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The activities of a Community Interest Company (CIC) must be for the benefit of the community. This can embrace either the community or population as a whole, or a definable sector or group of people either in the UK or elsewhere. A company will not be eligible if any of its activities benefit only the members of a particular body or the employees of a particular employer, without bringing any benefits to a wider community.

CICs are regulated by the Regulator of Community Interest Companies. All companies applying to be registered as CICs must provide the Regulator with evidence that they satisfy the community interest test, in the form of a community interest statement and it must continue to satisfy the test for as long as it remains a CIC.

Tax

CICs are taxed in the same way as normal companies. They are subject to corporation tax and VAT and a CIC that makes donations to charity can deduct the amount of the donation as a charge when calculating its profit for corporation tax purposes.

Charities compared to CIC

Charities have tax advantages that CICs do not; however, charities are subject to more onerous regulations. The definition of community interest that applies to CICs is wider than the public interest test for charity.

A charity may own a CIC and the CIC would be able to pass assets to the charity. A charitable company may be able to convert to a CIC and a CIC may be able to convert to a charitable company in the UK. However, a company cannot be both a charity and CIC.

Further guidance on converting to a community interest company is available from BIS.

Asset lock

Asset lock is a general term used to cover all the provisions designed to ensure that the assets of the CIC (including any profits or other surpluses generated by its activities) are, subject to meeting its obligations, either permanently retained within the CIC and used for the community purposes for which it was formed, or transferred to another asset locked body, such as another CIC or charity.

Any transfer of assets must satisfy certain requirements, which means that, subject to the CIC meeting its obligations, its assets must either be retained within the CIC to be used for the community purposes for which it was formed, or, if they are transferred out of the CIC, the transfer must satisfy one of the following requirements:

  • it is made for full consideration (ie at market value), so that the CIC retains the value of the assets transferred
  • it is made to another asset locked body (a CIC or registered charity, or non-GB based equivalent) which is specified in the CIC’s constitutional documents.
  • it is made to another asset locked body with the consent of the Regulator
  • it is otherwise made for the benefit of the community.

With only limited exceptions, such as the payment of dividends and the return of paid up capital on liquidation, a CIC’s assets cannot be returned to its members unless they are themselves asset locked bodies. However, the asset lock should not be seen as a bar to the CIC using its assets for normal trading or other business activities and meeting its financial obligations.

Dividend cap

Unlike most companies, CICs may only declare a dividend by ordinary or special resolution of the members (ie a dividend cannot be declared by the directors alone). Dividends are subject to the constraints that apply to an ordinary company such as the rules on distributable profits.

If the dividend is payable to other asset locked bodies or otherwise for the benefit of the community (ie not to private investors) the dividend cap does not apply; the dividend cap applies to other distributions.

The Community Interest Companies Regulations 2005 set the first caps for dividends to private investors as follows.

The maximum dividend per share limits the amount of dividend that can be paid on any given share. The limit for shares in issue between 1 July 2005 and 5 April 2010 is 5% above the Bank of England base lending rate of the paid-up value of a share. The limit for shares issued on or after 6 April 2010 is 20% of the paid-up value of a share.

Aggregate dividend cap: 35% of distributable profits.

These rates may be varied from time to time by the Regulator after consultation and with the approval of the Secretary of State.

Forming a new CIC

To form a new company as a CIC the following must be delivered to the appropriate Registrar of Companies for England & Wales, Scotland or Northern Ireland:

  • memorandum of association and articles of association that comply with the Regulations (a CIC must register Articles and cannot rely on Table A of the Companies Act)
  • form CIC 36, which includes a community interest statement, and a declaration that the company will not be an excluded company ie politically motivated
  • form 10 gives details of first directors and company secretary and the intended address of the registered office
  • form 12, which is a statutory declaration of compliance with the legal requirements for formation of a company
  • a cheque for £35 payable to Companies House. 

Converting an existing company to a CIC

To convert an existing company to a CIC the following must be delivered to the appropriate Registrar of Companies for England & Wales, Scotland or Northern Ireland:

  • a copy of the special resolution to alter the company memorandum to state that it is to be a CIC
  • a copy of the special resolutions necessary to alter the memorandum and articles of association so that they conform to the requirements for a CIC memorandum and articles of association
  • a copy of the special resolution changing the name of the company to one of the CIC designations. There is no need to invent a new name unless you want to; a simple change from ‘Ltd’ to ‘CIC’ will be enough
  • memorandum and articles of association, incorporating the changes made by resolutions, and that comply with the Regulations 2005
  • form CIC 37, which includes a community interest statement, a declaration that the company will not be an excluded company ie not politically motivated and the declaration that the company is not a charity
  • a cheque for £25 payable to Companies House.

Forms 10, 12, CIC 34, CIC 36, CIC 37, model resolutions and model memorandum and articles of association can be obtained free of charge from the Regulator’s website.

Annual community interest report

All the directors of a CIC have an obligation to prepare an annual community interest company report (form CIC 34) to be filed with the accounts. The report is to be made up to the same date as the accounts, regardless of the size of the company or the exemptions that they have taken advantage of. The report is delivered to the Registrar of Companies who will file it on the public record and pass a copy to the Regulator.

The Regulations prescribe minimum requirements which include:

  • information on the remuneration of the directors such as the total aggregate pay of directors, details of the highest paid director (if the aggregate pay of directors exceeds £200,000) and the number of directors who have received share benefits. (This information does not have to be duplicated in the report if it is included in the accounts and the report states that the information may be found in the accounts)
  • details of what the CIC has done to benefit the community
  • details of how it has involved its stakeholders in its activities
  • details of dividends declared (or proposed) on shares and performance related interest paid and their compliance with the capping rules. (If such dividends or interest have been paid reference should be made to the precise requirements in Regulations 27 and 28 of the Community Interest Company Regulations 2005)
  • information on the transfer of assets to another asset locked body or otherwise at less than market value for the benefit of the community.

Although the report has to be submitted with the annual accounts it must be in a separate document and be accompanied by the £15 fee.

The statutory obligations of community interest companies, including the annual reporting requirements, are available on the BIS website.

Article contributed by ACCA