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Richard King

Posted 20 July 2016
by Richard King

Charitable Incorporated Organisations (‘CIO’)



The first CIOs were created in January 2013. The Charity Commission welcomes applications to convert the smallest existing unincorporated charities as well as new creations of any size: there is no £5000 income threshold for CIOs.

It may become possible to register all charities as CIOs, regardless of type or income, but not just yet. A consultation on draft regulations for converting to CIOs either charitable companies (CLGs – who may not be too interested anyway) or Community Interest Companies (CICs – which are not charities) has recently ended.

 
Who are CIOs aimed at?

Trustees of all types of charity who want the same permanence and protection from liability that is available to CLGs, but simpler administration and regulation.

How does it work?

A CIO is set up as a charity, with all the usual requirements – a bit like a company, but with special features that suit a charity. There are two basic types of model constitution which the Commission expects to be used: ‘Foundation’ (where the members are all trustees) and ‘Association’ (with a wider membership).

What is the status of a CIO?

It has a corporate, almost permanent status. So there are few formalities when trustees change. It should use the initials “CIO” (or the equivalent words) in its title or make its legal status clear on everything including emails and website.

Do we have to go down the CIO route?

No. It is additional to the 3 main existing forms: trusts, member constitutions and CLGs. But it does carry advantages (even against the CLG alternative):

  • model constitutions specific to charities (unlike company Articles)
  • no need to register with or send returns to Companies House too
  • no need for a PSC (Persons with Significant Control) register as for companies
  • no right for members to vote by proxy
  • just one set of reporting and accounting regulations to comply with
  • the Charity Commission, as sole regulator, charges no filing fees – as yet
  • enforcement would not penalise the charity for the conduct of its trustees
  • protects trustees from personal liability (contract/negligence claims only)

Who controls the CIO?

The board of trustees and its other members (if any), as with any company. And the Charity Commission, as regulator, will have a watching brief. [The Commission should issue an authority for the transfer to the CIO because where trustees transfer – in effect to themselves – to avoid liabilities there is technically a conflict of interest.]

Can a charitable company convert to a CIO?

Yes, in time. But the cost could outweigh any reduction in regulatory costs. Single filing of accounts may eventually be allowed anyway. Also funders and lenders may not accept what is still an unfamiliar vehicle (with no means of registering loans), so the CIO will not suit some large charities. CIOs may be seen as 2nd class. But the new requirement for all companies to keep a PSC Register could tip the balance.

Can a CIO set up a CIC (Community Interest Company)?

Yes, as a subsidiary. A CIC can pass its assets to a charity. So a CIC can be a good vehicle for the charity’s trading arm such as a shop, though the public motive has to be more clearly spelt out than would be the case for the ‘traditional’ trading subsidiary. But you cannot fund the CIC out of the charity’s assets.

What disadvantages are there, as compared with a simple Trust?

  • CIO doesn’t exist until registered, so is of little use in an emergency
  • model constitution more rigid than those for trusts etc.
  • accounts and annual returns sent to the CC regardless of level of income
  • registers of charity trustees and members to be available for public inspection
  • conversion to CIO status of a charity with a defined benefit pension scheme is likely to be notifiable to the Pensions Regulator, leading to funding problems
  • new charity number and stationery requirements
  • lack of familiarity with lenders – though this is improving
  • no statutory right for members to remove trustees (unlike companies)

What if we decide to go down the CIO route and need your help?

We send you two questionnaires to find out your requirements. Then we draft a constitution, based on one of the two models. You complete a Trustees Declaration Form. We (or you) then apply online to the Charity Commission for registration of the new charity as a CIO. Meantime, we consider with you how any existing assets and liabilities – and the conflict of interest mentioned on p.1 – are to be dealt with.

Was it worth the wait?

As charity lawyers, we and other members of the Charity Law Association had long advocated a new corporate constitution for charities that would avoid dual regulation. After many years of painfully slow negotiation, it became a reality.

There are still concerns that, as happened at first with CICs, the CIO may not become acceptable to grant-makers and lenders until they are satisfied that it is wholly robust and transparent and gives sufficient security. Also, unlike with companies, there is no provision (let alone requirement) for registration of loans, so a lender has no means of knowing what other loans are due unless they are secured on land – a potential problem for larger charities that may want to borrow.

But, if you run a charity and you are at all concerned about the potential liabilities for trustees, CIOs are certainly well worth a look.

 

For more infomation contact Richard King: direct line 01392 667687; email r.king@tozers.co.uk Tozers LLP,

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About the author

Richard King