OG 711 Community Interest Companies

Last reviewed:
25 September 2012
Last updated:
19 January 2017

Policy Statement/Overview

 

This OG does not contain guidance on the procedure for Community Interest Companies (CICs) to convert to a Charitable Incorporated Organisation (CIO). There is currently no conversion process in place, however a consultation has been held about the introduction of legislation which will allow CICs to apply to the Commission to convert to a CIO. The conversion process is expected to be in place sometime in 2017. For further details see the consultation document.

16 January 2017.

A Community Interest Company (CIC) is a type of company that uses its assets and profits to conduct a business or other activity for the benefit of the community rather than solely for private profit. A CIC cannot be a charity and is often described as a social enterprise company. CICs are regulated by the Regulator for Community Interest Companies (RCIC) with whom we have a Memorandum of Understanding

Our role with CICs is limited and is usually part of a rigid procedure, required by legislation. We will work with RCIC to provide information and, if necessary, consents, when:

  • a CIC is considering converting to a charitable company,
  • a charitable company is considering converting to a CIC, or
  • a charity is considering establishing a CIC as a trading subsidiary.

As with all our work, we will deal with CICs in accordance with our Risk Framework. Broadly, we would expect a CIC converting to a charity to be relatively low risk (although the level of risk will be assessed against Registration Division's own risk assessment tool), whereas a charity converting to a CIC might carry a heightened risk due to the charitable assets involved.

Summary of the guidance

This guidance is intended to help caseworkers to:

  • gain a broad understanding of CICs and how they differ from charities
  • take appropriate action where a charity is converting to a CIC and where a CIC is converting to a charity 
  • make decisions about any consents necessary during the conversion process
  • understand the issues where a charity's trustees establish a subsidiary CIC, including how the charity might invest in the CIC.

OG Contents (Site map)

Casework Guidance

B1 Caseworking key points

keypoints

 

 

  • CICs are not charities and are regulated by the Regulator for Community Interest Companies (RCIC), not the Commission.
  • We are required, by law, to provide consent before a charitable company can convert to a CIC. We will give this consent if we are satisfied that the charitable property of the company will be adequately protected following conversion and if there are no regulatory concerns about the charity.
  • When a charitable company converts to a CIC we consider that its charitable assets become subject to a separate charitable trust. This charitable trust must be registered, if it meets the minimum requirements.
  • A charitable company that has converted to a CIC must be removed from the Register as it is no longer a charity.
  • An unincorporated charity cannot convert to a CIC, only another company can convert to a CIC. 
  • A CIC cannot convert to a charitable company unless we have issued a statement confirming that, should the CIC convert, it would be a charity and would not be an exempt charity. We call this the 'statutory statement'. 
  • Having issued the statutory statement, if the conversion goes ahead, we will register the newly converted charitable company, if it meets the minimum requirements.
  • We will work with RCIC to ensure that we fulfil our obligations in accordance with the Memorandum of Understanding.

B2 The Commission's role with CICs

The Commission has no regulatory role with CICs, this is the responsibility of RCIC.

However, we are required, by CIC legislation, to:

  • give consent before a charitable company can become a CIC (see B5), and
  • issue the statutory statement before a CIC can become a charitable company (see B13),

We will do this in accordance with the MoU we have with RCIC.

As the regulator of charities we will also signpost trustees to our guidance and publications regarding a charity setting up a CIC as a subsidiary of the charity and investing in the CIC.

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B3 General advice regarding CICs

If we are approached for advice on any aspect of CICs we should refer the enquirer to the website of RCIC. This contains FAQs and other more detailed guidance for and about CICs.

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B4 Our initial action when approached by a charitable company looking to convert to a CIC

Where we are approached by trustees who are considering converting their charitable company to a CIC, First Contact will issue the model letter (G1) that sets out the required process and refers to the guidance on the website of RCIC. The letter also includes information about the implications of conversion:

  • the CIC will not be a charity and will not have any of the benefits (tax reliefs, etc) that being a charity brings
  • the company, once converted, will be removed from our register as it will no longer be a charity  
  • the property of the charitable company at the point of conversion will still be charitable and will not become the property of the CIC. The property will be held on its own charitable trusts and will need to be registered (if it meets the minimum requirements). We consider that it is possible for the CIC to declare the basis on which it is holding the charitable property by adopting a trust deed and it may use our model governing document for this purpose. It cannot in the process confer any trustee benefits which it would not already be considered to have as a result of the charitable provisions. It is of course possible to use the power in section 280 of the Charities Act to amend the provisions regarding trustees' powers and the provisions regulating the administration of the charity to the extent permitted by that section. In order to register, it will be necessary to complete an online registration application which will result in the charity having a new registered number.

and gives advice regarding process:

  • the CIC will be created by amending the Articles of Association and having these amendments registered at Companies House, with the authority of RCIC. The Commission must ensure that the charitable assets are protected and applied appropriately following conversion.

in order to convert to a CIC a charitable company must pass a special resolution to:

  • alter its Articles of Association to state that it is a CIC
  • make any other alterations to its Articles of Association which might be necessary to comply with the requirements of the Companies (Audit, Investigations and Community EnterpriseAct 2004 ('the 2004 Act'), which regulates CICs
  • change its name to comply with section 33 of the 2004 Act, this states that the company's name must end with the words 'community interest company' or 'CIC'.

