T: 01733 568321 | info@rawlinsons.co.uk | www.rawlinsons.co.uk PAGE 1

Help! I’m a Social Enterprise

The term ‘social enterprise’ is increasingly being used. A survey suggested that 24% of small and medium sized (SME) employers in the UK considered themselves to be social enterprises. A report from the Cabinet O�ce suggests the �gure may be more like 5%, but that still represents a signi�cant number of organisations, employees and activity within our economy.

What is a Social Enterprise?But what actually is a ‘social enterprise’? There is no o�cial legal de�nition, but one that is increasingly being used is along these lines:

• It should be a business with primarily social or environmental objectives, whose surpluses are principally reinvested for that purpose in the business or community rather than being paid to shareholders and owners.

• It should not pay more than 50% of pro�t or surplus to owners or shareholders.

• It should not generate more than 75% of income from grants and donations.

• It should not generate less than 25% of income from trading.

These criteria attempt to balance the ‘social’ with the ‘enterprise’ i.e. the activity is being run on normal commercial principles, making it �nancially viable and sustainable, but that the funds being generated are then being used for a social purpose.

Are there di�erent types of Social Enterprises?Yes, social enterprises come in all shapes and sizes:

• Some ‘normal’ trading companies or sole traders / partnerships will describe themselves as social enterprises. When compared to the de�nition referred to above, the owners are likely to be permitted to receive all pro�ts, but have chosen not to.

• Charities – a charity would not necessarily �t into the de�nition above of a social enterprise, if they rely on donations and grants. Some charities however generate income from trading activities, particularly those who have trading subsidiaries, and therefore overall may �t the de�nition.

• Community interest companies (CIC) – a special type of company set up with a particular community bene�t written into its governing document and there are some restrictions on what the members and directors can draw out of the company.

• Company limited by guarantee (which may also be a charity or CIC).

• Industrial and Provident Societies, cooperatives or credit unions.

Should you be a Trustee or Director?Your legal role within a social enterprise will depend on the legal structure of the organisation. For example if you are a limited

company, CIC or company limited by guarantee, you may want to read our ‘Help I’m a Director’ brie�ng and if you are a charity, read ‘Help I’m a Trustee’ to learn more about your responsibilities.

What are my key duties? The Companies Act sets out seven general duties:

• To act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred.

• To promote the success of the company for the bene�t of its members.

• To exercise independent judgement.

• To exercise reasonable care, skill and diligence.

• To avoid con�icts of interest.

• Not to accept bene�ts from third parties.

• To declare an interest in a proposed transaction or arrangement.

Even if you are not a company, your duties will be similar to those noted above.

Induction As part of your introduction to the social enterprise, we would generally expect that you should be given a copy of the following documents:

1. Governing document (e.g. Articles of Association, constitution)

2. The latest annual accounts

3. Minutes of recent Directors / Trustees meetings

4. A business plan, if there is one, so that you are aware of what the company’s social mission is, how it measures whether it is achieving that mission, together with the �nancial viability of the ‘enterprise’ it is carrying out.

5. Con�icts of interest policy – depending on the type of social enterprise, good practice may require you to complete a declaration of interests so that the organisation can identify whether there are any potential con�icts between the social enterprise and other business interests or Trusteeships that you may have.

Governing document Your governing document does what it says – it governs the way our social enterprise is managed. It will include your legal objects i.e. what the organisation is allowed to do; there will be rules on how meetings should be managed, who can be members / Trustees / Directors etc., and how the organisation can deal with those people.

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What makes a good social enterprise stand out?Again the answer to this may depend on your particular circumstances, but could include:

1. Being clear about your social mission: being able to describe what social need you are trying to address and having a process in place to identify the impact of your organisation on that social need.

2. Having a clear and sustainable �nancial plan to demonstrate that reliance on donations and grants is kept to a minimum.

In order to achieve those two things you will need:

1. A strong Board

2. A structure that is �t for purpose

3. To be continually learning and improving

4. Being �nancially sound and prudent

5. To be accountable and transparent

Can I be paid? Possibly! Again this will depend on your precise legal structure. You may be able to be paid, but if you are, for example, a charity or CIC there may be restrictions and formal processes to go through in order for that to happen.

Again, refer to our other brie�ngs for more information.

Will I get sued if something goes wrong? This is a common question, and does cause Directors and Trustees some anxiety.

