As there are only three cheers to go around I was flummoxed; do I award one or two? Two seemed high and unwarranted by the Government’s recent decisions (revealed in two papers summarising the results of their consultation process) to change the limits on CIC funding. One cheer seemed churlish; failing to recognise that the Government had acted on complaints. Thus my part score of 1.5 cheers, seemed right.
The Government has announced two core changes. The first is to change its limit on the returns payable to equity shareholders in CICs. These will go from 5% over the base rate to 20% total per annum with no link to interest rates. The linkage to base was absurd and the 5% premium insufficient to reward investors who were making very high risk illiquid investments. As base rates plummeted the available rates of return became embarrassing; the Government had to act. Quasi-equity (QE– a debt-like instrument where returns are linked to the CIC’s performance, for example as a percentage of turnover) had been limited to 4% above base rate and this has been changed to a flat 10%–half the permitted return on equity. Finally, the 35% cap on “maximum aggregated dividends” has been kept unchanged. This was designed to insure that the majority of profits were re-invested in the business.
I am delighted the two changes were made. It should make it easier for CICs to raise money. Not only does this allow a fairer return entailed, but this will make calculating them easier. Twenty percent strikes me as a very fair number for equity investors, given the level of risk—so well done on that score. The 10% limit on QE is puzzling and mistaken. First, the old differential made much more sense. QE is not one-half less risky than equity, so why only permit half the return? Also, QE is sometimes used as a simple substitution when straight equity is not possible. We are currently advising the community transport company, HCT Group, on a fund-raising using QE, in part. We could not use a CIC structure under these new guidelines because the permissible rate of return is too low to secure investment. What a shame—an own goal in reform terms! And what if base rates rise sharply? Another “reform” will be needed.
Maintaining the 35% cap seems OK, but 40% or 45% would still maintain the spirit of the idea that a CIC is primarily for community benefit. It does not mean that they will pay the maximum, just that they could. Why does the Government persist in its refusal to trust CIC management’s and their judgement? The fact that there were, as of 30/9/09, 3,172 CICS and that it reported that in four years only two paid a dividend, and that the total aggregated dividend in each case was less than £4,500, certainly suggests responsible behaviour. This is taking the need for prudence too far.
Finally, there remains one elephant in the room. Small (non-social) companies can get EIS relief or may be permissible for investment by VCTs, which benefit from a tax subsidy. Charitable contributions are tax advantaged. Why does the Government insist on discriminating against social enterprises and not give them at least the same benefits as traditional small companies? When they announced CICs a few years ago they chickened out—they have done so again. It boggles the mind.
First Published in Third Sector in January 2010.