Having consulted RCIC, the trustees must come back to us, providing the information and documentation we need to consider giving consent to the conversion.

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B5 What does the Commission need to consider before giving consent to convert a charitable company to a CIC?

When the trustees formally apply for our consent to the amendment(s) and conversion we need to consider the case made and the charity's case history, to decide if we are prepared to give consent. Our consent is required to any regulated alterations necessary for the conversion (under s198 of the Charities Act) and to the conversion itself (under s39 of the 2004 Act).

[NOTE: When we are considering giving s198 consent to any regulated alterations necessary to convert a charitable company to a CIC we must not use the same criteria as set out in OG518 Alterations to Governing Documents - Charitable Companies. The company may decide to adopt objects that are not exclusively charitable or amend the dissolution clause to direct any surplus funds to another CIC (ie, a non-charity). In this case, the criteria set out in OG47 would mean we would not consent to the amendments. However, because the charitable funds will be protected, as they will continue to be held on charitable trust, the regulated amendments do not affect the charity property. This means we can give consent even though the amendments fall outside of the criteria we use when a charitable company is not converting to a CIC.]

Once we have given consent and the resolutions have been passed by the members and recorded by the Registrar of Companies (and a revised certificate of incorporation issued to the company), the amendments take effect and the conversion is complete. At this point the company will cease to be a charity so must be removed from the Register (see B8.1). The property of the charity remains charitable and must be registered, if it meets the minimum requirements (see B8.3).  

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B6 Making the decision

In deciding whether or not to give our consent to a conversion we should be satisfied, having taken into account all the relevant information, that:

  • the trustees have in place provisions to govern the charitable funds following conversion and they are aware of the need to register the charity comprising the charitable funds (if it meets the minimum requirements)
  • there are no outstanding concerns about the charity or its trustees that might be avoided by conversion.

While our policy is that we will give consent wherever possible, there may be specific reasons to withhold it. Our main concern is to ensure that charitable assets are properly protected. We might decide to refuse to give our consent where:

  • it seems that the charity's reasons for wishing to convert are not simply to develop the company for the benefit of the community. For instance, the trustees might want to convert the company to a non-charitable company so that this falls outside of our regulatory remit in order to evade ongoing, or potential, regulatory action by the Commission
  • there is no mechanism in place, or planned, to protect the charitable funds following conversion (see B8.2). There should be no question that conversion to a CIC might leave charitable funds at risk.

reviewableOnce we have made our decision this must be recorded on the case record as a formal decision of the Commission. This decision may be challenged in the following ways:

 

  • a decision to refuse (or agree) to give s198 consent to the changes required to make the company a CIC can be appealed to the First tier Tribunal
  • a decision to refuse (or agree) to give consent to a conversion under s39(1) of the 2004 Act cannot be appealed to the Tribunal but is subject to judicial review.

If there is any question that the decision might lead to an appeal to the Tribunal (this would usually be where we give, or refuse, consent to an amendment of the articles) we should refer to the Decision Review page on our website.

If we refuse to give consent to the conversion we must inform RCIC of this, this is a requirement of our Memorandum of Understanding. Contact details for RCIC are available on the RCIC website.  

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B7 Model wording when giving consent

The model wording to give our consent is set out in G2.

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B8 Updating the Register and dealing with the charitable property following conversion

B8.1 Removal of the Charitable Company

Once the CIC has been created, the company will no longer be a charity and must be removed from the Register. This should be done on the day that the amendments necessary to create the CIC are recorded at Companies House. We should ask the trustees to inform us of that date as soon as they know it and this is the removal date we will record on the Register.  

B8.2 The status of the existing charitable property

Once the resolutions have been passed by the members and recorded by the Registrar of Companies (and a revised certificate of incorporation issued to the company), the amendments take effect and the conversion is complete. At this point the company will cease to be a charity so must be removed from the Register. The property of the charity remains charitable and must be registered, if it meets the minimum requirements. The trustee of the charitable property (usually the CIC) should ensure that the charitable property has a working governing document, it can do this in one of two ways:

  • before conversion takes place, by setting up a new charity with the same objects as the charitable company then transferring the property of the charitable company to this new charity; or
  • at the point of conversion, the charitable property of the company becomes an unincorporated charity (with the same objects as the charitable company), this means that the trustee can adopt a trust deed by way of a Mathieson declaration to set out the terms of the charity and can, if necessary, rely on s280 of the Charities Act to change the administrative provisions to govern the charity to the extent permitted by that section.

Whatever the case, we should suggest that the trustee adopts one of our model governing documents, this should help to speed up the registration process. However, we should not object if the trustee wants to adopt a governing document other than one of our models.

Once the charitable property is held on charitable trust the trustee must apply for registration (if the charity meets the minimum requirements) this should be done by fully completing an online registration application form.

