On 1st April 2016 a new consultation was launched by the Cabinet Office covering England and Wales. It aims to make life easier for those English and Welsh charities currently using the company limited by guarantee (CLG) structure and for Community Interest Companies (CIC’s). The proposed regulations would be made under the Charities Act 2011 and would allow charitable companies and CIC’s to convert directly into Charitable Incorporated Organisations (CIO’s). Unincorporated charities have been able to register as CIO’s since 2013. Conversion avoids the need to set up a new CIO and transfer assets and operations into it. The consultation is open for responses until 5.00pm on 10th June 2016.
The CIO structure has been available for three years and is governed by Part 11 of the Charities Act 2011. It gives a charity the benefits of incorporation such as limited liability for trustees and members and the ability for the CIO to make its own contracts and hold property with continuity of ownership. It also allows those dealing with the charity to assess the risks of doing so more easily.
Those benefits are already available to charities using the other available corporate structures: the company limited by guarantee (CLG), registered with the Charity Commission, and the community benefit society (CBS) registered under the Co-operative and Community Benefit Societies Act 2014 (CCBSA 2014). Charitable CBS’s are recognised by HMRC as “exempt” charities but cannot register with the Charity Commission.
A charitable company is subject to two sets of regulatory requirements: they have to file annual accounts with Companies House and also with the Charity Commission and they are subject to both company law and charity law. Similarly, a charitable CBS has to comply with the regulatory requirements of the Financial Conduct Authority under CCBSA 2014 and also those of HMRC so as to maintain its charitable status for tax purposes.
A CIO, once registered with the Charity Commission, only needs to comply with the requirements of charity law and avoids dual regulation. As the consultation document points out:
“Since the introduction of the CIO legal structure in 2013 it has proven to be a very popular choice of structure for new and existing unincorporated charities. Over 6,500 new CIOs have been established since its introduction and it now accounts for over 25% of new charity registrations. It is expected that the option of conversion will be similarly popular for small charities that have opted for the company structure and for CICs.”
– Conversion to a Charitable Incorporated Organisation (CIO) (Cabinet Office, April 2016) pp 3-4.
The proposed regulations, working with the relevant sections of the Charities Act 2011, would allow charitable companies and CIC’s to convert into CIO’s only if they were not exempt charities and if their share capital (if any) was fully paid up.
The company or CIC would pass a special resolution to convert into a CIO. It would then send the Charity Commission copies of the conversion resolution, the proposed CIO constitution, and a company resolution adopting the proposed constitution. If the CIO constitution contained an entrenchment provision requiring a special procedure or bigger majority to change certain provisions the application would have to point that out. The Charity Commission could also demand any other relevant information or documents before dealing with the conversion.
Neither a company nor a CIC could convert if its returns and accounts to either Companies House or, for a company, the Charity Commission were not completely up to date. The proposed CIO constitution must comply with the registration requirements for CIO’s and must show that the CIO will be a charity. The CIO name must also comply with the rules applied by the Commission. If a converting CLG or CIC was limited by a guarantee of more than £10 per member, the CIO constitution must provide for at least the same level of guarantee if the CIO becomes insolvent. Where the guaranteed amount was £10 or less per member, the liability is extinguished and the CIO constitution need not make provision for any member guarantee.
For CIC’s, the regulations spell out more of the requirements for conversion as the Charities Act 2011 leaves the whole process to be laid down by regulations. The Regulations provide for liaison between the Charity Commission and the CIC Regulator. The CIC Regulator must decide that the CIC is eligible to cease being a CIC under section 55 of the Companies (Audit Investigations and Community Enterprise) Act 2004 (C(AICE)A 2004) and notify the Charity Commission of that decision before the CIO can be registered and established. The grounds for ineligibility are that the CIC is subject to current regulatory action by the CIC Regulator, such as appointing an auditor or appointing or removing a director of the CIC.
No provision is made for a community benefit society registered under CCBSA 2014 to convert in the same way – even if they are already recognised as charities by HMRC. That is because:
“a charity that would be an exempt charity following conversion cannot convert into a CIO because to become a CIO the charity must register with the Commission”
– Conversion to a Charitable Incorporated Organisation (CIO) (Cabinet Office, April 2016) para 38 pp 9-10 .