1.  The need for CICs                                                                         

What is a CIC?

A CIC is a new type of company, designed for social enterprises that want to use their profits and assets for the public good.  CICs will be easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community.

What is a Social Enterprise? 

"A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.

Social enterprises tackle a wide range of social and environmental issues and operate in all parts of the economy. By using business solutions to achieve public good, the Government believes that social enterprises have a distinct and valuable role to play in helping create a strong, sustainable and socially inclusive economy.

Social enterprises are diverse. They include local community enterprises, social firms, mutual organisations such as co-operatives, and large-scale organisations operating nationally or internationally. There is no single legal model for social enterprise. They include companies limited by guarantee, industrial and provident societies, and companies limited by shares; some organisations are unincorporated and others are registered charities."

from 'Social Enterprise - a strategy for success'

Why are CICs needed?

Social enterprises are an exciting and fast-growing sector.  Yet some of the legal forms were originally designed for completely different types of organisation. The Government wants to support the sector by creating a modern and appropriate legal vehicle and to help raise their profile.

What will CICs do?  

CICs will be organisations pursuing social objectives, such as environmental improvement, community transport, fair trade etc.  Social enterprises are playing an increasing role in regenerating disadvantaged areas, empowering local communities and delivering new, innovative services at local level.

The Government does not intend that CICs should deliver essential public services in core sectors such as hospitals and schools.  Rather, CICs should develop to meet the needs of local communities, complementing core Government services in areas such as childcare provision, social housing, leisure and community transport.  The CIC is a flexible form that will allow such enterprises to grow and expand their activities.

What’s wrong with existing legal forms?

Currently companies that do not have charitable status find it difficult to ensure that their assets are dedicated to public benefit.  There is no simple, clear way of locking assets to a public benefit purpose other than applying for charitable status.  The Community Interest Company will help to meet the need for a transparent, flexible model, clearly defined and easily recognized.

Will this require legislation?

Yes, legislation is needed.  This will cover a regulator, a community interest test, and community interest reports.

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2.   Charities, CIOs and I&PSs                                                            

Can a CIC be a charity?

No, a new organisation will need to make a choice between being either a CIC or a charity.

Why would an organisation want to be a CIC instead of a charity?  

There is no doubt that charitable status is exactly right for many who wish to further charitable objectives and it is likely that most organisations operating for the public benefit (and who are eligible for charity status) will choose to be charities, not least for the fiscal advantages.

The sort of people who will want to set up a CIC will typically be entrepreneurs who want to do good in a form other than charity.  This may be because:

1.     They are looking to work for community benefit with the relative freedom of the non-charitable company form to identify and adapt to circumstances, but with a clear assurance of not-for-profit distribution status.

2.       Members of the board of a charity may only be paid where the constitution contains such a power and it can be considered to be in the best interests of the charity.  It means that, in general, the founder of a social enterprise who wishes to be paid cannot be on the board and must give up strategic control of the organisation to a volunteer board which is often unacceptable. 

3.     The definition of community interest that will apply to CICs will be wider than the public interest test for charity.

Could a CIC convert to charitable status?  Could a company with charitable status become a CIC? 

Although it will be technically possible to convert from CIC to charitable status and vice versa, it is not thought there will be much demand for this.

A CIC that became a charity would no longer be subject to the community interest test and the regulator.  Instead it would be subject to the more restrictive provisions for charities and the Charity Commission.  Similarly, a charity that converts to CIC status would need to satisfy the regulator that it was working in the community interest but it would lose the tax breaks.

An existing charitable company which wishes to convert to a CIC will be subject to the same sort of controls as apply at present when a charitable company seeks to use the powers in the Companies Act 1985 to convert to a non-charitable company.  A CIC which wishes to convert to a charitable company will, of course, have to have exclusively charitable purposes.

Scottish charitable companies will be subject to the constraints of Scottish charity law.

Will CICs replace Industrial and Provident Societies (I&PSs)?

No. The I&PS tradition is very strong in some sectors and some areas of the country.  It can offer democratic accountability through IP&S membership structures.  The Government is extremely supportive of the co-operative sector and recognises the importance of the I&PS as a legal form.  That is why it supported a recently enacted Private Member’s Bill which will help bring I&PS legislation up to date.

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3.   The Community Interest Test                                                   

What is the Community Interest Test and what is it meant to achieve?  

Community interest is the heart of the CIC and the community interest test is what differentiates CICs from other not-for-profit organisations.  Demonstrating community interest is of value to those seeking grant funding or philanthropic investment.

The test is intended to be light touch.  To become a CIC, an organisation would need to satisfy the regulator that its purposes could be regarded by a reasonable person as being in the community or wider public interest.  It will also be asked to confirm that access to the benefits it provides will not be confined to an unduly restricted group.

Can political and campaigning organisations be CICs? 

To ensure that the regulator does not become involved in debate about whether particular political purposes are beneficial, it is proposed that political parties should not be able to become CICs, or to set up CIC subsidiaries.  It is also proposed that organisations whose purposes are support for a political party, or political campaigning, should be unable to become CICs.

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4.  Finance                                                                                         

How will CICs be financed?  

