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Posted 17 September 2018
by James Evans

To Convert or Not to Convert…

Coffee and a laptop

On 1 September 2018, a new process was introduced enabling a Community Interest Company (“CIC”) to convert directly into a Charitable Incorporated Organisation (“CIO”).

A CIC is a special kind of limited liability company specifically designed for social enterprises operating to provide a benefit to the community, but without having charitable status. Over 14,000 CICs have been registered.

In contrast, like all charities, a CIO must have exclusively charitable objectives for the public benefit and comply with the requirements of the Charities Act 2011 and other charity legislation.

So the conversion involves a fundamental change in the nature of the organisation.

Why would a CIC want to convert?

This new conversion process is likely to be of interest to those CICs whose activities, financial and operational model are more akin to that of a charity rather than a social enterprise, who could benefit from converting to a CIO by then potentially being able to access additional sources of funds that are only available to charities and benefit from charity tax breaks that are not open to CICs.

But what does it involve?

The Charity Commission have published new guidance outlining a short 4-step process which looks straightforward at first glance:

https://www.gov.uk/guidance/convert-a-community-interest-company-to-a-cio

These steps include:

  1. the members or shareholders of the CIC passing a special resolution or a unanimous written resolution approving the conversion to a CIO;
  2. preparing the new constitution for the CIO (the Commission require their association model constitution to be used as a starting point and certainly using a Commission model document should speed up the conversion process);
  3. the members or shareholders passing an ordinary resolution adopting the proposed constitution of the CIO; and
  4. using the Commission’s online portal to apply for charitable status as a CIO submitting all of the above documentation together with a completed Trustee Declaration.

When completing the Commission’s application, the ‘Special Circumstances’ section must state the CIC’s name and explain that this is an application to convert into a CIO.

But a CIC looking to convert will need to consider a number of factors and make sure they are ‘charity ready’ before they embark on the process, because if it cannot comply with the charity requirements its application will likely be refused.

Key implications

Firstly, the CIC will need to review whether all its current purposes and activities will be exclusively charitable for the public benefit, taking professional advice as needed.

If they are not, some advance restructuring may be needed before an application to the Commission is made. This could involve, for example, separating out significant non-primary purpose trading activities into a new wholly owned trading subsidiary company to comply with charity trading restrictions and/or ceasing to carry on certain non-charitable activities completely.

Board remuneration

Careful consideration will also need to be given as to whether the CIC wishes to continue with any paid director arrangements it currently has in place, and if so, how these might translate in a charity structure, as the normal default position for any charity is that the board of trustees will be volunteers.

This does not mean that trustees can never receive payment for services provided to a charity. But a CIC will need to consider whether, as a CIO, it would be able to take advantage of the framework in the Charities Act 2011, which permits trustees to be paid for additional services they provide ‘over and above’ their normal trustee duties in certain circumstances. Otherwise the CIC may need to seek specific Charity Commission approval for a proposed payment arrangement as part of the conversion process.

This is an area which will be scrutinised in great detail by the Charity Commission when they consider the conversion application and any proposed board payment arrangements have the potential to cause additional delays in the Commission considering the application.

Other implications

CICs that have been set up as a company limited by shares will have additional implications to consider.

CIOs do not have a share capital and so once a CIC has been converted into a CIO, the CIC’s existing share capital will be extinguished. So if the CIC has any existing shareholders who have made significant share capital investment into the CIC some advance restructuring of the investment may well be needed, for example using a share buy-back.

This will of course not be an issue for CICs set up as a company limited by guarantee and we anticipate generally the process should be slightly smoother in those cases.

Timescales

Whilst the application process looks straightforward, it is unlikely to be quick given current Charity Commission workloads and turnaround times. Shortly before this was written the Commission quoted us a 16 week turnaround time on an application to set up a new CIO, although in our recent experience actual timescales are highly variable and straightforward CIO registrations are often turned around much sooner than that.

In an application to convert a CIC to a CIO, we would not be surprised if the Commission take even longer to review a CIC conversion application given the additional factors they will need to consider to satisfy themselves a previously non-charitable company is now exclusively charitable.

Conclusion

The conversion process is a potentially useful tool offering CICs additional flexibility if they conclude the charity business model is more suitable than a purely social enterprise model.

But CICs should ensure they are fully aware of the implications and take legal and tax professional advice before proceeding, and make sure they are truly ‘charity ready’ before applying to the Charity Commission.

If you require any advice regarding an issue similar to this, then please do not hesitate to contact our experienced team of charities solicitors on 01392 207020.

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About the author

James Evans

Partner and Solicitor