Community Interest Companies - many will have heard the term, but will struggle to explain exactly what they are and how they are regulated. Accounting firms will often turn them away citing a lack of expertise. In Monty’s case they’ve been a bit like buses. We’ve not previously had any involvement with them and have recently had 3 enquiries in as many months. Now that we’re clued up, we wanted to share some things we’ve learned on the regulation side of things.
A Community Interest Company (CIC) is a type of social enterprise. They can be used for any purpose, but typically they are used for community projects or activities which bring a benefit to the communities they serve. They are relatively easy to set up and administer in comparison to charities. There are lots of organisations who will give grants to CICs and therefore they represent a fantastic opportunity to bring funding to local interest projects.
If you're thinking of setting up a community interest company or have recently done so here are a few points that you should consider.
Incorporation. To set up a CIC you need to register with Companies House much like you would for a normal limited company. You also need to include a community interest statement which must be approved by the CIC regulator at the time of incorporation. Because of this additional step, CIC’s cannot be set up using an online formation service and must be done using a paper application.
Legal structure. A CIC can be limited by shares or limited by guarantee. If it is limited by shares, there is a cap on the amount of dividends (surplus profits) that can be paid out to shareholders. In practice many CIC’s are set up to be limited by guarantee because funding bodies may not wish to support an organisation where the directors can take a dividend. Before setting up your CIC you should speak to potential donating bodies to check what conditions they include.
Asset lock. This is a key feature of a CIC. It has permanent, long term consequences so it’s essential that it is understood prior to setting up a CIC. Basically it means that any assets held by the CIC cannot be transferred out unless they are sold at market value or transferred to another asset locked organisation.
Administration. Something that is often overlooked when setting up a CIC is that it requires all of the same administration and filing as a regular company eg annual accounts, corporation tax returns and confirmation statements. In addition CICs are required to produce an annual report recording the CICs activities and how it involved its stakeholders during the year. The cost of producing this information can be prohibitive, particularly for small CICs, so it’s advisable to get an estimate of costs when starting out.
Profits and taxation. CICs are subject to corporation tax and do not get any of the tax breaks of a traditional charity. This can come as a surprise to the directors of a CIC, as they consider their organisation as not for profit and don’t expect to be subject to taxation. In reality, many CICs will end an accounting period with a financial surplus and this will be taxable under UK corporation tax at 19%. With some forward planning, this tax can be kept to a minimum and in some cases may be completely avoidable.
Directors remuneration. Directors may be paid for their services to a CIC, provided the amount paid is considered reasonable. Any payments made to Directors must be disclosed in the annual CIC report which is held on public record. The CIC regulator recommends that if a CIC is going to remunerate directors, this is formally noted in the Articles of Association. This may not seem like a big issue in the early stages of a CICs life, but as it develops over time and directors come and go this can become an area of contention.
We love the CIC model and we are lucky enough to be involved with some great examples locally. See the links below to find out a bit more about the work they do.
If you've got any questions on CICs, drop us a line. We'd like to hear from you.
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