5. What are the common challenges for Social Enterprises becoming a charity?

Below are some of the most common challenges we see Social Enterprises face when trying to meet the charity test:

Private benefit

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:

• incidental means that the private benefit is a necessary result or by-product of the organisation’s activities and is not an end in itself.

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.

Training and employment

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.

For example:

• people with chronic physical or mental health problems
• people with learning difficulties
• women returning after career breaks to bring up children
• people with caring responsibilities who need to work flexibly
• ex-offenders
• people of low educational attainment
• people recovering from alcohol or substance misuse.

In these cases we look to see that:

• participants are employed for a limited period of time
• on-the-job training is complemented by other types of training (for example work skills or life skills) or the opportunity to gain vocational qualifications
• support or advice is provided to address other barriers to work, like homelessness or substance abuse
• the majority of workers in the business are from the target beneficiary group.

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.

Delay in providing public benefit

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.