Gatecrashing the Social Investment Tax Relief party

When the government first hinted, a year or more ago, that it was considering a specific form of tax relief for investors in social enterprises, co-operative development workers...

When the government first hinted, a year or more ago, that it was considering a specific form of tax relief for investors in social enterprises, co-operative development workers around the country sat up.

After all, co-ops were leading the way over the use of equity finance for social purposes, and a tax relief tailored to the needs of accountable and democratic social-purpose organisations would greatly help.

But the eventual proposals for Social Investment Tax Relief (SITR) were disappointing. Co-operatives were specifically excluded; so were credit unions, with a blanket ban on financial services; and community interest companies (CICs) limited by shares were welcomed in with extra powers to distribute their profits to investors, while beneficiaries could be excluded from decision-making. It seemed to say that deprived communities could get support from investors only if they signed away control over their own destinies.

This was a shame because some features of SITR are of potential use to co-ops. In particular, trades based on ‘hire of assets’ could attract tax relief on investment for the first time ever. ‘Hire of assets’ is, in effect, businesses based on sharing stuff – and if there is one thing co-ops are good at, it’s sharing.

Another innovation was that you didn’t have to issue shares. Charities and CICs limited by guarantee cannot do this, so it was helpful for them that full-risk debt securities – such as bonds and loan stock – could be used as alternatives.

This meant it was a poke in the eye to be told that the only legal structures that could use SITR were CICs, charities and community benefit societies (bencoms for short). There’s a logic to the position: those are the three legal forms that can have regulated asset locks – the best guarantee that profits made for a community remain available to it.

That seemed, on the face of it, to leave co-ops out in the cold. But was that correct? The membership list of Co-ops UK does include a few CICs – my co-op, Somerset Co-operative Services, is one of them. The requirements for CIC rules, while clearly not drawn up with co-ops in mind, leave space for co-operation, and there are a few co-operative CIC rulebooks in circulation. And many bencoms are, to all intents and purposes, community co-ops.

One prospect was that community land trusts – similar to housing co-ops but with a wider community membership – might be able to access SITR as they are ‘hiring assets’. But that hope faded quickly – anyone who is essentially acting as a landlord would not get SITR, not matter how pure their motives.

But there are still three ways for a co-op to benefit from SITR. All require the co-op to aim their mission for the well-being of the community beyond their membership. This is not a new idea: co-operation is mutual aid to meet the needs of members, and those needs aren’t always economic. Sometimes, co-ops form to help their members help others. Maybe, with social investment, that’s as it should be.

First up is the co-operative CIC – a CIC limited by guarantee. This can issue loan stock which should comply with SITR; the only drawbacks being those of debt as opposed to equity. Not having any voting rights at all in the co-op, even limited ones, might put off some investors, and the co-op must have a plan to repay all that debt. Under the Somerset Rules drawn up by my co-op, investors could be given membership in a special non-user class, so they can protect their investment from arbitrary changes.

Next is the community co-op – a bencom that accepts anyone into membership and offers SITR on the community shares issued. The difficulty here is that co-ops are meant to be controlled by users. If you limit membership to the community you serve, you may find that the pool of investors is limited. If you accept into membership people whose only interest is investment, are you really a co-op? You could try to ensure that investors are always heavily outnumbered by users, but it may not always be possible.

Finally – my preferred option – the Somerset Rules co-operative. The FCA has now approved these multi-stakeholder rules for use with bencoms. These rules (previously only available for CICs and co-ops) allow for weighted votes depending on the class of member, so a co-op can ensure that 75% control of the co-op is in the hands of the intended beneficiaries. Investors and supporters can be included in a separate class of membership that enables them to protect the value of their investment (for example, by vetoing changes to the rules with their 25% vote share) but leaves day-to-day control where it belongs, in the hands of the users.

Two co-ops are investigating the possibility of SITR share issues using this method – the Ecological Land Co-op, who have just let out three affordable smallholdings near Wellington, and Co Cars, a leading co-operative car club in the West Country. Both find that conversion to a bencom has little effect on their rules and policies, and recognise that their social mission and rewards for investors would not be possible with Enterprise Investment Scheme, an alternative tax relief already available.

There is a regulated asset lock and unregulated offers of equity to investors, and social accounts alongside financial accounts. SITR also provides the widest possible access to tax relief for investors. That’s as good as it gets for a social co-op.

 Read more: Capital Gains Tax? What a Relief!

  • Alex is an author and an expert social enterprise adviser with significant experience in legal structures, financial management, community share offers and co-operative housing.
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