This guidance outlines the position under Scottish charity law for Social Enterprises thinking about becoming a charity and is based on our experience of applications from organisations who class themselves as Social Enterprises. It is also relevant for existing charities thinking of setting up a Social Enterprise trading arm.
|As the Scottish Charity Regulator we are not primarily concerned with whether an organisation calls itself a Social Enterprise or not. What we focus on is whether it is a charity or can become a charity.|
There is no legal definition of a Social Enterprise in Scotland, and different stakeholders have their own views about what the characteristics of a social enterprise are. However, there are a number of descriptions, which share common concepts:
It’s generally recognised that a Social Enterprise is a business and operates on a profit-making basis, putting those profits back into the social mission or purpose of the organisation.
The term ‘Social Enterprise’ describes the nature of a business, not its legal form. Social Enterprises can take different legal forms, as can charities.
Social Enterprises try to be financially independent through trading, by selling goods and/or services for a profit. This profit is ploughed back into the Social Enterprise and its mission. This self generated income gives Social Enterprises greater flexibility about how to apply their assets.
Some charities carry out trading, but not all of them do. Many charities have ‘non-trading’ income streams, such as donations or grant funding.
In general, there are two types of Social Enterprise trading:
A cafe that has been set up primarily to provide training and work experience for people with learning difficulties. The majority of those working in the cafe are beneficiaries and other employees are limited to those needed to ensure adequate support and training. Any profits made from the trading are put back into running the cafe. This could further charitable purposes of advancing education or relieving the needs of those disadvantaged by disability.
A cafe run purely to make a profit for a social enterprise to cover the costs of another activity that advances its social mission (such as providing free education classes).
The Charity Test
The charity test is set out in the Charities and Trustee Investment (Scotland) Act 2005 (the 2005 Act). To pass the charity test an organisation:
When we look at whether or not an organisation provides public benefit, we need to consider if:
Not everything that is ‘beneficial’ in a general sense is necessarily public benefit in terms of the charity test. An activity can only provide public benefit if it is advancing a charitable purpose.
It may be ‘beneficial’ for a village community to have a grocery or convenience store, but this does not automatically make it charitable to provide one if the shop is run on a commercial basis for private benefit.
To pass the charity test any private benefit must be incidental to the organisation’s activities that advance its purposes:
In addition, an organisation will fail the charity test if:
We apply the charity test to Social Enterprises in the same way as any other organisation wishing to become a charity.
All Social Enterprises have a social mission: a primary objective to achieve social and/or environmental benefit, and aim to achieve a social impact. However, there is no guarantee that the social mission will consist of exclusively charitable purposes.
If the organisation has only charitable purposes then we look at whether its social impact provides (or intends to provide) public benefit.
Sometimes the connection between the social mission and charitable purposes, and the social impact and public benefit is obvious, sometimes it is not. If it’s not, then we will need to ask more questions about the Social Enterprise - see question 6 for more detail.
An organisation will fail the charity test if its governing document allows it to use any of its assets for a purpose that is not a charitable purpose under the 2005 Act. This applies during the lifetime of the organisation and when the organisation is being wound up.
A charity’s governing document must not allow profits from trading to be paid to members, shareholders or other individuals as dividends or bonuses.
How we make our decision:
We look at the organisation’s governing document, the whole picture of what the organisation does (or plans to do), and the benefit the activities provide. We also look at any private benefit, disbenefit or undue restriction.
For more information see: Meeting the Charity Test Guidance.
|OSCR regulates Social Enterprise charities in the same way as any other charity.|
Below are some of the most common challenges we see Social Enterprise’s face when trying to meet the charity test:
We have to compare any public benefit provided (or intended) against any private benefit there may be.
If it appears to us that a Social Enterprise has been set up wholly or mostly for the private benefit of an individual or group of people, it will not pass the charity test.
We see applications to become a charity from organisations describing themselves as Social Enterprises where the starting point appears to be an attempt to make an existing business profitable. The tax and rates advantages enjoyed by charities may be a motivator for a business to attempt to reduce its overheads.
We also see applications where the payment or business interests of an individual are central to the proposal. This is of concern especially where we find that the person setting up the Social Enterprise decides to employ themselves as the Chief Executive before we receive an application to become a charity.
These are both examples of possible private benefit. To pass the charity test any private benefit must be incidental to the organisation’s activities that advance its purposes:
If registered as a charity there are further implications if a charity trustee or a person connected to them is going to be paid. See our guidance on Charity Trustee remuneration for more information.
Primary purpose trading (links directly to the social/environmental mission)
A common example of primary purpose trading that can be charitable is providing training and work experience in order to create opportunities for those who face significant barriers to employment.
In these cases we look to see that:
Many Social Enterprises identify the creation of new jobs as evidence of their social impact but this does not necessarily mean they are advancing a charitable purpose and providing public benefit. Simply employing people in order to carry on a trade does not relieve unemployment in a charitable sense unless it can be demonstrated that the jobs will be for those who are genuinely disadvantaged in the labour market, for example adults with learning difficulties.
Social Enterprises, like any business, may take some time to become profitable and are subject to the risks and uncertainties of the market for their goods and services.
In cases like this we often need to see a business plan or projections, which demonstrate when, profit is likely to start and therefore when public benefit is likely to be provided to achieve the organisation’s charitable purposes.
The public benefit would not come from the café itself but from the grants made to other projects. If the café generates little or no profit then it will be difficult to see how public benefit is provided.
When we look at applications to become a charity from Social Enterprises we need to ask the following questions:
Where the answers to these questions are unclear, we will need the applicant to provide us with more information. If you are unable to answer all or most of these questions then you should get some advice before applying to become a charity. See question 8 for sources of help and advice.
There are advantages in becoming a charity, but you will need to consider whether this is the best option for your Social Enterprise. Registration as a charity tells the public that:
Being a charity can give you access to different opportunities and tax reliefs; however, it can also restrict the type of activities an organisation carries out. See our Becoming a Charity in Scotland page for more details.