How Can Taxation Systems Better Support the Social Economy?

On 7 May, we were honoured to travel to Brussels to contribute to the European Economic and Social Committee's public hearing entitled, "How Can Taxation Systems Better Support the Social Economy?"

The social economy is a vital part of the European social and economic system. It generates and maintains high-quality jobs, fosters the inclusion of marginalised groups into the labour market, promotes sustainable business practices, and provides employment for millions of people. In this way, it makes the single market more inclusive, our societies more cohesive and fosters employment models that are tailored to local and communal needs.

You can now read the entirety of our contributions to the hearing below .... 

How Can Taxation Systems Better Support The Social Economy?

In the Irish context, there are 6 main ways in which best practices might be developed in the social economy space:

• The Legal Framework; 
• Tax Incentives;
• Business or Entrepreneurship Supports;
• Procurement;
• Better Data; and linked closely to that
• Social Value, also known as Social Return on Investment.

In terms of the Legal Framework, these tend to be divided by either legal forms or legal statuses, as set out in a 2022 OECD Report on Designing Legal Frameworks for Social Enterprises. 

Legal Forms are the foundational structures adopted by an organisation such as an association, co-operative, or limited liability company. The legislation that defines each of these legal forms sets out specific purposes and guidelines for each, particularly in the areas of governance, ownership, structure, and distribution of profit, such as social cooperatives in Italy and Poland.

Legal Statuses are different in that they can be adopted by a broad spectrum of legal forms based on compliance with certain criteria, such as the primacy of social purpose, a stable and continuous production of goods and services, and limited profit distribution. A legal status has an impact on how the entity is treated from a fiscal perspective. Legal statuses have been adopted in Denmark, Luxembourg and Slovenia.

In Ireland, however, we have neither a dedicated legal form nor a legal status for social economy organisations. 88% of all social enterprises are registered charities, and are regulated by the Charities Regulatory Authority. The rate of charitable status is higher among social enterprises in operation for 5 years or more, at 95%, but even with newer social enterprises, those in operation less than 5 years, the proportion who are also registered charities is still 83%[1].   

In 2009, The Wheel was one of the founding members of a coalition of 12 organisations and key stakeholders called the Social Enterprise Taskforce (the Taskforce). The Taskforce was an effective voice promoting the role of social enterprises in Ireland and advocating for a national policy for the sector.

In 2019, the first National Social Enterprise Policy for Ireland 2019-2022 was published by the Government of Ireland. In our comprehensive review, aimed at informing and influencing the development of the successor policy, The Wheel commissioned a report, Unlocking the Social Economy, Supporting Social Enterprise, which sought further research and analysis on the operation of social enterprises within existing legal structures and an assessment of the potential value of a distinct legal form for social enterprises.

In October 2023, the OECD Local Employment and Economic Development (LEED) Programme recommended to the Government of Ireland that “creating a specific legal status for social enterprises might be a good way to enable greater access to markets and financing. This would allow Ireland to keep leveraging on the large spectrum of legal forms offered to social enterprises while setting the clear criteria they need to comply with”[2].

In early December 2023, the Irish Government published a consultation document for the new Social Enterprise Policy[3] which stated that “within the new policy measures advanced…could include…company legal form for social enterprise and accreditation or quality marks”[4].

The consultation document also referenced one potential legal form – the Co-operative. The Co-operative Societies Bill, 2022 intends to consolidate and modernise existing legislation to ensure that there is a clear and more favourable legal basis for the co-operative model in Ireland. The needs of social enterprises are being taken into account during the ongoing drafting of the Bill, which will improve the available options for legal form.[5]

A General Scheme (also known as the Heads of Bill) for the Co-operative Societies Bill; setting out the main objectives, headings and provisions, was published in 2022. The Wheel advocated for an optional asset lock for co-operatives during the Scheme’s pre-legislative scrutiny by the Joint Oireachtas (or Parliamentary) Committee on Enterprise, Trade and Employment. We asked that the legislation provide for an optional ‘non-distributive capital surplus’ whereby on wind up, outstanding shares and share interest would be repaid to member shareholders and thereafter all remaining capital surplus would be transferred to another co-operative with a non-distributive capital surplus, or to a registered charity. 

