What is a Community Interest Company (CIC)?

arrow peopleA CIC set-up became available in 2005 and its purpose is for entities that are non-charitable enterprises but benefit the community.

A CIC can be established as a company limited by guarantee or a company limited by shares.

A significant aspect of a CIC is that it must be set-up to fulfil a community purpose - see reporting requirements section below.

Who regulates CIC’s?

The Community Interest Company Regulations assist to regulate CIC entities. This regulation is not more onerous or limiting as charity regulators (OSCR) making it a lot more commercial and appealing for people to choose as a set-up.

There is a much lower level of governance expectation for a CIC unlike a charity but each year a CIC must submit a CIC34 form to the regulator which must be submitted on paper only.

Can an existing entity convert to a CIC?

Yes – in most cases any company would need to pass the relevant resolutions and obtain approval from the CIC Regulator via form CIC37. In addition, existing charities may also convert to a CIC providing they have approval from OSCR.

How to register or convert to a CIC?

A CIC can be registered at Companies House in the same way as a normal company with the same incorporation documents.

The CIC Regulator for all the UK is in Cardiff. Companies House will pass the application to the Regulator. CICs cannot be registered electronically so paper forms must be used. You can find out more here >setting up and registered a CIC 

There is an additional form, a CIC36, required for incorporation of a CIC, which includes the community interest statement. The current cost to set-up is £35. The Articles of Association for a CIC must contain a statement that the company is a Community Interest Company and must comply with the detailed requirements of the CIC regulations.

Defining features of a CIC entity

The Community

When a CIC is formed, it must express how it intends to benefit “the Community”.MACO TPL Tree Swing

This term can be defined in several ways, but usually it refers to a distinct group of people, wider than the membership of the CIC itself, which the reasonable person might consider to be “a section of the community”.

As such, “the Community” might refer to the residents of a particular town, or a social group such as “the elderly.” However, a CIC may also have as its purpose a more general benefit to the community at large such as “the promotion and encouragement of sporting activities.”

The Regulations made under the Act provide that any group of individuals may constitute a section of the community if:

  1. They share a readily identifiable characteristic OR
  2. Other members of the community of which this group forms part do not share that characteristic.

The Asset Lock

This is an essential feature of all CICs and is designed to make sure that the assets of the CIC are used exclusively for the benefit of the community.

Any assets and profits (aside from those distributed in accordance with the rules on dividend capping) must be retained within the CIC and used solely for community benefit.

The only bodies to which assets are allowed to be transferred are other “asset-locked bodies” which are organisations’ that already have an asset lock such as charities, or to other CICs.

The asset lock must be referred to explicitly as a provision in the CIC’s articles of association. This is extremely important to consider if a CIC is ceasing or dissolving as the asset lock must be considered in these circumstances.

The Dividend Cap19942 MACO Tax Planning 39

In the case of a CIC existing as a company limited by shares, a ‘dividend cap’ must be put in place.

The purpose of this is to ensure that a balance is achieved between providing an attractive investment opportunity (often essential in stimulating and maintaining the financial backing required to run the CIC) and making sure that the majority of the profits made are applied for the community benefit.

The cap has two elements:

  • An aggregate limit on the total dividend declared
  • An ability to carry forward unused dividend capacity

Maximum aggregate limit: The maximum aggregate dividend limit is calculated with reference to the company’s profits: specifically, the aggregate dividend must not currently exceed 35% of the distributable profits of the CIC.

Ability to carry forward: If a CIC does not use its entire dividend capacity in a given financial year, then any unused capacity can be carried forward up to five years subsequently.

The performance-related interest cap: there exist similar provisions which govern performance-related interest – i.e. in circumstances when interest payable on debts or debentures is linked to the performance of the CIC, the level of that interest is subject to a cap.19796 MACO FINANCIAL ACUITY NEWSLETTER WEB FILES 16

Tax

Unlike a charity which gets various tax reliefs, a CIC entity is not exempt from tax so is payable. This is important to consider if approached for set-up of a new CIC or charity being more beneficial.

Board Members and their control

Board members of a charity may generally only be paid where its constitution allows this and it can be justified as in the best interests of the charity.

In practice, it is deemed more risky and ethically wrong for a Trustee to be paid for commercial services and maintain their independence.

However, the owners of a community interest company can retain control over the business while being appointed and paid fairly for their work as directors of the company. As well as the founders themselves, it may be easier to attract additional skilled individuals to the CIC through the offer of a measure of control alongside a salary set at a market rate.

Does a CIC have any specific reporting requirements?19796 MACO FINANCIAL ACUITY NEWSLETTER WEB FILES 04

A CIC must file with its accounts each year an annual community interest report (form CIC34) which will be placed on the public record at Companies House and copied to the CIC Regulator.

The report must include details of the remuneration of the directors, the dividends paid on shares and the interest paid on capped loans. It will also need to explain what the CIC has done to benefit the community and how it has involved its members in its activities.