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.
Draft regulations for converting to CIOs either charitable companies (CLGs – who may not be too interested) or Community Interest Companies (CICs – which are not charities) have at last been laid before Parliament so it may become possible to register all charities as CIOs, regardless of type or income, from January 2018, though on a phased basis starting with CLGs with an income of <£12500 and ending with CICs from 1 September 2018.
Who are CIOs aimed at?
Trustees of all types of charity (and CICs looking to convert to charity status) 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 associations and CLGs. But it does carry advantages (even against the existing 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 by a trust or association to the CIO because where trustees (of an unincorporated charity as opposed to a CLG) transfer – in effect to themselves – to avoid liabilities there is technically a conflict of interest.]
Can a charitable company convert to a CIO?
Yes, from 1st January 2018 for the smallest companies (<£125,000) and from 1st August 2018 for the largest (>£500,000). 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 a relatively unfamiliar vehicle (with no equivalent of the charges register at Companies House). So the CIO will not suit some large charities, especially if they have granted a fixed or floating charge to a lender as its registration to Companies House cannot be removed post-conversion. CIOs may even be seen as 2nd class.
But, as the legal status of the entity is to remain the same, there will be no need for a transfer of assets and liabilities – or even staff – on a CLG’s becoming a CIO. And the new requirement for all companies to keep a PSC Register could tip the balance in favour of a conversion.
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, though the public motive has to be more clearly spelt out than would be the case for the ‘traditional’ trading subsidiary. But there are restrictions on funding the CIC out of the charity’s assets.
As noted above, a CIC can itself convert to a CIO from 1 September 2018. This may well be of interest to social enterprises that have found that they do not need shareholder investment and other CIC flexibilities after all and prefer to have charitable status to attract funds or tax exemptions.
What disadvantages are there, as compared with a simple Trust?
- A CIO doesn’t exist until registered, so is of little use for emergency start ups
- 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 (though not for converted CLGs) 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.2 – 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. It is not as user-friendly as we had hoped, but useful all the same.
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 security, so a lender has no means of knowing what other secured loans are due unless they are secured on land – a potential problem for larger charities that may want to borrow. But we have not seen any actual evidence of any major problem issues in practice, and we have seen high street clearing banks agree to lend substantial 7-figure sums to CIOs.
If you run a charity and you are at all concerned about the potential liabilities for trustees, CIOs are certainly well worth a look.
Contact James Evans or Richard King on: 01392 207020 or email: firstname.lastname@example.org
Broadwalk House, Southernhay West, Exeter EX1 1UA