By Julian Smith and Elizabeth Jones


Farrer & Co

Highlights

• CICs are designed to be social enterprises and signify to third parties that the company operates for a community purpose.
• CICs remain under-explored as vehicles for corporate community programmes and can provide a limited financial return.
• CICs are subject to light touch regulation and their assets are ring-fenced by an asset lock.
• CICs can attract external finance and raise funds through commercial trading.

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What are CICs?

The Community Interest Company (CIC) was launched in July 2005, aimed at creating a recognisable legal entity for social enterprises.  In our view, the CIC form is capable of offering companies significant opportunities for their community programmes as an alternative to running these in-house or through a charity.

A commonly used definition of social enterprise is an organisation "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."  This definition recognises that despite the principal social objective, social enterprises can also work to return some profit to shareholders.

The CIC reconciles these contrasting objectives in a single legal form. CICs can be private companies (limited either by guarantee or by shares) or public limited companies (although at the time of writing there are no CICs established as public limited companies).  CICs must be established with special features that ensure that their assets can only be used for community purposes and can only be disposed of at below full value if the recipient is either a beneficiary of the CIC's work, or is another similarly asset-locked body (such as a charity or another CIC).

CICs are regulated under a light touch regime by the CIC Regulator. To be registered as a CIC, an applicant must satisfy the CIC Regulator that the company's activities will benefit the community.  CICs limited by shares can offer dividends to equity investors, accept debt finance and provide security.  Dividend payments and interest on debt finance are subject to statutory caps, but a CIC's ability to offer some return on investment makes it a more attractive prospect for commercial investors.

What are the opportunities for corporate community  programmes?

Currently, most companies either run their community programmes 'in-house' or establish a charitable foundation and make donations to it. The CIC offers most of what these forms offer, without some of the downsides.

For instance, a charitable foundation can attract external support and benefit from tax reliefs, but cannot be created to produce a commercial benefit to its sponsoring company, or easily attract venture capital funding. It must also be independent, with the trustees acting only in the best interests of the foundation, not according to the company's agenda. Furthermore, a charitable foundation cannot undertake commercial trading activities, unless it establishes a subsidiary trading company. 

The upside of in-house programmes is that they remain completely under your control, and you can derive as much benefit from them as you want. However, they have difficulty attracting external investment, so their scope for growth (and thus for brand enhancement for you) is limited to the size of the CR budget.

By contrast, as a separate organisation, a CIC can attract external finance, be it philanthropic, governmental or venture capital, allowing unlimited growth. It can also raise funds through commercial trading. At the same time, it can provide a return to your company, through loan interest, dividend payments and brand enhancement, subject to the payments being within the permitted caps for dividends and loan interest.  The maximum dividend per share is currently 20% of the paid up value of a share for shares issues after 6 April 2010, subject to an aggregate dividend limit of 35% of distributable profits.  Provided the CIC's activities benefit the community, it does not matter how much you dictate its activities. In other words, you can both retain control of the organisation and benefit from the growth afforded by external funding.

It is sometimes said that charitable foundations are better because donations can be made tax effectively, via Gift Aid. However, if you finance your CIC as a form of business development expenditure, you should be able to deduct the cost from your profits, giving you the same effect, tax-wise, as Gift Aid.  Additionally, the announcement in the 2013 budget of tax incentives being introduced for investment in social enterprise from 2014, may make a CIC an even more attractive prospect for a company's community programmes.  

There are alternatives - since the CIC was created, the Charity Commission has accepted that charitable industrial and provident societies (called "community benefit societies") can in very limited circumstances pay interest on share capital, allowing some money to be returned to investors.  This may be a way for a company to establish a charitable foundation that is able to make limited payments back to the company in relation to its original investment.  However, these payments may not constitute a distribution of profits and must be more akin to interest payable on sums invested in a bank account.  Further, societies of this kind are expensive to establish and may otherwise be ill suited to serve as a vehicle for a company's CR programme.

In conclusion, unlike in-house programmes and charitable foundations, the CIC offers a vehicle for community programmes that allows those programmes to develop a life of their own and yet, at the same time, remain under your control – enabling your brand to enjoy the boost afforded by large-scale social projects. If the project is profitable, it can also give you some financial return.

Frequently asked questions

1. What does a CIC offer that a non-charitable company limited by guarantee does not?

We recognise that companies can – and do – successfully use guarantee companies for CR purposes. Nevertheless:

• CICs contain an in-built asset lock. It is possible to create a guarantee company with an asset lock, but it is not an intrinsic part of the format.
• CICs limited by shares can attract share capital as well as loan capital, and offer dividends. Guarantee companies can only raise capital by taking loans.
• CICs are approved and monitored by the CIC Regulator, giving your community programmes an official stamp of approval. Non-charitable guarantee companies do not enjoy this endorsement.
• CICs are likely to be able to take advantage of any new tax relief for investment in social enterprise.  Although the details are not yet known, it seems likely that guarantee companies will not. 
• If the CIC becomes viable in its own right and able to be floated off, a CIC format provides more options for its successful evolution as a social enterprise. 

2. Does taking profits from a CIC dilute the brand enhancement aspect of the programme, perhaps even having a negative reputational effect on the company?

The whole premise of social enterprise is that it is possible for social action to be an objective in which both society and the investor win.  With charities becoming increasingly involved in social investment (as opposed simply to making grants), our view is that opinion is changing on this point.  It is also likely to depend on the nature of the programme and how it is promoted.

3. How much benefit can a sponsoring company gain from its CIC before it can no longer be said that the CIC's activities are conducted for the benefit of the community?

The community interest test requires that a reasonable person must be satisfied that a CIC's activities are being carried on for the benefit of the community they are established to serve.

Provided the success of the CIC's community programme is put first, we imagine that any resulting benefit to your company (be it through reputation enhancement or financial return) is unlikely to be viewed as detracting from the overall purpose of the activities being for the community.

Other points include:

• That directors could be paid;
• Investments in CICs are tradable although their value will be based primarily upon their capacity to generate income;
• Any assets left on dissolution of a CIC must go to another CIC or to a charity; and
• A CIC can form part of a group structure involving a charity as well as a CIC. However, a CIC cannot be a charity.

Recommended resources

http://www.bis.gov.uk/cicregulator

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About the authors

Julian is a Partner at Farrer & Co who has specialised since 1994 in advising charities, not-for-profits and social enterprises.  Julian writes and lectures regularly on matters relevant to charities and is a part-time lecturer on charity law at the Cass Business School. Julian is a member of the Executive Committee of the Charity Law Association and is also chair of its Standing Committee on Taxation, which responds to tax consultations of relevance to the voluntary sector.

Elizabeth is an Associate at Farrer & Co who advises a diverse range of charities and social enterprises.  She has advised a large number of community interest companies (CIC) in recent years on a range of matters including formation, governance and re-structuring.  Elizabeth recently co-authored a pamphlet on Structuring not-for-profits in the UK that was published as part of the Charity First series.