three crucial pillars for all charities.

But look…

Over recent years, we have seen the rise of social enterprises and the creation of Community Interest Company forms often known as CICs. They trade for social benefit, can distribute some of their profits, and are a growing movement which is changing the culture of doing business and of doing good, for a new and more sustainable social and economic future. CICs have to show community benefit, but they are much more lightly regulated than charities. The strength of the three pillars is somewhat weaker.

Even more recently, people have been creating what are sometimes called “profit with purpose businesses”: committed to social benefit, but allowing full profit distribution. So far this sector has no clear boundaries, but new mechanisms are coming into play. The B Lab agency accredits profit with purpose businesses, and has a detailed analytics system to check if the companies are doing good, and to help them improve further. Purposely is a new agency making it easier for companies to put strong social mission locks into their company articles. Social mission incubators and accelerators help new profit with purpose companies to grow, and social venture funds invest to take them further. But a company can exit its B Lab recognition, and can give up its social mission. The strength of the three pillars is weaker still.

Incentivising social impact

Could we look at tax incentives to organisations that deliver social good? So instead of focusing on the type of organisation – charity, social enterprise, company – the tax break is for the actual benefit created. It would have to rely on a rigorous, auditable system for calculating the impact – the social good – that has been achieved. That would be very difficult in general terms, but there are some specific opportunities.

For example, social impact bonds which have clear criteria for the level of social benefit delivered before money is paid out. In fact, individual investors can already be eligible to attract social investment tax relief by investing into social impact bonds. Could that extend further? Should we look for tax breaks on public service provision, or on early action to prevent harm?

It’s all good?

The energy and ambition of the UK population to improve the lives of people and planet is truly wonderful to see. A quarter of newly formed companies in the UK now say they want to achieve a social or environmental benefit. A rapidly growing number of customers want to buy social. Young people preferentially seek out jobs in organisations that do social good. Millions of people donate or volunteer with charities. Millions more simply do good just as themselves. Human nature at its very best.

It’s all good. But when we look at the three pillars: tackling the deep social problems, long term commitment to keep doing that, and putting social benefit before financial gain, it’s clear that charities have the strongest locks. There is a logic to giving the best tax breaks to charities. And there is certainly a public passion to help them on their way.