07 Feb Community Interest Companies: an introductory guide
A Community Interest Company (a ‘CIC’) is a corporate vehicle which was introduced under companies legislation in 2005, specifically for social enterprises and/or ‘not for profit’ projects. It has the well-established form of a normal limited company, either limited by shares or limited by guarantee, and is subject to the regulation of both Companies House and the CIC Regulator.
The CIC Regulator generally applies a ‘light touch’ approach so that the added administrative burden on a CIC is minimal compared to the requirements placed on a standard company.
Three key distinguishing features of a CIC are that:
- it has an overriding community purpose (which is enshrined in its objects, as set out in its constitution)
- it has a statutory asset lock (which ensures the assets are used for the benefit of the community)
- dividends are capped at 35 per cent of distributable profits (the ‘Maximum Dividend Cap‘).
The overriding community purpose can be defined very narrowly or very broadly but is what fundamentally defines a CIC as a social enterprise vehicle.
The asset lock means that a CIC can only transfer assets:
- for less than market value, to another CIC or asset-locked body (such as a charity or a similarly asset-locked community benefit society); or
- to a third party (not falling into the description above) for market value.
Any surplus assets arising on the dissolution of a CIC (after satisfaction of its creditors) must go to another asset-locked body.
A CIC can be formed with any number of members (it can be a single member company or involve a wide membership) and can have a mix of stakeholders, so that investors can be involved and can be paid dividends or performance-related interest. Dividend payments can only be declared by an ordinary or special resolution of the members and are subject to a Maximum Dividend Cap. This ensures that a guaranteed proportion of profits is available to benefit the community in line with the CIC’s core community purpose. Similarly there is a cap on the level of interest linked to the performance of the CIC which can be paid – currently the maximum interest rate is 20 per cent. These caps are designed to balance the principle of community benefit against encouraging people to invest in the CIC, to allow a CIC to thrive.
The CIC Regulator’s primary role is to oversee compliance with these key differentiators, in order to maintain the integrity of CICs and to provide reassurance for stakeholders. The CIC Regulator does have extensive reserve powers to allow him to supervise a CIC which is in default of the CIC Regulations. This extends to investigating, for example, allegations that a CIC is contracting with any third party on non-arm’s length terms.
Importantly, a CIC is not a charity (and cannot register as one) and so is not constrained to purposes which are wholly and exclusively charitable. Instead, a CIC can engage in a range of trading activities without the extensive range of restrictions imposed on charities by the Charity Commission and HM Revenue & Customs.
It must be stressed that CICs do not automatically benefit from tax reliefs, unlike charities. A CIC can apply for certain tax exemptions but they are not guaranteed by right. This differentiator is less relevant to those CICs which do not generate much in the way of taxable surpluses, and which use their income wholly to supply services.
All or some of the board directors of a CIC can be paid, unlike trustees of charities, although the CIC Regulator can intervene if the pay is excessive.
Each year a CIC must file an annual community interest company report with the CIC Regulator as well as the usual accounts and returns to Companies House. The report must outline:
- the CIC’s activities and how the CIC has benefitted the community
- any assets transferred for less than market value
- the dividends paid
- the remuneration of directors
- any performance related interest paid
- how it has consulted with stakeholders.
Formation of a CIC
The formation and registration process is similar to that of any limited company (and thus straightforward and inexpensive to set up). On incorporation, the main function of the CIC Regulator is to ensure that the CIC’s constitution satisfies the community interest test. The test is satisfied if the CIC can demonstrate that a reasonable person would regard its activities as being carried on for the benefit of the community. A CIC will fail the test if it engages in either political campaigning or activities which will only benefit members of a particular body or employees of a particular company. The CIC will need to continue to show it passes the test in its annual community interest company report.
The constitution of the CIC will be a form of Memorandum and Articles of Association, which must be drafted in compliance with the relevant CIC Regulations. The CIC Regulator’s website contains a wealth of helpful guidance and forms.
Otherwise, the usual Companies House incorporation forms with details of the first officers and registered office must be completed.
A prescribed CIC form must also be filed, declaring that the proposed CIC will not be a political party or campaigning organisation. It must also describe the community to benefit from the CIC’s activities, state how those activities will achieve that benefit and how any surpluses will be applied.
These forms, the Memorandum and Articles and a nominal registration fee are lodged with Companies House which will then pass the application documents to the CIC Regulator’s Office for scrutiny. Our experience to date is that this scrutiny is no mere formality – the CIC Regulator’s office can ask some searching questions as to a CIC’s proposed activities and, for example, any perceived conflicts of interest between the CIC and its directors or sponsors.