The only time that no action is required is where the trustees expend all of the charitable funds on the objects of the charity in advance of conversion. In this case, of course, there will be no remaining charitable funds so there will be no need to take any further action once the charitable company has been removed from the register.

B8.3 Registration of the new charitable trust

If the newly created charitable trust meets the minimum income requirements (see our detailed guidance notes on applying to register), this must be registered. Registration of the trust could take place before or after conversion, depending on the circumstances of the particular case. When deciding if the charitable trust meets the minimum income requirements for registration (more than £5,000pa), the trustee should only count the income generated by the charitable trust and not that of the CIC itself. The trustee of the charitable trust (usually the CIC) must apply for registration by fully completing our online application form having considered our guidance on registering a new charity.

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B9 What if the trustees of an unincorporated charity want to convert to a CIC?

If we are approached by the trustees of an unincorporated charity who are considering converting this to a CIC we must explain that a CIC is a company, so an unincorporated charity cannot simply convert.

If, however, the trustees of an unincorporated charity wish to run a CIC they can do so by establishing a new CIC. Having done that, if the trustees want the CIC to become trustee of the unincorporated charity, they can appoint the CIC as trustee, subject to any limitations within the charity's governing document. The property of the unincorporated charity must be held on the original charitable trusts and cannot be transferred to the CIC (but could be invested in the CIC, in certain circumstances, see F8).

We might be approached by an unincorporated charity that is looking to incorporate as a charitable company simply so that this can then convert to a CIC. In this case we should explain that this adds an unnecessary extra step in the process and suggest that the unincorporated charity establishes a new CIC rather than incorporate as a charitable company then convert.

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B10 Dealing with a CIC proposing to convert to a charity

B10.1 Brief outline of the conversion process

There is a strict procedure that must be followed during the conversion of a CIC to a charitable company, this includes provisions to give time for dissenting members to object to the conversion and also includes an appeal process. RCIC has produced detailed guidance on conversion and this is available on the RCIC website. Once the CIC has consulted RCIC the CIC must apply to us for the statutory statement required before the conversion can take place.

While it is the role of RCIC, and not the Commission, to advise a CIC that is considering converting to a charity, it might be helpful for Commission caseworkers to be aware of the process involved should this come up during casework.

In order to convert to a charity a CIC must amend its Articles of Association to:

  • adopt exclusively charitable objects (if it does not already have them)
  • change the company name to remove reference to CIC
  • make any other changes necessary for the conversion (RCIC will advise regarding these).

There are various documents that must be submitted to Companies House before the amendments can be registered. These include the Special Resolutions making the required amendments and the statutory statement from the Commission. Once these documents have been received by Companies House they will be referred to RCIC to decide if the CIC is eligible to convert to a charity and to see if there have been any objections to the conversion. If RCIC is satisfied that the CIC is eligible to become a charity, and that any objections have been satisfactorily dealt with, RCIC will advise Companies House of this. Companies House will then register the amendments and issue a new certificate of incorporation. At this point the conversion is complete and RCIC will inform us of the date that the CIC became a charitable company, falling under our jurisdiction.

The new charitable company must register with the Commission, if it meets the minimum registration requirements (see our detailed guidance notes on applying to register). If the company does not submit a completed registration application form we will deal with this, as we would any other charity in this position, according to the Registration Staff Instruction 21 - Dealing with non-responders.  

B10.2 Our role in the conversion process 

Our role in the conversion process is to provide the 'statutory statement' to say that, should the special resolutions take effect, the CIC would become a charitable company and would not be an exempt charity (see B13). When deciding whether or not to issue the statutory statement we will consider the proposed objects of the company as well as the information regarding public benefit, etc, provided in response to our model letter (G1). Once we issue the statutory statement and the conversion has been registered at Companies House we must register the newly converted charity, if it meets the minimum income requirement.

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B11 The conversion of different types of CIC

B11.1 CIC limited by guarantee

A CIC limited by guarantee can convert to a charitable company by making appropriate alterations to its Articles of Association once we have issued the statutory statement. Sections 54 and 55 of the 2004 Act (as amended) contain the legal requirements of the conversion process.

Following conversion, we must register the new charitable company, if it meets the minimum registration requirements.

B11.2 CIC limited by shares

Care is required where a CIC which is a company limited by shares is proposing to convert to a charitable company, because the articles of companies limited by shares are not usually appropriate for a charitable company. However, providing the articles prevent any distribution of profits to shareholders, eg by prohibiting dividends, or the sale of shares, this may be acceptable. 

lawyer_referIf you are contacted by a CIC limited by shares that is considering converting to a charity, take legal advice.

 

If a CIC limited by shares wishes to pass its assets to a chartable company, limited by guarantee, we would usually advise the CIC to establish a new charitable company (limited by guarantee), then transfers the assets of the CIC and dissolve the CIC. The CIC must obtain the permission of RCIC before doing this.

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B12 CICs looking to convert that would be exempt or excepted charities following conversion

We might be asked to issue the statutory statement for a CIC that, once converted, would become an exempt or excepted charity. How we deal with this differs for each of these charity types.

