4 Apr 2012

Benefits of big society bank outweighed by tax proposals

The government’s big society bank launched today. But its chairman has told Channel 4 News that all the good it might do could be outweighed by budget proposals to cap tax relief for philanthropists.

Big Society Capital (BSC) is the government’s latest attempt to encourage ‘social finance’, with £600m of investment in the voluntary sector.

Over the next five years, the government expects BSC to drum up around £400m from dormant bank accounts (left untouched for 15 years), and £200m from four high street banks – Barclays, HSBC, Lloyds and RBS.

But could its impact be undermined by a proposal in last month’s budget?

“It could certainly have a bigger negative impact than the amount of money flowing in to us.Sir Ronald Cohen, BSC chairman

The chancellor has planned for a cap on tax relief of £50,000 on charitable giving or income from interest on loans. And this could seriously undermine a charitable sector that has been encouraged by the government to look to private philanthropy for financial support in a time of public austerity.

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Speaking on Channel 4 News, BSC chairman Sir Ronald Cohen, agreed that the proposed withdrawal could wipe out the benefit to the charitable sector from his fund, saying: “It could certainly have a bigger negative impact than the amount of money flowing in to us.”

He added: “The budget statement mentioned the intention not to hit donors and recipients, so I think it’s a hint that there’ll be a period of consultation now and I hope that as a result of this consultation the idea will be rescinded.”

Sir Ronald said that in a speech at the launch of BSC on Wednesday the prime minister had made it clear that he did not want to see charities affected by a change in legislation.

Impact of Big Society Capital

Access to millions of pounds of capital could revolutionise the social investment sector, especially considering that just £165m was put into this market last year, according to a report by the Boston Consulting Group. But is the voluntary sector in a position to deliver the results presumably required for such investment?

Many smaller charities do not have significant infrastructure in place or a means to deal with investment and the responsibilities it demands, says Daniela Barone Soares, CEO of the venture philanthropy organisation Impetus Trust and an advisory board member of BSC.

“While I am full of praise for the idea, which is revolutionary, the concern is that they are addressing the supply side and getting money into the system, but not the demand side and the organisations that will access money,” she told Channel 4 News.

While I am full of praise for the idea, which is revolutionary, the concern is that they are addressing the supply side, but not the demand side and the organisations that will access money. Daniela Barone Soares, Impetus Trust CEO

The attempt to help charities expand comes at the same time as public spending cuts which have put voluntary groups under more pressure to fill the gap in social services.

As well as the chancellor’s proposal to cap the tax relief for major donors, charities have also been dealt a blow in the form of an estimated cut of £1.2bn cuts per year to the voluntary and community sector.

Expanding ‘social finance’

The government hopes the fund will help to grow this market and enable social enterprises and charities to access affordable loans. It will not invest directly in social enterprises, but will fund the intermediaries who do.

“For years, the City has been associated with providing capital to help businesses to expand,” said David Cameron.

“Today, this is about supplying capital to help society expand. Just as finance from the City has been essential to help businesses grow and take on the world, so finance from the City is going to be essential to helping tackle our deepest social problems.”

Social impact bonds

In a similar attempt to create a market for ‘social finance’, the government recently pioneered social impact bonds, where charities are obliged to measure the social savings that their work will generate in return for investment, and part of the savings are paid back to the investor.

For example at one of the six pilot schemes at HMP Peterborough, private investors are funding prisoner rehabilitation through a coalition of charities. If reoffending is reduced by an agreed target, investors will get a return from the Ministry of Justice, the idea being that the government will still save money by not having someone return to the system.

The best thing is that that the mission hasn’t changed depending on what government is in power. Faisel Rahman, Fair Finance MD

Impetus Trust helps fund St Giles Trust, one of the charities involved in the pilot, which is “a fantastic idea”, adds Ms Soares.

“But again, it’s not a solution for the entire sector,” she told Channel 4 News. “We’ve worked with them [St Giles Trust] for five years, so they were ready to take on this. There is a plethora of solutions and approaches that we need to do together.”

BSC will take ‘first step’

BSC chairman Sir Ronald Cohen told Channel 4 News that he believes there is a huge latent demand for capital in the social sector, given that so many organisations are financially insecure because they have to rely on a flow of donations for their funding.

For some well established charities, the BSC could go a huge way in growing an underdeveloped market.

“Nobody wants to be the first person to invest – they’re all scared that they will lose their money,” said Faisel Rahman, MD and founder of Fair Finance, who hopes it will make it easier and less time consuming for social enterprises to get funding. “If the BSC acts as the first person in, that could encourage people to do the same.”

Jeremy Robinson, chief executive of social enterprise Clarity, also told Channel 4 News that taking social benefits into account in financial transactions, would be a huge benefit.

Despite the “big society” name, the idea of an organisation like BSC has been in the pipeline for some years. The appointment of Labour party supporter Sir Ronald Cohen as BSC chairman is recognition of his involvement in the development of the fund, and no doubt a sign that – whatever the political complexion of government – it is an initiative that is likely to stick around.