CICs are organisations pursuing non-political social objectives, providing community facilities or trading with a social purpose. A CIC is not a charity, and is prohibited from applying for charitable status. CICs are regulated by the CIC Regulator, based at Companies House.
A CIC has a number of potential advantages over the alternative structures:
- Limited liability;
- The test to become a CIC is less rigorous than for a charity;
- Ongoing reporting and regulatory requirements are less costly and rigorous than a charity;
- The assurance given to investors/donors/members of the community that assets will be used solely to benefit the community because of the asset lock on distributions;
- The legal suffix of the entity (e.g. CIC) may be more socially acceptable;
- The ‘Asset Lock’ for CIC’s does not prohibit the disposal of land/buildings, on normal commercial terms;
- It may suit some entities to have a more commercial style entity that can access government and lottery funding;
- A CIC is able to remunerate its Directors (although this must not be ‘excessive’);
- Investors are able to realise their investment by the sale of their shares to a third party;
- The corporate structure is familiar to third parties such as banks and suppliers; and
- The corporate structure is more flexible than many other structures available.
- In some circumstances local government may provide discretionary rate relief to social enterprises, such as CICs.
A CIC is taxed in the same way as a normal trading company and there are no specific tax reliefs available to CICs.
FEATURES
A CIC is a limited company, which can be either private or public, limited by share or guarantee. CICs are created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage. This is achieved by a ‘community interest test’ and ‘asset lock’.
Community Interest
The test is intended to be light touch. To become a CIC, an organisation needs to satisfy the regulator that a reasonable person would regard its purposes as being in the community or wider public interest.‘Community’ will normally be a group of people wider than the members of the CIC. The CIC will also need to demonstrate that access to the benefits it provides will not be confined to an unduly restricted group. This would mean that a work social club could not be a CIC unless people other than current/previous employees were able to use the company’s facilities.
Asset Lock
Is designed to ensure that the assets of the CIC (including profits) are used for the benefit of the community. A transfer of assets out of CIC must meet one of the following requirements in relation to: consideration; that it is made to another asset locked body (e.g. a charity); is made to another asset locked body with the consent of the Regulator; or is otherwise made for the benefit of the community.The lock does not prevent CICs from using their assets efficiently in pursuit of community benefit; for instance, they will be able to use assets as collateral for finance.
There are two specific applications of the ‘asset lock’ principle:
- Dividend Cap
Upon formation, a CIC may opt to only permit dividends to be paid to other asset locked bodies (for which no cap exists), or may permit dividends to be paid to other parties, subject to a ‘dividend cap’. Divided may only be paid if it is permitted by the CICs Memorandum and Articles;has been approved by the members; and the amount of dividends does not exceed the ‘maximum aggregate dividend for that financial year’, for instance, if the profit for the period were £10,000, the maximum total dividend would be £3,500 (£10,000*35%).
- Performance Related Interest Cap
Subject to its Memorandum and Articles CICs have the same borrowing powers as any other companies and can usually pay normal commercial rates of interest to lenders. On occasions, the amount of interest payable may be determined by the performance of the CIC.
REPORTING AND FILING REQUIREMENTS
Financial Statements
CICs are required to file financial statements annually at Companies House. The rules are the same as any normal public or private company although it is not currently possible to file accounts using Companies House on-line filing system. CICs are entitled to audit-exemption in the same way as other companies.
Community Interest Reports
In addition to the requirement for filing financial statements all CICs are required to prepare and file a Community Interest Report annually at Companies House. The CIC regulator has produced pro-forma reports and recommends that these are used.The filing deadline is the same as for the financial statements.