In 2010, I wrote a piece in this magazine arguing against tax incentives for the social enterprise (SE) sector, saying they were ineffective, complex and unfair—I have also added elsewhere that they are distortive.  Such advice seems to be falling on deaf ears.  Our sector, and impact investment generally, is very much in favour, and this Government is committed to further encouragement through fiscal incentives.

Despite the fact that ClearlySo may be a beneficiary of state largesse I remain opposed to it. Hyping the sector further could actually delay its necessary path to sustainability. Supporting a sector already predicted to grow at 35%+ per annum by BCG and others is unnecessary, wasteful and likely to have unintended consequences.

In the likely event that my advice is ignored, I urge the Government to target the incentives on social entrepreneurs rather than impact investors, for three reasons. First, it is social enterprise, and the positive social outcomes they generate that we seek to encourage, rather than impact investment, which is a means to an end. Government incentives should be targeted at intended beneficiaries of any programme, and the best chance of doing this is to directly incentivise SEs.

One problem in adopting my approach is that there is no single category of social enterprise. However, CICs, Industrial and Provident Societies and co-operatives could be suitable beneficiaries. Another approach could be to reward the desired social impact itself. In this way many social businesses, structured as limited companies (not as CICs, etc.), could also benefit from the scheme.  I appreciate this approach involves complexities but they are not insurmountable. Government would identify those outcomes it seeks to support and the credits could reflect anticipated savings in public services budgets commensurate with the outcome achieved. This is similar in concept to “payment by results” structures, but might cost less to implement.

The second attractive aspect of this proposal is that, if done cleverly, it could enable capital markets to amplify the impact of such subsidies/credits. Imagine if Government announced credits to reward the generation of certain easily identifiable social benefits and made it clear that more would be forthcoming.  The capital markets would favour social businesses and enterprises which generate these social impacts and incorporate estimates about future policy changes, thereby lowering the cost of capital to many SEs. Even today, capital markets value social impact, for example, in anticipating punitive charges on polluters. My approach would use the capital markets to work also when positive externalities are generated.

The third argument against incentives for impact investment is that they would only benefit the rich, as they alone have meaningful savings to benefit from fiscal incentives. A recent report by Lloyds Bank reported that 30% of UK households have no savings and a further 19% have savings of under £1,500. That’s half the population unable to benefit from these incentives.

I am as keen as any practitioner to help ensure the social sector grows faster, but we need to be careful for what we wish for, aware of practical issues around implementation and mindful that this is not the time to be creating loopholes for the well-off.

First Published in Third Sector in November 2012.