16 SEP 2014
Community Benefit Charities: New Legislation
The Co-operative and Community Benefit Societies Act 2014 has consolidated the legal framework for co-operatives and community benefit societies (formerly known as industrial and provident societies). The Act builds on some key legal changes and simplifies and updates the language of the legislation. It applies separate registration for co-operatives, and community benefit societies respectively. That means that new charitable societies will register as community benefit societies and not co-operatives.
Practitioners with existing society charity clients need to be aware that the 2014 Act has consolidated the former Industrial and Provident Societies Acts and has renamed societies as “registered societies”. When looking at the options for establishing a charity, the society model should be considered alongside other options such as a company limited by guarantee, an unincorporated charitable trust, and a Charitable Incorporated Organisation.
To register a community benefit society, the business must be run primarily in the interests of people other than members, provide limited interest on members' loans or any member shares, prohibit any profit distribution to members or distribution of surplus assets on dissolution. Some community benefit societies register as charities and these societies my include in their constitution a legally enforceable restriction on any asset distribution or conversion into a different legal structure. Housing associations are the biggest group of community benefit societies but the structure is also used by charities, community organisations and amateur sports clubs. The registration conditions must continue to be met after initial registration. If they are not, the FCA Mutual Societies Team can cancel the society's registration.
The passage of the 2014 Act has highlighted the availability of this legal structure as an alternative to the use of other structures for charities.
Up to now, a community benefit society registered with charitable objects has been regarded as an “exempt” charity and, to gain the tax benefits of charitable status, has registered its status with HM Revenue and Customs rather than registering with the Charity Commission. That position continues for now but is likely to be be subject to change in due course - see http://www.charitycommission.gov.uk/detailed-guidance/registering-a-charity/exempt-charities-cc23/#annex1.
Among the advantages of the society structure over the other available structures is the power, subject to the Charity Commission's guidelines on share capital, to issue “withdrawable” shares to members which can be repaid to allow exit to members.
The Charity Commission guidelines on shares impose a number of restrictions on return and repayment:
“1. The interest rate is set at a level which is not in itself a motivation to buy shares and which the charity trustees can justify as being in the interests of the charity by reference to available commercial rates for borrowing.
2. The cost is part of the society's revenue expenses and met before the surplus is determined.
3. The rates are declared in advance of the period for which they will become payable, just as for a bank or building society account, and never retrospectively.
4. There is a power to suspend interest payments in the interests of the society.
5. There is a power of the society to withhold repayment of the shares, either temporarily or indefinitely and to write the value down below the nominal £1.
6. The shareholding does not confer any rights to the underlying assets of the society.
7. In the event of a solvent dissolution, shareholders cannot be paid more than the nominal value of their shares.”
Charitable community benefit societies also enjoy certain exemptions from Financial Services and Markets Act 2000 requirements when shares are issued.
Practitioners should be familiar with this legal structure so as to offer a full range of choices to clients setting up a charity. It is also important to be able to advise clients already operating a community benefit society charity.