1 March 2021

Social enterprises are a huge success story – but they need the tools to succeed

By Andrew O'Brien

When the Chancellor stands up to deliver the Budget on Wednesday he faces a daunting task. Despite the successful rollout of the vaccine, he still has to steer the UK economy through the phased withdrawal of lockdown restrictions. At the same time, he needs to outline policies to deliver a strong recovery and level up the country. 

This commitment to levelling up is more important than ever. The Prime Minister and Chancellor both know that the public need a sense of what the sunlit uplands will be after the pandemic. There are tough days ahead, but the public needs a sense of hope. 

Although a lot of focus has been given to the state and public spending so far, we know that the strength of our recovery will be based on the creative potential of entrepreneurs across the country. They will be the ones that have to adapt, innovate and hire as they search for the best way to build their businesses.

One of the most damaging things about Covid is that many small businesses have had to draw down on their capital just to survive. According to the FSB, two thirds of SMEs expect their performance to worsen in the near future. 34% of SMEs have increased their levels of debt, with 40% now saying that they are carrying ‘unmanageable debt’. 

We need to recapitalise these businesses and invest in new ventures so our private sector can grow and thrive. 

The good news, as outlined in a new report from Social Enterprise UK with a foreword from Steve Baker MP, is that there is capital out there. Households have saved tens of billions of pounds over the last year. In many cases, this money is sitting in low-yielding savings accounts. It could be more productively and profitably invested in serving our communities.

Government must help people bring this capital to businesses and overcome the uncertainty Covid has created.

This is where the Social Investment Tax Relief comes in. SITR enables individuals that invest in social enterprises – businesses which trade and reinvest their profits to achieve a social or environmental mission – to get tax back on their investment. This makes them more likely to provide funds and take risks. Access to finance remains a barrier for many social enterprises, which are mostly small businesses, making this tax relief important to their success. Thanks to this relief, millions of pounds have already been injected into businesses, creating jobs and spreading opportunity.

The bad news is that this tax relief is due to expire in April 2021, just when it is most needed. HM Treasury officials may not see the value of this small tax relief to entrepreneurs, but speak to the social enterprises that have used it and they will tell you that their business would not have been possible without the help SITR has given them.

Analysis by Social Enterprise UK indicates that extending and expanding this tax relief could unlock £500m in investment and create 13,500 jobs as individuals look to make the most of their savings. The cost to the Treasury would be just £150m – a very strong return on investment.

Backing SITR is a win-win. People can make their money work harder and have a sense of helping the national effort to rebuild from Covid. Businesses will benefit from getting access to finance to grow and recruit.

Social enterprises have a wonderful track record of creating jobs – with the average social enterprise creating 3 jobs per £100,000 of turnover, compared to 0.6 jobs per £100,000 of turnover in the rest of the private sector. They are also located in the places that most need levelling up, with 1 in 5 located in the most deprived communities. The business case for SITR and the social enterprise sector is very clear.

The Chancellor must use the Budget to give social enterprises and SMEs the tools they need to succeed. Social Investment Tax Relief is one such tool and the Chancellor should make the most of it.

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Andrew O'Brien is Director of External Affairs at Social Enterprise UK.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.