Article

Community Interest Companies

The Government’s stated intention in promoting Community Interest Companies (“CIC”) was to:

= improve access to finance,
= create a strong new brand,
= provide protection from demutualization and
= preserve assets and profits for solely social purposes.

This article looks at the background to CICs and considers the extent to which the Government’s intention has been realised.

What are CICs? - CICs were introduced in July 2005, as a vehicle for businesses wanting to trade for the benefit of a community, rather than to maximise private profits. It was intended that the CIC initials would become a recognisable symbol to both potential investors and customers who would instinctively associate the initials with a company whose activities they would understand and trust. CICs are very
similar to ordinary private profit-making companies, apart from a number of important exceptions, including:

= Asset lock requirements: all assets and profits must be permanently retained within the company and used solely for the community benefit, or transferred to another organisation which itself has an asset lock (e.g. a charity or another CIC).
= The Community Interest Statement and Report (“CISR”): the company must initially file a Community Interest Statement along with other incorporation documents and then send a Community Interest Report when filing accounts. The aim is that the activities of the CIC will be transparent to its stakeholders and the wider community.

What type of organisations use CICs? - The CIC model is particularly useful for would-be charities that find it difficult to meet the public benefit requirement or for charities that would like to have a trading arm to raise funds for their charitable purpose. CICs are regulated less stringently than charities, leaving them to trade with only the limited interference necessary to maintain public confidence. Yet, a CIC will not attract the same beneficial tax consequences as a charity and this should be borne in mind by
any new business deciding whether to set up as a charity or CIC. The CIC model may also be attractive to businesses within the social enterprise sector. Such businesses may be interested in using a well-known and trusted corporate vehicle with the added benefits of transparency and community purpose provided for in the asset lock requirements and the CISR.

How successful is the CIC Model? - One year on, the view of the Government was that “CICs are taking off far more quickly than we could have expected”. In August 2006, the results of a survey conducted by Social Enterprise Magazine on behalf of RBS/NatWest were published. When the survey was carried out there were 344 CICs registered at Companies House. There are now 558 - an increase of 62% in 4 months - which goes some way to supporting this view. The survey also said that the most popular reason given for becoming a CIC (43%) was that it was thought to be a middle-ground between a business and a charity. Other important reasons were less regulation than a charity (19%), to improve social purpose (16%) and the brand (8%). When asked what the biggest barriers to their company’s success were, 38% of the respondents said access to funding, whilst 20% thought it was the lack of
understanding amongst others of the CIC model.

CICs are seen by those who run them as providing commercial benefits. However, one of the Government’s prime objectives in introducing the CIC - access to finance - is one of the biggest obstacles to their success to date. This suggests that there is still some way to go before the CIC can meet all of the Government’s stated intentions. It is also questionable whether a CIC would be any more successful in achieving its aims than a regular company limited by guarantee.

For further enquiries please contact James Partridge (view full profile) on 01892 701280 or email james.partridge@ts-p.co.uk.

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