In September, the government finally brought in long-awaited legislation making it possible for a community interest company (CIC) to convert to a charitable incorporated organisation (CIO). Becoming a charity is only really appropriate if you’re planning to direct 100% of your profits into good causes. But what are the benefits? Is it right for your organisation? And how do you go about it?
What are the benefits of seeking charitable status?
As a CIC, you’ll need to pay Corporation Tax of 19% on any surplus profits that you generate. That’s not the case with a CIO, so you could save a significant amount of tax by converting. As a charity, you could also attract donations and may appeal to different funding bodies. .
What are the benefits of staying as a CIC?
Staying as a business has its advantages. For example, the directors of a business can be paid a salary, but the trustees of a company can’t. Directors also have more control over a company than trustees have over a charity.
As a CIC, you may be able to attract outside investment if you want to expand or free up resources. You can also pay dividends (although these are capped), which can help to attract new leadership staff.
Legally, they are very different structures, so it can be a steep learning curve to understand all the requirements and obligations of running a charity. Charities are more heavily regulated and subject to the charity jurisdiction of the High Court, and charity reporting is complex and rather onerous.
All that being said, the tax advantages of converting to a charity can be considerable and may far outweigh any negatives.
If we change to a charity, can we change back to a CIC if we need to?
Possibly, but it’s a complicated process, there are some restrictions and you will need the consent of the Charity Commissioners. You would also then lose your tax advantages.
What other legal structures might be suitable for our organisation?
Social enterprises don’t have to be CICs or CIOs. They can register as a straightforward limited company, a co-operative, an unincorporated association, business partnership or sole trader. There are benefits and drawbacks of each structure, so if you’re just in the process of registering your organisation, do your homework before deciding which route to take.
How do you convert a CIC to a charity?
The process used to be rather complicated, and basically required you to close the CIC and re-register with the Charity Commission. That meant transferring all assets and contracts, re-registering for PAYE and a whole lot more.
Thankfully, the process is now considerably simpler. You’ll need to prepare a conversion resolution – a special resolution of the CIC, or a written resolution signed by, or on behalf of, all the members of the CIC who would be entitled to vote on a special resolution. You’ll also need to prepare a proposed constitution of the CIO, along with any other documents required by the Charity Commission. It sounds complicated, but it’s a whole lot easier than the old process. Full details of what to do can be found on the government’s website here.
As specialist charity accountants, Griffin can talk through the pros and cons of converting to a CIO, including how much you could save on tax. Please contact us to find out more.