CICs, Charities and SITR

A Community Interest Company (a CIC) is a limited company designed by statute as a vehicle for social enterprise. It must have a special constitution specifying the social aims and containing:

  • a restriction on the transfer of assets out of the CIC to ensure they continue to be used for the benefit of the community;
  • a restriction on the amount it can pay investors.

A CIC may be:

  • a company ‘limited by guarantee’, meaning its members liability is limited to a sum they agree to pay if the company gets into trouble (this is normally £1 a member). As there are no shares, a dividend may not be paid. A model constitution is available from the CIC Regulator.
  • a company ‘limited by shares’, meaning its members (also called shareholders) liability is limited to a sum they agree to pay for the shares (often £1 a share). As there are shares, a dividend may be paid. A model constitution is available from the CIC Regulator.

This Firm favours the company ‘limited by guarantee’ form for simplicity, with trading activity carried out through another company limited by shares.

To incorporate a CIC, various documents including a model constitution and a Community Interest Statement must be submitted to the CIC Regulator for approval, evidencing that the CIC meets the Community Interest test.

A CIC must file annual accounts, an annual return, and an Annual Community Interest Report so its activities can be monitored by the CIC Regulator.

A CIC may borrow money and, like any other company, should not pay more than a commercial rate of interest. A commercial rate of interest is not defined and will depend on the circumstances of the case eg the amount of risk. As an exception, where the amount of interest is linked to performance, such a loan is regarded as similar to having an equity stake, and so the amount of interest is capped.,

In April 2014 a new tax relief was introduced called Social Investment Tax Relief to encourage individuals to invest in CICs. The relief enables them to deduct 30% of the amount invested from their income tax liability. The relief may be obtained in respect of loans (this was not available under the Enterprise Investment Scheme on which the new relief is modelled). Loans are included because many CICs wishing to raise capital are companies ‘limited by guarantee’ and so do not have shares and so cannot pay dividends. To qualify for relief on a loan certain criteria must be met as tabulated below:-

1 CIC - Size Less than 500 employees andLess than £15m in gross assets (including assets in any subsidiaries)
2 CIC - Activities Does not conduct a substantial amount of any excluded activities, including:

  • dealing in land, commodities or futures, or
  • banking, insurance, moneylending (except to social enterprises), or
  • property development solely or primarily to make capital gains, or
  • generating or exporting electricity which will attract a feed in tariff
3 Investment – Type A loan that:

  • is unsecured by assets
  • the principal of which is not repayable in the first 3 years
  • is not preferred over any other investment instrument on a winding up
4 Investment -Amount Not more than approximately £290,000
5 Investment - Term Must be made for at least 3 years for relief to be retained
6 Investment – Other Relief Has not received any other form of tax relief on the same investment
7 Investor Is an individual paying tax in the UK, with UK tax liabilities to set against the relief. Is not an employee or paid director of the CIC.
8 Investor - Structure Makes the loan either:

  • directly or
  • through a nominee fund

A Government consultation has recently taken place with a view to increasing the Investment Amount and permitting indirect group Investor Structures to be used eg loans through a fund manager running a collective investment scheme.

The Benefits of a CIC

  • Limited liability – members have limited liability
  • Paying directors – being able to pay the directors a reasonable amount, unlike a charity which is generally unable to do so.
  • Branding - using CIC in the name as evidence to the public (including donors, grantors and investors) that it is operating for the benefit of the community, that there are permanent clauses in the Constitution required by statute to protect its assets, and a CIC Regulator to enforce compliance.
  • Donations – the enhanced prospects of donations due to the entity’s status as a CIC.
  • Grants - the enhanced prospects of grants due to the entity’s status as a CIC.
  • Loans – the enhanced prospects of loans due to the entity’s status as a CIC and because of the new tax relief.
  • Charity regulation – avoiding the heavier regulation if the entity were a charity. The IC Regulator regulates with a light touch.

By Simon Studd

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