For a company or incorporated charity, there is a legal separation between the Directors / Trustees as individuals and the organisation. For example if one of your organisation’s products brings harm, the action from the third party will generally be against the company, not the individual.

However, Directors / Trustees may incur personal liability, both civil and criminal, for their acts or omissions in directing the company. Examples include:

• Where you are aware, or should have been aware, that the company is trading while insolvent. However, you will not be made personally liable in circumstances where you can show that you took every reasonable step prior to the liquidation to minimise the potential loss to the company’s creditors.

• Where you are found to be guilty of wrongful or fraudulent trading.

• Health and safety law places duties on organisations and employers, and Directors can be personally liable when these duties are breached.

• A failure to comply with companies legislation regarding the �ling of documents with Companies House.

Of course, if you are deliberately fraudulent, you will not be protected!

Do I have to prepare accounts? Yes, whatever legal form you take you will be required to account for the �nancial transactions of the organisation.

If you are a company or charity there will be a relatively �xed format for those accounts.

CICs are also required to submit an additional return with their accounts describing the bene�t they have brought to the community.

Some social enterprises may be required to have a formal external audit or an independent examination; others (mainly smaller organisations) will be exempt from this requirement.

What key numbers should I be looking out for in my accounts?The numbers that are of most importance to you and your organisation will be unique to you. However, here are some of the common �gures to look out for:

• Turnover / sales – the total amount of revenue income that is earned by the company. For most companies, �uctuations in this number has a direct impact on the pro�tability of the company.

• Gross pro�t % - this is a measure of your income against the direct costs that have generated that income. Even a small di�erence can have a dramatic e�ect on your bottom line.

• Overheads – this is all the other costs of a business. It is important to keep an eye on all costs, and in particular sta� costs, because for many organisations that will be the main cost.

• Donations – the level of resource that is directed towards the social mission of the organisation.

• Working capital – this is the total of stocks, debtors, cash less creditors and is a measure of your ability to meet liabilities as they fall due.

• Cash – without which you will be unable to operate!

• Reserves or funds – in simple terms, this is the cumulative balance of pro�ts or surpluses made by the organisation and is shown towards the bottom of the balance sheet.

Help! I’m a Social Enterprise

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What about tax? Tax issues will vary considerably depending on whether you are a charity or not. Some of the main areas are:

1. Trading – pro�ts arising from trading activities, including those of CICs, are subject to corporation tax, but charities enjoy a number of exemptions.

Generally a trading company making a donation to charity will obtain tax relief for the donation. So, whether you are a trading subsidiary of a charity or making a donation to an independent charity, you may be able to treat the donation as a business expense.

2. VAT – some of your income may be subject to VAT and other bits may not be. Particularly with charities, it can be very di�cult to ascertain with certainty what the right answer is, so it is important to take advice at an early stage, as the amounts can be very signi�cant. The allocation of income then has a knock-on e�ect to how much input VAT on expenditure that you may (or may not) be able to reclaim.

3. Gift aid – charities receiving donations from UK taxpayers may be able to get an extra tax repayment from HMRC. This can be very valuable, but you must get the paperwork right, otherwise they may ask for it back when they come to inspect!

4. Rates – charities are entitled to an 80% mandatory reduction on rates for property used for the purposes of the charity. The Local Authority also has discretion to grant additional relief on the remaining 20%. The Local Authority will want evidence that the property is actually being used for charitable purposes. Trading companies will not receive this relief, and depending on the view of your local authority, other legal forms, for example, CICs may or may not receive the relief.

5. Personal Tax - if you operate as a sole trader or private limited company you will need to consider implications on your personal tax position. This could include capital gains tax if you choose to sell the business and indeed inheritance tax if you still own the business at death.

6. Pension – whilst not strictly a tax, you may have obligations under ‘auto enrolment’ to provide a pension scheme to your employees.

Where can I �nd extra help?1. The Charity Commission website holds all sorts of useful

information – in fact there is almost too much on there.

There is a long list of guidance booklets, operational guidance and an increasing number of training podcasts. If ever there is a particular issue in your charity that you need guidance on, it may well be worth looking for the answer here �rst.

Of particular relevance to those new to the world of charities is The Trustee Handbook – a summary of some of the key things Trustees should be aware of.

You can sign up on their website for email alerts and you can even follow them on Twitter.