Like other social enterprises, CICs will find funds from a variety of sources, including grants and donations, loans from high street banks and other institutions.  The Government is proposing limited access to equity finance.

The Government is supporting finance for social enterprises, through community development finance institutions and the Community Investment Tax Relief.

As the concept of social enterprise becomes more widely understood by the finance community, social entrepreneurs should find it easier to explain what they are doing and to get a competitive price for finance.  Clear recognition of the CIC form will help this process.

Can a CIC apply to the Inland Revenue for tax reliefs?

The Government is supporting social enterprises through the tax system.  The Community Investment Tax Relief (“CITR”) gives tax benefits to investors who back businesses in less advantaged areas through Community Development Finance Institutions (CDFIs).

CITR provides tax relief of 5% per annum to investors who invest in an accredited CDFI, which then in turn lends to or invests in a qualifying profit-distributing enterprise or community project. Accredited CDFIs may invest in qualifying CICs.

CICS will be eligible for the same tax reliefs available to other companies.  The Government is considering carefully the various technical points about fiscal matters that were raised during the consultation, in order to ensure that the introduction of the CIC will be of real practical value to the social enterprise sector.  

     4.1   The asset lock                                                                        

What is the asset lock?

The asset lock will be established in legislation, and will prohibit CICs from distributing their assets or profits to their members, except to the extent permitted where CICs issue equity (see 4.2 below).  The lock will 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.  The regulator will be responsible for ensuring that the asset lock is maintained, and stakeholders who believe that it is being breached will be able to ask the regulator to take action.

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4.2  Equity finance                                                                        

How will the equity finance work? 

The Government proposes to structure legislation so as to allow CICs to issue suitably capped investor shares, while recognising that demand for such shares may initially be limited.  The level of demand will be influenced by the way in which the cap is set.  The Government intends that the cap should be set at a level which will allow CICs to access investment, without undermining their focus on community benefit.  

The Government will set the structure of the cap in secondary legislation, and the CIC regulator will be responsible for setting the cap in a way that will balance need to encourage investment with the primacy of community interest.  The regulator will take the views of the social enterprise sector into account in setting the cap. 

Why is the Government not providing for real equity?  

The concept of unrestricted distribution of dividends to shareholders is fundamentally contradictory to the concept of a company which is not-for-profit. This point was confirmed in the technical consultation where most of the respondents who favoured the ability of CICs to issue shares and pay dividends, thought these should be capped in some way to protect the finance of the CIC, meet the statutory requirement for an asset lock and still attract some investors. 

Those who want to use unrestricted equity can set up as normal companies, and CICs set up unrestricted subsidiaries e.g. to raise real equity for higher-risk ventures, provided the arrangement with the subsidiary is purely commercial.

How does the equity finance proposal fit with the lock on assets?  If people invest in CICs and get returns surely CICs are not not-for-profit?

We think a balance can be struck between the flexibility needed by CICs to raise finance and the need to provide a meaningful asset lock.  Although investors have the possibility of making a modest return, this will be restricted in order to ensure that the main beneficiary of the CIC is the wider community.  One of the aims of the CIC proposals is to expand the access to finance available to community organisations, permitting them to offer a reasonable return to investors is key to achieving this.

How do CICs relate to CDFIs and/or the CITR?

Funds invested by individuals and corporate bodies in accredited Community Development Finance Institutions (CDFIs) will be eligible for Community Investment Tax Relief (CITR) at a rate of 5% per annum of the amount invested and may be claimed in the tax year in which the investment is made and in each of the four subsequent years.  The organisations that CDFIs invest in and lend to may include CICs.

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5.  Regulation                                                                                      

How will we know that CICs are acting in the public interest?

CICs will report annually to an independent regulator on how they are delivering for the community and how they are involving their stakeholders in their activities.

Who will be the regulator and how will he or she be selected?

The regulator will be appointed by DTI Ministers, and will work very closely with Companies House. 

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What teeth will the regulator have?

It is intended that the CIC regulation will be ‘light-touch’.  The majority of CICs will have a similar relationship with the CIC regulator as companies have with Companies House (i.e. registration followed by annual returns).  The very active regulation which is necessary for charities will not be required for CICs.

However, the regulator will be able to investigate complaints from stakeholders and will have powers to act if it is found that a CIC is not working in the interest of the community or that the profit/asset lock is not being observed. These powers will include the ability to change the directors or wind up the company.

Will there be limitations on the pay of CIC directors?

The decision as to how much an individual director is paid will be a matter for each CIC to decide itself.  The Government does not wish to hold back the development of the sector by setting artificial limits.  Stakeholders will be able to go to the regulator if they consider remuneration levels are inconsistent with a CIC’s community benefit aims.  There will be some additional reporting requirements on directors’ pay.

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6.   Stakeholders and CIC governance                                            

Will CICs be obliged to involve their stakeholders?  

CICs will be encouraged to involve their stakeholders as a matter of best practice and will be required to report to the regulator on how they have done so. 

Who will actually control CICs?

In the same way as a private company or a charity, each CIC will be controlled by those individuals who are appointed to its board and by those who become shareholders/members.  The precise structure that is put in place will be a matter for each CIC to determine and will reflect the particular needs that apply in specific cases

7.  Glossary                                                                                             

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