Social enterprises must be dealt a fair hand, says Ross Griffiths.

In January, Noel Plumridge outlined the challenges facing new social enterprises, warning that “the odds are not in their favour in a cut-throat market”.

To a certain extent, he is absolutely right. Social enterprises do not have the capital of the large corporate, or the foundation trust’s advantage of not charging VAT, which makes every action a greater challenge and a greater strain on resources. 

However, the situation is certainly less grim than that portrayed and there is certainly much that could be done to stimulate employee ownership.

We should begin by examining the VAT “inequity” that Mr Plumridge describes.  There is no denying that this disadvantage exists; however, this should not mean that social enterprises should give up immediately.  The issue requires detailed analysis to see how the hit affects the cost of doing business – for starters, the 20 per cent rate will not apply to everything. 

It is easy to dismiss accountants’ warnings and commentary on the subject as merely designed to drum up business, but many will find a real advantage in visiting an expert to see how the business could be structured to minimise the impact.

The next problem to be tackled is that of assets. Social enterprises would like to be able to hold assets to boost their worth and to be able to access greater funding from lenders. However, whether the social enterprise actually needs this level of working capital depends entirely on the business that it undertakes. 

A little extra cash in the bank is, of course, a nice thing to have, but a wages-based operation will generally not need as much as one that is involved in purchasing, for example, and the absence of a capital asset such as premises ought not to be something that automatically thwarts the ability of a social enterprise to trade. 

Social enterprises are trading in services delivered by people to people, so there may not even be a need for offices or premises, particularly given the movement in the health sector towards service delivery closer to home.

It is also worth remembering that the future will involve trading in a commissioner’s market, and the commissioner should have a hold over the assets from which services are delivered. When the contract for a high street clinic comes to an end, for example, shouldn’t those who are commissioning its services have access to that estate, given that they are responsible for planning it? And one of the unwelcome consequences of having assets available is that you have to pay for them if anything goes wrong or if changes need to be made; as a licensee, the responsibility is likely to lie elsewhere.

There is every reason to believe that these issues could be overcome, but social enterprises will need more support. The current incentives to promote social enterprises are being handled in a very “governmental” way, attempting to level the playing field by encouraging commissioners to look more favourably on such organisations as providers of services and to take a more studious approach to the public procurement regime.

Currently, the default position is that commissioners must go out to tender, and it makes better economic sense to do this on a large scale, which means social enterprises will often find themselves excluded. Commissioners may need to be encouraged to be more sympathetic to social enterprises when they are parcelling up the work, and to operate on a value rather than a price basis when accepting tenders.

This is happening in various places and to an extent in the health sector where it is possible to adopt a longer-term approach to valuing what a social enterprise brings to the economic, social and environmental wellbeing of the area.  It is worth recognising the fact that those who are employed by the social enterprise are more likely to be within the area, thus sustaining spending power within the community rather than leaking profits to investors outside the patch.

The government could also encourage commissioners to take into account the statistical evidence pointing towards higher levels of productivity and employee and customer satisfaction in employee-owned businesses, particularly when compared to the public sector and to large corporates. 

There is a case to be heard that such social enterprises can offer both higher operational efficiency and higher quality, and it would be wrong to dismiss their potential due to disadvantages that could almost certainly be minimised by a government committed to promoting their value.