B12.1 A CIC that would become an exempt charity 

We cannot issue the statutory statement for a CIC that, once converted, would be an exempt charity, this is set out in the CIC legislation. Section 54(7) of the 2004 Act states that the statutory statement must include confirmation that the CIC, if converted, must not be an exempt charity. In the absence of the statutory statement, the CIC cannot convert. Further information about exempt charities can be found in OG 717-1

B12.2 A CIC that would become an excepted charity

Where a CIC, if converted, would be an excepted charity, this can convert. We are able to issue the statutory statement because the stipulation is that the CIC would become a charity that will not be an exempt charity. If we are approached to provide the statutory statement for a CIC that would become an excepted charity, we will consider this in the same way as we would were the CIC to become a registrable charity.

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B13 Giving advice and issuing the statutory statement

Following any initial advice, which would usually simply involve First Contact sending out the model letter (G4), cases to consider whether or not to issue the statutory statement are dealt with in Registration.

The model letter includes an annex that sets out the information we need to consider before issuing the statutory statement and asks that the applicant inserts the responses in the annex then emails this to us. This should be accompanied by the CIC's current certificate of incorporation, a copy of the draft Special Resolution making the changes and a draft of the Articles of Association. (If these documents are not included in the submission we should contact the CIC and explain that we cannot take this forward without them.)

We would usually expect the Special Resolution to be submitted as a draft resolution, we can then:

  • issue the statutory statement, subject to the resolutions being passed as drafted, or
  • if we require changes to be made to the resolution we can suggest these, and issue the statutory statement subject to the adoption of our suggestions, before the resolution is put to the members.

However, the resolution may already have been passed before the CIC submits this to us to consider issuing the statutory statement. We will consider these Special Resolutions in the same way as we would a draft resolution, but, if the resolution has been passed and we require changes to the wording of the resolution, the CIC will have to call a second general meeting to agree the amendments. Because of this, wherever possible, we should encourage the submission of a draft Special Resolution or of a resolution passed subject to any changes that we might require.

We will consider all of the information provided in order to decide if it is appropriate to issue the statutory statement. Where the objects, as drafted, are not charitable, or where we have any other reason to think the company, once converted, would not be a charity, we should discuss these with the applicant to try to rectify this.

Once we are satisfied that the company, if converted, would be a charity, and would not be an exempt charity, we should issue the statutory statement (see G5) and ask the applicant to apply for registration, using the online application form, once the conversion has taken place. (Having decided to issue the statutory statement, registration will usually be a formality, unless the objects or activities of the charity have changed since the statutory statement was issued.)

In all but exceptional circumstances we expect the trustees to apply for registration by fully completing an online application form and including the references from the conversion case. This applies even though some of the information might already have been provided when applying for the statutory statement. Submitting a fully completed application form will provide all the information we need in one place and should speed up the registration process.

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B14 Where we refuse to issue the statutory statement

If, having considered the information submitted, we are not satisfied that the CIC, once converted, would have exclusively charitable purposes for the public benefit we will not issue the statutory statement. This will mean that the CIC cannot convert.

 

reviewableAlthough deciding not to issue the statutory statement is a formal decision of the Commission, this is not a decision that is listed in Schedule 6 of the Charities Act so it cannot be appealed to the First Tier Tribunal. However, in common with other decisions that cannot be appealed to the Tribunal, the decision may be subject to judicial review. We must make it clear, when refusing to issue the statutory statement, that this is a decision to refuse to issue the statutory statement and not a refusal to register a charity (which is a decision that can be taken to the Tribunal). Before conversion the CIC is not capable of being a charity so cannot be considered for registration.

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Charts

C1 Conversion of a charitable company to a CIC

OG711 C1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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C2 Conversion of a CIC to a charitable company 

 OG711 C2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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This OG does not contain guidance on the procedure for Community Interest Companies (CICs) to convert to a Charitable Incorporated Organisation (CIO). There is currently no conversion process in place, however a consultation has been held about the introduction of legislation which will allow CICs to apply to the Commission to convert to a CIO. The conversion process is expected to be in place sometime in 2017. For further details see the consultation document. 

16 January 2017.

Legal/Policy/Accountancy framework

E1 Definitions

Within this guidance the following terms are used:

'Asset lock'

This is a general term for various provisions within a CIC's Articles of Association designed to ensure that the assets of the CIC are applied only for the benefit of the community and are not distributed to the CIC's members (except where a CIC issues shares to raise money; in this case, the CIC can pay appropriate dividends to shareholders). Broadly, the assets of a CIC must only be transferred to another asset locked body (a CIC, a charity or an industrial and provident society) or applied for the benefit of the community. Where a CIC's assets are to be transferred to another body which is not an asset locked body this can only be done at full market value. The Regulator for Community Interest Companies (RCIC) must ensure that the asset lock is adhered to and will take action where it is breached.

'Community interest test'

The community interest test is applied by RCIC to ensure that a CIC is established for the benefit of the community. The test is that RCIC must be satisfied that a reasonable person might consider that the activities of the enterprise/business will be carried out for the benefit of the community. When applying to RCIC to be accepted as a CIC the declaration form requires the applicant to set out the proposed CIC's activities and explain how these will benefit the community. This information, along with the Articles of Association, is used by RCIC to decide if the proposed CIC passes the community interest test.