2. The CIC Regulator provides guidance on the formation and operation of community interest companies www.gov.uk/government/organisations/o�ce-of-the-regulator-of-community-interest-companies

3. Companies House website has a number of guidance booklets relating to the operation of companies

4. HMRC have a whole host of information available via their website – and they have a whole section dedicated to charities.

5. Government website https://www.gov.uk/business and the Department for Business Innovation & Skills have useful guides to being in business.

6. Social Enterprise East of England.

7. The SROI Network (Social Return on Investment).

8. Rawlinsons – come and talk to us, and look out for:

And �nally…. There is a lot of information to take on board when you are a social enterprise. But never forget why you are there: to make a positive impact on the society in which we live. We wish you well!

• our programme of workshops and events, regularly updated at www.rawlinsons.co.uk/resources/seminars-and-events

• our website www.rawlinsons.co.uk which includes a number of guides and factsheets

• our free accountancy App for iPhone and Android devices, a useful tool for personal and business use containing tax tables and calculators

• sign up for Rawlinsons eNews, our quarterly email newsletter to keep you up to date with the latest �nancial news www.rawlinsons.co.uk/signup-for-our-newsletter

• our Twitter feed @RawlinsonsUK

• our Blog, containing topical posts from our resident experts www.rawlinsons.co.uk/blog

Copyright © 2017 Rawlinsons Chartered Accountants

Who are Rawlinsons?

Rawlinsons Chartered AccountantsRawlinsons operate from o�ces in Peterborough and Cambridge and have established their reputation within the Cambridgeshire community, providing a professional, personal and �exible service to a wide variety of organisations.

Rawlinsons has developed a growing reputation as charity accountants – and currently acts for more than 100 charitable and not for pro�t organisations. The �rm now boasts a team of partners, quali�ed audit managers and accounts sta� to support a wide range of charity-based clients. The list includes organisations working in grant-making, supporting those in need, leisure, cultural, community, religious groups and educational establishments. In addition, we provide accountancy services to Community Interest Companies and Community Amateur Sports Clubs.

Our accounting services for charities covers organisations large and small and is tailored to meet individual needs. For more information on Rawlinsons’ specialist charity services please contact our experts:

CONTACT USRawlinsons Chartered AccountantsRuthlyn House, 90 Lincoln Road, Peterborough PE1 2SP | T: 01733 568321 2 Hazlewell Court, Bar Road, Lolworth, Cambridge CB23 8DS | T: 01223 237027info@rawlinsons.co.uk | www.rawlinsons.co.uk

Mark Jackson, Partner FCA DChAT: 01733 568321 | E: mark.jackson@rawlinsons.co.uk

Mark quali�ed in 1993, joining Rawlinsons a year later and became a partner in 2002. He works for a wide range of corporate clients and specialises in the not-for-pro�t sector, including charities and schools.

Mark is also a member of the Charity & Voluntary Sector Special Interest Group and holds the ICAEW diploma in Charity Accounting. His work includes audit and accounts, general corporate taxation, due diligence and cash �ow forecasts. Most recently, Mark has been providing expertise to local schools converting to Academy status.

Tracey Richardson, Partner BSc (Hons) FCAT: 01733 568321 | E: tracey.richardson@rawlinsons.co.uk

Tracey joined Rawlinsons in 1998, qualifying as a chartered accountant in 2001. She manages the �rm’s audit team and has a broad range of experience in audit and accounts for companies, charities, and academies. Tracey also specialises in work for the legal profession, has been involved in a number of due diligence assignments and coordinates the �rm’s iXBRL service. Tracey is also responsible for the �rm’s auto enrolment services, advising clients on the practical implications of implementing the workplace pension scheme. Graham Jones, Partner BA (Hons) FCAT: 01733 568321 | E: graham.jones@rawlinsons.co.uk

Graham joined the Peterborough o�ce of Thomas May & Co in 1983 and was a partner for eight years prior to the merger with Rawlinsons in April 2006. He quali�ed with the Institute of Chartered Accountants of England and Wales (ICAEW) in 1987.

Graham provides audit and accounting services from multinational corporations to small start up companies, partnerships and sole traders including charities, solicitors accounts rules, IR35 clients and information technology.

In addition to charities, Graham has a particular focus on Community Amateur Sports Clubs (CASCs), advising them on their particular rules and regulations as well as their year end audit and accounts requirements.

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