We believe that the introduction of “non-distributive capital surpluses” would provide stakeholders with a standardised and legally secure provision, allowing them to judge whether a co-operative is meeting their requirements around the distribution of reserves on dissolution. 

In May 2023, the Joint Committee on Enterprise, Trade and Employment published it pre-legislative scrutiny report of the General Scheme of the Co-Operative Societies Bill, containing the following two recommendations[6]:

“Recommendation 11: The Committee recommends the legal requirement for an asset lock, as is the case with Credit Unions and for all co-operatives.”

“Recommendation 24: The Committee advocates for the inclusion of an optional ‘mission lock’ in the provisions of this legislation to provide certainty to stakeholders and would ensure that the co-operative model is an attractive legal form for community organisations and social enterprises.”     

However, it is not envisaged that the Bill will be brought to Government until at least Quarter 2 of this year.

So, notwithstanding the recommendations or the OECD reports, the draft national policy does not envisage any move towards a specific legal framework for social economy organisations.  The 24 month delay in producing draft legislation to modernise the legal basis for co-operatives is, unfortunately, indicative of where the social economy lies in the order of the government’s priorities. 

Moving on then to the area of Tax Incentives.

A range of tax incentives are available to private companies and investors. In 2022, the Commission on Taxation and Welfare[7] (the Commission) examined these tax incentives, also known as tax expenditures from Budgetary perspective, but was unable to evaluate them in full due to inadequacies in data collection and reporting.

Tax incentives available to enterprises established as private limited companies are not available to companies limited by guarantee, the form that is available to charities and social enterprises, as they are designed to assist companies limited by shares and their shareholders. Notwithstanding data considerations, the Commission made the following recommendations in respect of tax incentives which may be instructive:

• Endorsing the use of appropriately targeted taxation measures to support small and medium enterprises (SMEs) in raising equity investment, and thereby supporting such firms to establish, grow and sustain employment. 
• Supporting the continued use and development of investment-based schemes, such as the Employment Investment Incentive (EII) and recommending that EII should be extended and enhanced to support early-stage, high-risk and research and development-intensive businesses in attracting stable financial investment.
• Extending Entrepreneur Relief to angel investors, subject to appropriate limits and conditionality.
• Enhancing the Research and Development (R&D) Tax Credit targeted at small and micro-sized enterprises with more guidance and supports introduced to facilitate greater uptake by SMEs more generally. Consideration to also be given to a limited acceleration of the refundable element of the R&D tax credit from three years to one in order to support early-stage and research and development-intensive businesses.
• The allocation of specialist resources and capabilities to the Revenue Commissioners and the Department of Enterprise, Trade and Employment, and its agencies to develop an advance assurance mechanism in order to enable wider access to tax incentives such as the R&D tax credit and EII.
• Reforming the Key Employee Engagement Programme, or KEEP, to broaden its use and make it fit for purpose.
• Limiting the exemption from employer PRSI on share-based remuneration through the introduction of an appropriate annual cap or, alternatively, by restricting the exemption to micro, small and medium-sized enterprises.
• Taxation of employee share options through the PAYE system, rather than the current process of self-assessment.
• Further restricting SARP – the Special Assignee Relief Programme – and subjecting it to continued review.

There is much within these recommendations that could be adopted for the social economy.

Moving now to Business Supports for Social Enterprises. There are over 170 government supports for start-ups and small businesses. These are delivered on behalf of the Government by Local Enterprise Offices (LEOs) and Enterprise Ireland (EI), however CLGs, the structure used in the sector, are excluded. 

This lack of support was also reflected in a 2023 report by the National Economic and Social Council (NESC) which stated[8]:

• social enterprises in general and companies limited by guarantee (CLGs) specifically are not included in the range of businesses eligible for financial support from LEOs. Enterprise Ireland similarly does not support CLGs. 

• CLGs, are specifically excluded from types of enterprises listed for support on the Local Enterprise website.

• The Wheel seeks that Enterprise Ireland and each Local Enterprise Office provide the same full range of business supports to social enterprises, irrespective of legal form, as they provide to other enterprises. 

• Develop foundations for a government-supported business support consortium, whereby the consortium delivers critical and time-consuming business support services such as: strategic planning, legal and governance advice, HR.