'Social enterprise'

A social enterprise is defined by RCIC as 'a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. Social enterprises tackle a wide range of social and environmental issues and operate in all parts of the economy'.

'Statutory statement'

This is a statement made by the Commission as part of the process to convert a CIC to a charity. This statement confirms that, should conversion take place, the company will be a charity and will not be an exempt charity. The requirement to make the statutory statement is set out in s54 of the 2004 Act. The CIC must send the statutory statement to Companies House along with the Special Resolution changing the name of the CIC, and making any other changes relating to the proposed conversion, before the conversion can take place.

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E2 The legal framework for CICs

E2.1 Companies (Audit, Investigations and Community Enterprise) Act 2004 ('the 2004 Act') 

This Act came into force in October 2004. Part 2 and Schedules 3 to 7 of this Act (as amended by Schedule 4 of the Companies Act 2006 (Commencement No. 2, Consequential Amendments, Transitional Provisions and Savings) Order 2007 and the Companies Act 2006 (Consequential Amendments, Transitional Provisions and Savings) Order 2009) set out the regulatory regime for CICs. This Act established the overarching legal framework for CICs and created the Regulator of Community Interest Companies (RCIC). This Act also makes provision for the Secretary of State to make regulations in relation to CICs.

E2.2 The Community Interest Company Regulations 2005

These Regulations were introduced in July 2005 and amended by the Community Interest Company (Amendment) Regulations 2009. The Regulations contain rules about the activities of a CIC, use of a CIC's assets, the required contents of the CIC's annual report, etc. 

E2.3 The Companies Act 2006

As CICs are companies they are also subject to the requirements of the Companies Act 2006.     

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E3 Specific powers 

E3.1 The power to create a CIC

This power was introduced by section 26 of the 2004 Act. This section states that a CIC cannot be a charity therefore the Commission has no direct jurisdiction over CICs.

E3.2 The power to convert from a charitable company to a CIC

This power is given by section 39 of the 2004 Act (as amended). This section sets out that our consent is required to any conversion. This is to ensure that any charitable assets are protected and are not available to the CIC for its general purposes. The charitable company may also need our consent under s198 of the Charities Act for any regulated alterations necessary during the conversion process. (See B5).

E3.3 The power to convert from a CIC to a charitable company

This power is given by sections 54 & 55 of the 2004 Act (as amended). Before converting, the CIC will need to have exclusively charitable purposes and, once converted, will fall to be registered by the Commission (if it meets the minimum income requirements) (see B10). 

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E4 Policy  

Within our limited role regarding CICs, our policy is that:

  • we will issue the legal consents necessary to convert a charitable company to a CIC, as long as we are satisfied that the charitable assets will be adequately protected following conversion and there are no regulatory concerns about the charity
  • we will issue the statutory statement on request (if we are satisfied that the requirements are met) and will register a newly converted charitable company (if it qualifies for registration)
  • we will work with RCIC to ensure that:
    • we fulfil our legal obligations regarding CICs
    • any conversion is carried out in accordance with the legislation and as efficiently as possible.
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Q&A

F1 What is a Community Interest Company?

A Community Interest Company (CIC) is defined by the Regulator of Community Interest Companies (RCIC) as 'a limited company, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage'. CICs are designed for those who want to use a company's profits and/or assets for the benefit of the community without the restrictions imposed by charity law.

A CIC:

  • cannot be a charity (but can convert to a charity, in certain circumstances, see B4)
  • will have provisions in its Articles of Association that act as an 'asset lock'. This ensures that the company's assets are used for community purposes and are not distributed to members 
  • could be a private company limited by shares, a private company limited by guarantee or a public limited company 
  • (if it is a company limited by shares) can issue shares and pay dividends, subject to a cap
  • is not subject to charity law so can operate more commercially than a charity
  • can pay its directors for acting for the CIC
  • can carry out charitable or non-charitable work, or a mixture of both
  • is regulated by the Regulator for Community Interest Companies (RCIC) with whom we have a Memorandum of Understanding.

The CIC format was introduced by section 26 of the Companies (Audit, Investigations and Community Enterprise) Act 2004 ('the 2004 Act'). 

The CIC is intended to provide a transparent, flexible, alternative to a charity, which is clearly defined and easily recognised.

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F2 What kind of activities might a CIC carry out? 

A CIC can carry out many different activities for the benefit of the community, for example, a CIC might be set up to:

  • carry out environmental improvements (for example, renovating local historical sites or encouraging the use of sustainable building methods)  
  • encourage community development and inclusion (running a community shop or providing an event space, etc)   
  • provide training and development opportunities (helping young people or ex-offenders into work)
  • promote sport, art or musical activities (running a theatre or providing sports facilities and activities) 

Broadly, any activity that could be said to benefit the community (and therefore passes the community interest test) can be carried out by a CIC.

A selection of case studies can be found on the website of RCIC.

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F3 Is a CIC a charity? 

