Taking positive action to help social enterprises

‘Ownership’ is not always a precise term and in this context I am not just thinking in a qualitative sense - doing it well, thinking about strategy, good decision-making and so on - but rather in the sense of the nature of the ownership, the model or the characteristics. For example, the PLC model, family owned businesses, state owned, employee owned and mutuals. In its recent report on plurality, stewardship and engagement the Ownership Commission said that a healthy, pluralistic capitalism will have - indeed does need - a mix of ownership forms that strike the balance in different ways. But it will start to malfunction if one ownership characteristic or interest starts to dominate. The idea is that if you have a number of different forms of ownership then you will have diversity in governance ideas, risk appetite and management, incentives, behaviours and outcomes. Ultimately the business system will be more resilient if there are different ownership structures. Of course, this is easier said than done. As we know, Britain is dominated by the large shareholder PLC form but we also know from the Crash that people are beginning to understand that we need to lessen this dependency.

Addressing the PLC imbalance

The strength of the PLC has led to some uneven legislative impact on other corporate forms. So for example, the legislation for cooperatives and mutuals has been arguably out of date and there are taxation differences for the different forms. Also employee-led organisations and social enterprises often need to generate capital for growth from their trading income because they have no shares to sell and no access to markets. It is only relatively recently that this has become the subject of greater scrutiny and a growing realisation that these inequalities are just perpetuating the in-built problem.

The Government does however have a track-record now of starting to address these inequalities, including setting up structures like the Mutuals Taskforce to promote employee ownership of public sector spin-outs and it is helping some organisations move forward into similar formats like the Post Office Ltd. Real, positive action is genuinely needed to stimulate thoughts, ideas, advisors and more flexibility and variety in the  system. This includes levelling the playing-field and helping employee owned businesses at critical times including creating taxation and regulatory equivalence with other types of organisations. The Ownership Commission very much picks up this whole theme and looks at the possibility of tax-incentivised savings and investments for the benefit of members and the ability to issue bonds to members who want to invest in the business.

A couple of things have also happened this month which may contribute to the long road of recovering the imbalance. Firstly, the launch of Big Society Capital; secondly, the review of the position of NHS health care providers which was announced in the new Health and Social Care Act 2012.

Big Society Capital

Big Society Capital has been set up by the Government to help finance charities and community groups. It has a 600 million pounds in the bank derived from unused cash in bank accounts that have been dormant for more than 15 years. The organisation is in fact independent of the Government with 60% of its shares owned by the Big Society Trust - a private limited company comprised of executives from social, business and Government roles and 40% by banks. The fund will be used where social enterprises can prove they can repay the investment. Generating capital has been difficult but “this is about supplying capital to help society expand” said Prime Minister David Cameron. Venture capitalist Sir Ronald Cohen, who is Big Society Capital’s chairman, said that the aim of the fund was to create a thriving market for social investment and to help organisations that were unable to get a normal loan because they lacked assets that could be offered as security. However, some have highlighted the limitations of the scheme - namely the limited amount of the money which will not help those that do not have a revenue stream that can be used to repay the funding or organisations, who themselves simply cannot cope with risk capital.

Report on Providers under the Health and Social Care Act 2012

Another interesting development is contained in the new Health and Social Care Act 2012 which amends the NHS Act 2006. The relevant provision is set out below:

1GSecretary of State’s duty as to reporting on and reviewing treatment of providers

(1) The Secretary of State must, within one year of the passing of the Health and Social Care Act 2012, lay a report before Parliament on the treatment of NHS health care providers as respects any matter, including taxation, which might affect their ability to provide health care services for the purposes of the NHS or the reward available to them for doing so.

(2) The report must include recommendations as to how any differences in the treatment of NHS health care providers identified in the report could be addressed.

(3) The Secretary of State must keep under review the treatment of NHS health care providers as respects any such matter as is mentioned in subsection (1).

(4) In this section -

(a) “NHS health care providers” means persons providing or intending to provide health care services for the purposes of the NHS, and

(b) “health care services for the purposes of the NHS” has the same meaning as in Part 3 of the Health and Social Care Act 2012.”

The provision stems from discussion in Parliament about the fact that, unlike NHS bodies, charities do have to pay VAT on goods and supplies in certain circumstances and this, it was argued, placed them at a competitive disadvantage. Even so, charities do have a better tax position than social enterprises. In any event, as the Bill went through Parliament a provision was introduced that required the SoS to look at the issue of VAT and charities and report within the year; yet, I am pleased to say that, before the Bill became an Act, the provision was widened to include an obligation to look at the treatment of NHS health care providers as respects any matters including VAT - and the provision now covers social enterprises as well as charities.

Finally

The Ownership Commission recommends that because good ownership matters, the Government does need to think in terms of having an ownership policy. New capital instruments are required for mutuals and social enterprises to allow them to raise external capital to help growth prospects and they need to be encouraged to become developed and successful; further, tax and incentives and the regulatory framework need to be reviewed and action considered to help create a more level playing field for these important businesses.

Chris Brophy is a partner with Capsticks, specialising in commercial and contractual work for healthcare bodies,social enterprises, mutuals and charities.