The Wheel highlighted that the EU Commission Recommendation 2003/361/EC specifically includes “associations regularly engaged in an economic activity” in its definition of an SME. The Recommendation also states “An enterprise is considered to be any entity engaged in an economic activity, irrespective of its legal form”. The exclusion of CLGs from the support by LEOs is clearly counter to that Commission Recommendation. 

In October 2023 the Government announced the establishment of a new National Enterprise Hub[9] with a dedicated website and phone line with a Hub Advisor to help businesses access State supports. Private business can call it for direct help in navigating the comprehensive suite of supports that are being offered to business throughout Ireland. However, social enterprises with the legal form of Company Limited by Guarantee are not eligible for support.

The supports exist, just not for the social economy. It is our position that these supports should be available to all.

Procurement is another area in which the social economy is experiencing barriers. The Wheel has long argued on behalf of our members that all public authorities should commission for outcomes and use any procurement process to maximise the societal value of the service. A landmark study commissioned by The Wheel[10] states that: 

Good public services involve a range of dimensions. Measuring public services in solely financial or economic terms is inadequate. Societal Value is created not just in the output of public services but also in the processes and ethos involved in service provision. Societal Value creation involves both financial and non-financial dimensions, and thus encompasses the full value of the work of organisations delivering public services, whether they are community and voluntary organisations or public bodies.

(2016:17)

The 2023 NESC report referenced earlier also acknowledged that the Office of Government Procurement has been reforming public procurement to take greater account of social and environmental considerations. 

In our response to the consultation on the new Social Enterprise Policy, we proposed that Government should: 

• Establish a central register of social enterprises (including consortia of social enterprises) interested in tendering for public contracts.

• Promote a ‘Buy Social’ campaign to encourage the incorporation of social enterprises in corporate supply chains. 

• Introduce a Societal Value Act requiring all public authorities to evaluate societal value when procuring goods and services. 

• Set an ambitious target, above the 30% threshold, for implementation of Article 20 of EU Directive 2014/24.

Data Collection

The absence of reliable data on the scale and reach of the social economy in Ireland presents an enormous challenge to its further development. The Wheel in its response to the consultation on the new Social Enterprise Policy highlighted the need to conduct a full review of the sector to develop robust mechanism for data collection to meaningfully enumerate social enterprises.

Robust, reliable data is an essential tool to demonstrate the impact of social enterprise.  Improving levels and quality of social enterprise data, facilitates greater transparency and understanding of the sector. 

We further recommended developing a framework for identifying the societal value in services and supports provided by social enterprises and develop impact and outcome measurement techniques to capture this value as proposed in the 2016 Commissioning for Communities Report.

The Wheel’s work to develop such a framework (known as the Ethoscope) could be further developed to support the goal of providing evidence for stakeholders, but will require funding of collaborative work and resourcing social enterprises to play their part in data collection.

And closely linked to that, is the need to showcase the Societal Value of the social economy. The 2016 report on Commissioning provides a model, as does our work with Social Value International, and our local network Social Value Ireland. 

Again, I would like to thank the organisers of today’s public hearing and look forward to further engagement.

[1] SOURCE: Amárach Research/SERI/ILDN (2023), Social Enterprises in Ireland: A Baseline Data Collection, Exercise, para 3.2  https://www.gov.ie/en/publication/b30e5-social-enterprises-in-ireland-a-baseline-data-collection-exercise

[2] OECD LEED (2023) Boosting social entrepreneurship and social enterprise development in Ireland -In-depth policy review, Page 15

[3] Government of Ireland (2023) National Social Enterprise Policy for Ireland 2024-2027 Public Consultation

[4] Ibid. Page 5

[5] Ibid. Page 7

[6] Joint Committee on Enterprise, Trade and Employment (2023), Report on the Pre-Legislative Scrutiny of the General Scheme of the Co-Operative Societies Bill, 2022.

[7] https://www.gov.ie/en/publication/7fbeb-report-of-the-commission/

[8] https://www.nesc.ie/publications/social-enterprise-on-the-island-of-ireland/ p.23

[9] https://www.neh.gov.ie

[10] Clann Credo, The Community Foundation for Ireland, The Wheel (2016) Commissioning for Communities