No, a CIC is prevented from being a charity by section 26(3) of the Companies (Audit, Investigations and Community Enterprise) Act 2004. This applies even if the CIC's purposes are charitable. Occasionally, we might receive a registration application from a CIC. Where this happens we must explain that a CIC is not a charity and suggest that, if the CIC would like to become a charity, it may be able to convert to a charitable company. Alternatively, it could establish a new charity then pass the assets of the CIC to this charity. Model wording to advise a CIC is available in G3.

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F4 What are the main differences between a CIC and a charity?

  • Charities, by law, must be established for exclusively charitable purposes; CICs can be established for any lawful purpose providing this benefits the community.
  • Charities are entitled to tax relief whereas CICs are not.
  • CICs have the freedom to operate more commercially than charities. For example, where CICs are limited by shares they can pay dividends to individual shareholders, subject to a cap. Charities cannot distribute any profits except to further their objects.
  • The community interest definition for CICs is wider than the public benefit test for charities.

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F5 Can a charitable company convert to a CIC?

A charitable company can become a CIC if it follows the correct conversion process. This process ensures that charitable assets remain charitable and are not absorbed into the general funds of the CIC. The assets of the charity will form a new charitable trust that must be administered by trustee(s) (usually the CIC) and registered, if it meets the minimum requirements.

Converting a charity to a CIC needs the prior written consent of the Charity Commission.

Once the conversion has taken place the company will be removed from the register. The conversion takes effect on the date Companies House issues the new certificate of incorporation. The CIC will then be subject to RCIC (see B4).

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F6 Can an unincorporated charity convert to a CIC?

No, a CIC is a type of company and only another type of company can convert to a CIC. However, an unincorporated charity can establish and run a CIC as a subsidiary, with the CIC passing any profits to the charity. The CIC could, if appropriate, be appointed trustee of the charity (see B9). 

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F7 Can an exempt charity become a CIC?

Yes, a charitable company that is an exempt charity can convert to a CIC. If we are asked to advise an exempt charity that is proposing to convert to a CIC we should refer the exempt charity to RCIC.  

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F8 Can a charity have a CIC as a subsidiary?

Yes, a charity can set up and run a CIC. This will be a non-charitable commercial company that will trade on behalf of the charity and will be subject to the regulatory framework for CICs. One example might be a charity establishing a CIC to run a charity shop with any profits being transferred to the charity to be used for its charitable purposes. There are, however, restrictions on the size of dividend that a CIC can transfer to a shareholder, this is known as the 'dividend cap'. Chapter 6 of the RCIC guidance gives more information about the dividend cap. If the CIC wants to transfer funds to the charity, where this will exceed the dividend cap, this can be achieved by the CIC making a charitable donation to the charity, as long as there is provision in the CIC's Articles that allows this.

Where a charity establishes a subsidiary CIC it is important that there is clear separation between the two entities. While the funds of the CIC can be used for the purposes of the charity, the funds of the charity must not be used for the purposes of the CIC. However, a charity can, in certain circumstances, use charitable funds to invest in a CIC either purely for profit or as programme related investment or a mixture of both. Further details about investing charity funds can be found in Charities and Investment Matters (CC14).

The trustees must also ensure, where the same people are trustees of the charity and directors of the CIC, that there is clear separation of duties and responsibilities between the two roles.

Further information on establishing and running a subsidiary trading company is available in Trustees, trading and tax (CC35).

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F9 Can a CIC become a charity?

Yes, a CIC can become a charity if it follows the correct conversion process. Once converted, the company must be a charity and must not be an exempt charity (but can be an excepted charity) (see B10). 

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F10 Can a CIC have a charity as a subsidiary?

Yes, a CIC is able to establish and run a charitable company that may be a subsidiary under the Companies Act 2006. We would treat this the same as any other charitable company. It is important that the funds of the charitable company are used only for the purposes of the charitable company and are not made available to the CIC (except as a legitimate investment or where the funds are passed to the CIC to be expended solely in furtherance of the charitable company's purposes).

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F11 Are CICs entitled to tax relief?

No, because CICs are not charities they do not qualify for the same tax reliefs as charities. If a charity becomes a CIC it will lose this benefit although the CIC may be eligible for discretionary rate relief, in certain circumstances (see RCIC guidance).

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F12 How are CICs regulated? 

CICs are regulated by the Regulator for Community Interest Companies (RCIC). The Companies (Audit, Investigations and Community Enterprise) Act 2004 established the Regulator.

The role of RCIC is to:

  • consider applications to become CICs
  • give consent, if appropriate, to the alteration of a CIC's objects
  • ensure that a CIC complies with its legal obligations, and
  • take enforcement action where serious breaches occur.

A CIC must send an annual report to RCIC showing how the CIC is aiding the community and involving stakeholders. 

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F13 What is the Commission's role in relation to CICs?  

The Commission has no role in the day to day running or regulation of a CIC. The Commission only has a role if a charitable company is proposing to convert to a CIC, if a CIC is proposing to convert to a charitable company or if a charity is considering establishing a CIC to run as a subsidiary.

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F14 Is there a register of CICs?

