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On 1st April 2016 a new consultation was launched by the Cabinet Office on regulations to allow charitable companies and Community Interest Companies (CIC's) to convert directly into Charitable Incorporated Organisations (CIO's). Unincorporated charities have been able to register as CIO's since 2013. Conversion avoids the need to set up a new CIO and transfer assets and operations into it.
The CIO structure has been available for three years and is governed by Part 11 of the Charities Act 2011. It gives a charity the benefits of incorporation such as limited liability for trustees and members and the ability for the CIO to make its own contracts and hold property with continuity of ownership. Unlike charitable companies and community benefit societies,CIO's only have to comply with one set of regulatory requirements by filing returns with the Charity Commission.
Under the proposed regulations, a company or CIC would pass a special resolution to convert into a CIO. It would then send the Charity Commission copies of the conversion resolution, the proposed CIO constitution, and a company resolution adopting the proposed constitution. If the CIO constitution contained an entrenchment provision requiring a special procedure or bigger majority to change certain provisions the application would have to point that out. The Charity Commission could also demand any other relevant information or documents before dealing with the conversion.
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Neither a company nor a CIC could convert if its returns and accounts to either Companies House or, for a company, the Charity Commission were not completely up to date. The proposed CIO constitution must also comply with the registration requirements for CIO's and must show that the CIO will be a charity. The CIO name must comply with the rules applied by the Commission.
For CIC's, the Regulations provide for liaison between the Charity Commission and the CIC Regulator. The CIC Regulator must decide that the CIC is eligible to cease being a CIC under section 55 of the Companies (Audit Investigations and Community Enterprise) Act 2004 (C(AICE)A 2004) and notify the Charity Commission of that decision before the CIO can be registered and established. The grounds for ineligibility are that the CIC is subject to current regulatory action by the CIC Regulator, such as appointing an auditor or appointing or removing a director of the CIC.
No provision is made for a charitable community benefit society (CBS)registered under CCBSA 2014 to convert in the same way – even if it is already recognised as a charity by HMRC. In England and Wales, charitable CBS's are ‘exempt charities’ and cannot register with the Charity Commission. In Scotland they must register with the Scottish equivalent OSCR. Hence conversion from charitable CBS to CIO is already possible in Scotland but will not be available in England or Wales even after the proposed regulations have been made.
That is anomalous. English CIC's, which are not generally regarded as charities, can convert into CIO's but charitable CBS's already recognised by HMRC as charities are not permitted to do so. The Charities Act 2011, underwhich the proposed regulations are to be made, allows for regulations to cover the conversion of societies into CIO's. It seems that this has not been done as CCBSA 2014 societies have been treated like exempt charities that are subject to another regulator (such as Academy Trusts or Universities). Most societies outside the housing sector are not subject to any other regulator and could be allowed the right to convert. The complexity of the exempt charities concept and the limited resources of the Charity Commission have delayed the process of dealing with exempt charities by using a ‘principal regulator’ for e.g. housing charities using the CBS structure and registering the others with the Charity Commission. That is unfortunate.
If the changes go ahead after the consultation, the Government plans to phase in the availability of conversion over a year from October 2016. The consultation is open for responses until 5.00pm on 10th June 2016 –see https://www.gov.uk/government/consultations/converting-to-a-charitable-incorporated-organisation.