Back to the basics

Celia Cullen examines some of the basics underlying the service and funding models available to deliver local authority services.

The Coalition Government promised to support the creation and expansion of mutuals, co‑operatives, charities and social enterprises to enable community groups to have a much greater involvement in public services and to give public sector employees a new right to form employee owned co‑operatives and bid to take over the services they deliver.

The Minister for the Cabinet Office has already announced a number of mutuals to act as pathfinders as part of this new policy. Since then there has been a number of announcements and consultations:

• The Right to Provide: requiring employers to accept suitable proposals from front‑line staff who want to take over and run their services as mutual organisations
• The Green Paper Modernising Commissioning: Increasing the Role of Charities, Social Enterprises, mutuals and co‑operatives in Public Service Delivery
• The Community Right to Challenge: the government's consultation paper puts some flesh on the bones in relation to methodology for the community or employees to run local authority services. It is intended that the Community Right to Challenge will be the mechanism for implementing the Right to Provide for local authority employees.

Talking the Talk

One thing is for sure, this is an area which has developed its own particular vocabulary which is often used in a somewhat confusing and interchangeable way. So perhaps the first thing is to have a look at terminology.

Mutual?

Mutual organisations are either owned by and run in the interests of existing members or owned on behalf of the wider community and run in the interests of the wider community. Mutuals are characterised by their democratic governance arrangements, usually having one member one vote. Their governance structures often incorporate a wide variety of stakeholder interests.

Co‑operative?

A co‑operative is a company or society set up as an enterprise and owned and controlled by its members and follows "Co-operative principles". It is a type of mutual whose members tend to have a close association with the enterprise as producers or consumers of its products or services, or as its employees. All profits are distributed to members or re‑invested in the enterprise.

Social enterprise?

Social enterprise is more of a "political" than a legal definition. However, it is generally a business with primarily a social objective or purpose which reinvests its profits for its objective, purpose or community. There is no set legal form for a social enterprise to take and for most purposes is no different to any other business taking that chosen form.

Charity?

A charity is defined in the Charities Act 2006 as an institution which is established for charitable purposes only. Charitable purposes are purposes listed in the Section 2 of the Charities Act 2006 and are for the public benefit. Examples include the prevention or relief of poverty or the advancement of education. Charities have particular benefits, most importantly tax exemption, but as a consequence are constrained on what they can do.

Community Interest Company?

Community Interest Companies are a type of limited company for people wishing to establish businesses which trade for a social purpose or to carry on other activities for the benefit of the community. In order to be registered as a CIC a community interest test must be passed. A CIC can take any company form but are subject to an "asset lock". The "asset lock" prevents the transfer of assets other than at full market value (except another asset locked body) and on dissolution they must be passed to another asset locked body eg a charity. There are caps on dividends and interest payments on loans where payment is linked to the CICs performance. A CIC cannot be a charity and has no special tax status.

Company limited by guarantee?

A company limited by guarantee is a limited company which has members who act as guarantors rather than shareholders. The members give an undertaking or guarantee to contribute a nominal amount in the event of the winding up of the company. A company limited by guarantee has no share capital.

Industrial and Provident Society?

An industrial and provident society is an organisation conducting an industry, business or trade either as a co-operative or for the benefit of the community and is registered under the Industrial and Provident Societies Act 1965. A committee or officers of the Society manage on behalf of members and it is strictly one member one vote (regardless of the size of shareholding). Once the co-operative and Community Benefit Societies Act 2010 becomes law registration will be required as either a Co-operative Society or Community Benefit Society.

Community Benefit Society (or BenCom)?

An industrial and provident society that conducts business for the benefit of their community. Profits are not distributed among members, nor external shareholders, but returned to the community. A BenCom can be a charity provided it has charitable objects and a non charitable BenCom may apply an "asset lock" which protects their assets for the future benefit of the community. BenComs that do so can only convert to a Community Interest Company.

Employee Ownership?

Employee ownership involves the employees in a business acquiring the ownership of that business. There are various ways in which this can be achieved, through a co-operative structure, a not for profit company for the public benefit or ownership directly through shares or indirectly through a trust.

A Limited Liability Partnership?

A limited liability partnership or LLP has both the flexibility and tax advantages of a partnership. It is a corporate entity trading with a view to a profit.

Options for Service Provision

Local authorities faced with the requirements of significant savings will inevitably be considering alternative means of service delivery. There is also the Community Right to Challenge which the Government intends to introduce next year. Mutuals of various forms clearly provide options although they are not the only and indeed necessarily the most appropriate depending on the circumstances. Consideration of the models available also needs to take into account alternative funding models that are being developed.

Celia Cullen is head of local government services at Pinsent Masons. She can be contacted on 0161 234 8308 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..