No, there is no register specifically for CICs. However, a CIC will appear on the Companies House register in the same way as any other company. A CIC can be identified because it must have 'CIC' or 'Community Interest Company' at the end of its name.   

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F15 What is the community interest test?

The community interest test is a test applied by RCIC to ensure that a CIC is established for the community or wider public interest.

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F16 What is a social enterprise?

A social enterprise is a business whose objectives are primarily to benefit the community. Profits are invested in the community rather than being distributed to shareholders or owners.

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 F17 What is the asset lock?

The term 'asset lock' refers to provisions within the Articles of Association of a CIC that are designed to ensure that the assets of the CIC are used only for the benefit of the community.

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Model wording

G1 Model text explaining the process to convert a charitable company to a CIC    

Thank you for your query regarding the proposed conversion of ## from a charitable company to a Community Interest Company (CIC).

Details of the process and the actions necessary to convert are available in section 4.3 of chapter four of the CIC guidance on the website of the Regulator of Community Interest Companies (RCIC). You should read this guidance first to familiarise yourself with the requirements.

When considering whether or not to go ahead with the proposal, the trustees must be aware of two key points:

  • the CIC will not be a charity and will not have any of the benefits (tax reliefs, etc) that being a charity brings
  • the property of the charitable company will not be available for the general purposes of the CIC. The property will still be charitable so you may wish to adopt a new governing document to hold and administer the charitable assets. The new charity will need to be registered with us (if it meets the minimum registration requirements).

Overview of the conversion process

Should the conversion go ahead, the CIC will be created by amending the company’s Articles of Association and registering these at Companies House, with the authority of RCIC.

To convert to a CIC, a charitable company must pass a special resolution to:

  • alter its Articles of Association to state that it is to be a CIC
  • make any other alterations to its Articles of Association which might be necessary to comply with the requirements of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (‘the 2004 Act), which governs CICs
  • change its name so that it ends with the words 'community interest company' or 'CIC' (as required by section 33 of the 2004 Act).

Before these resolutions can be passed you will need the consent of the Commission:

How to apply for Commission consent

Having considered the issues, if the trustees decide to go ahead with the conversion, please contact us again with:

  • an explanation of how any remaining charitable assets will be protected and managed in the future, and 
  • draft copies of the Special Resolution(s) that will amend the Articles of Association. We will consider these to see if any of the amendments are regulated alterations needing s198 consent.

We will then decide if we can give consent to enable the conversion to take place.

If we do give consent, the amendments will only take effect once you have registered these at Companies House and a revised certificate of incorporation is issued to the company. At this point the company will cease to be a charity and must be removed from the Register. You must inform us of the date that conversion takes place so that we can remove the company from the Register of Charities. Further details on the amendment process can be found on the website of RCIC.

Protecting the charitable assets

Even though the company will no longer be a charity once it becomes a CIC, the charitable assets of the company will remain charitable and will need to be applied for the same objects as the charitable company. We usually expect the charitable company to establish a new charity using one of our model governing documents before conversion so that this new charity can accept the assets of the company before, or at the point of, conversion. Alternatively, at the point of conversion, the CIC as trustee of the charitable property can rely on the implied power to make clear the trusts by adopting a trust deed and the statutory power to change the trustee’s powers or the provisions regulating the administration of the charity under section 280 of the Charities Act 2011 (we recommend that this is done by adopting one of our model governing documents). In either case, you must register the new charity with us, if it meets the minimum registration requirements (see Applying to Register: detailed guidance notes). The trustee of the charitable property (usually the CIC) should apply for registration using our online application form. Guidance on setting up a new charity can be found on our website.

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G2 Model text giving consent to the conversion of a charitable company to a CIC

Under s39(1) of the Companies (Audit, Investigations and Community Enterprise) Act 2004, the Charity Commission consents to the conversion of the charitable company [Charity name] to become the Community Interest Company [CIC name]. The assets of the charitable company at the time of conversion are held on trust and must be applied only for the charitable company’s original purposes.

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G3 Model text to use when a CIC mistakenly applies to register as a charity 

Thank you for submitting the completed registration application form for ##CIC. Unfortunately we cannot register the company in its current form.

Community Interest Companies (‘CICs’) are a particular type of company set up under the Companies (Audit, Investigations and Community Enterprise) Act 2004. Under section 26(3) of that Act, CICs are prevented from being charities, even if their purposes are exclusively charitable. This is why we are unable to register the CIC.

It is possible for a CIC to become a charity, but if it does then it will no longer be a CIC. There are two ways for a CIC to become a charity:

  • the CIC could create a new charity (which can of course be a charitable company), transfer the assets of the CIC to this charity and wind up the CIC. This transfer and winding up would need the approval of the Regulator of Community Interest Companies (RCIC)
  • alternatively, there may be reasons why it is better to retain the same company (the CIC) and convert this to a charitable company. This can be achieved by the CIC amending its Articles of Association to cease to be a CIC and to become a charitable company. There is a set procedure that needs to be followed during the conversion process. Guidance on the conversion process can be found on the website of RCIC.

You now need to consider if it is better to continue operating as a CIC or to become a charitable company. This is not something on which we can advise. In making this decision, the directors should consider the guidance on the website of RCIC and, if necessary, take their own legal advice. If the directors decide to convert the CIC into a charitable company (rather than winding it up and transferring its assets to a new charity) please contact us again and we will set out the procedure you need to follow at that time.

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G4 Model text setting out the process to convert a CIC to a charity 

Thank you for your query regarding the proposed conversion of ##CIC to a charitable company. There is a set procedure that must be followed to convert a CIC to a charitable company. This is overseen by the Regulator of Community Interest Companies (RCIC), who you should contact next for further advice.

Role of the Charity Commission

The role of the Charity Commission in the conversion process is to:

  • consider the request for conversion and the information provided by the CIC explaining how the proposed charitable company will operate to further exclusively charitable purposes for the public benefit. The information we require is set out in the Annex below  
  • decide if the proposed charitable company will legally be a charity
  • provide a statement to say that, should the CIC convert, this would be a charity and would not be an exempt charity, we call this the 'statutory statement'. You must send a copy of the statutory statement to Companies House when you register the changes to the company's Articles.

What do you need to do to convert the company?

The action required by the company is explained by RCIC but, broadly, the requirements are 

  • the company must prepare a Special Resolution to adopt the Articles of Association of a charitable company (RCIC should be able to help with the wording of the Special Resolution and we recommend that you use this wording to adopt the model Articles of Association available on our website)
  • before this is put to the members, copies of the Special Resolution and the draft Articles of Association must be sent to us. We will then consider issuing the statutory statement. A CIC cannot convert without this statement
  • you must then send the Special Resolution, the new Articles of Association and the statutory statement to the Registrar of Companies who will contact RCIC. If RCIC decides that the CIC is eligible to convert then the Registrar of Companies will issue a new Certificate of Incorporation, the Special Resolution will then take effect, and the company will cease to be a CIC. At this point, the newly created charity will need to register with us, using the online application form, if it meets the minimum registration requirements (see Applying to Register: detailed guidance notes). There is no charge for registering a charity and we aim to complete the registration process no more than 15 working days following receipt of a completed online application form 

NOTE: Most charitable companies are companies limited by guarantee which is usually a more appropriate structure for a charity than a company limited by shares. If your CIC is limited by shares, rather than by guarantee, you may wish to establish a new charitable company, limited by guarantee, rather than try to convert the CIC to a charitable company limited by shares. Please discuss this with RCIC.

Applying for the statutory statement from the Commission

If, having consulted RCIC, you would like to go ahead with the conversion, you must apply to us for the statutory statement. The information we require is set out in the annex. We will use this information to decide if we can issue the statutory statement. It would be helpful to us if you insert your responses into the annex then email this to us.

While the questions in the annex should provide everything we need to consider issuing the statutory statement, we may need to contact you again to ask for further information.

Before applying for the statutory statement it might be helpful to read our publication Registering as a charity, our guidance Charitable purposes and public benefit and Applying to Register: detailed guidance notes. Doing this should help you to understand the issues surrounding becoming a charity and might help when providing the information we require.

ANNEX

To apply for the statutory statement please email us copies of:

  • the Certificate of Incorporation of the existing CIC
  • the draft Special Resolution to adopt the new Articles of Association
  • the draft Articles of Association (we recommend you use our model Articles of Association, this will speed up both this process and any subsequent registration process).

Please insert your responses to the following and email this back to us:

  • state if the CIC is limited by guarantee or by shares
  • where the CIC is limited by shares, explain why you want to convert this to a charitable company limited by shares
  • provide full details of the activities of the proposed charity, specifically:
    • what will the charity do?
    • how will it do it?
    • how will this further the objects of the charity?
    • who will be the beneficiaries of the charity and how will they benefit?
  • give details of where the charity will operate and whether or not the beneficiaries will be defined as the inhabitants of a particular area
  • explain the structure of the charity (does it have subsidiaries, branches, etc?)
  • how will the charity be funded?
  • provide details of any financial benefit that the directors of the CIC currently receive from the CIC and details of any benefits that the trustees of the charity will receive from the charity
  • give details of any fees the charity will charge and any concessions that might be available
  • if the charity will work with young people and/or vulnerable adults, please confirm that the necessary checks will be carried out (see our guidance on protecting vulnerable groups including children).

On receipt of this information, and the documentation, we will consider whether or not to issue the statutory statement.

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G5 Model text for the 'statutory statement'

Thank you for your recent correspondence attaching the proposed Articles of Association and a copy of the Special Resolution resolving to adopt the Articles of Association and changing the company’s name to #####.

I am pleased to confirm that, if the Special Resolution takes effect and the company ceases to be a Community Interest Company, then, in our opinion, the company will be a charity in law (and will not be an exempt charity).

This letter has been issued on the basis that the company will register with the Articles of Association as currently drafted and is the statutory statement required by section 55(7) of the Companies (Audit, Investigations and Community Enterprise) Act 2004. You will need to send a copy of this letter to Companies House when you apply to convert your CIC to a charitable company.

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