Spotlight – CICs and me

Community interest companies have the potential to have a huge influence on the arts world. Rachel Holmes explains.

Since their launch last year, community interest companies (CICs) have created something of a buzz in the social enterprise sector. They were developed specifically for organisations that trade to further a social cause. Social enterprises don’t naturally fit into the commercial sector, but, at the same time, many fall outside the charity sector  perhaps they conduct activities that are out of line with charity law requirements. In any event, many of them sit somewhere between the voluntary and commercial sectors, seeking to achieve social aims, using commercial methods.

In 2001, the Prime Minister gave the Cabinet Offices Performance and Innovation Unit the task of reviewing the law of charities and not-for-profits. Its report dealing with social enterprise concluded that these businesses were poorly understood and would benefit from having a bespoke organisational form. It recommended creating the CIC, as this form. The basic framework for CIC is in the Companies (Audit, Investigations and Community Enterprise) Act 2004, with further details in the Community Interest Companies Regulations 2005.

Community benefits

The CIC is available as a guarantee or a share company, as a private company or a PLC. All CICs have an asset lock, which means that their assets must be used for their community purposes. CICs are also subject to regulation. Before being registered, a prospective CIC must satisfy the Regulator that its activities will benefit the community. Once registered, CICs must file annual community interest reports, setting out how their work in the previous year has benefited the community and detailing other prescribed matters; essentially demonstrating that the CIC is being run in the interest of the community, not for private interests. The Regulator has powers to intervene if he is concerned that the CIC is not delivering community benefit.

When the CIC was being created, it was intended that regulation and the asset lock would encourage charitable and philanthropic investors, who might otherwise be unwilling to invest in a non-charitable company, for fear that their assets may end up lining the pockets of private investors. Share CICs have power to pay capped dividends to investors, making them attractive to commercial investors. As an organisation able to appeal to both social and commercial investors, the CIC gives social enterprises a platform that, arguably, they didnt have before.

Artistic relevance

A list of all registered CICs is on the Regulator’s website, www.cicreg.gov.uk. By way of example, theres Cilgwyn Theatre Company CIC, Access Development and Development in Arts CIC, Community Arts Network CIC, Figment Theatre CIC and movingsounds CIC. So it is certainly possible to use the CIC to deliver arts programmes, provided those programmes are aimed at benefiting the community (or a section of it).

It is still early days for the CIC, but take-up has been good and funders seem to like it, with the Big Lottery Fund recently expressing willingness to support CICs. If the form continues to take off, the CIC brand itself will be an attraction, together with the fact that, having been registered as a bona fide community organisation, with assets dedicated to community purposes and under the watchful eye of the Regulator, CICs enjoy an official stamp of approval unavailable to other social enterprises.

It is worth mentioning that the asset lock may not continue to be such a draw for the CIC. The Companies Bill, currently making its way through Parliament, will give companies a power to entrench certain provisions in their governing documents, including (say) a non-profit distributing clause. Entrenched provisions will still be open to amendment by a unanimous vote of the members, but for some companies, entrenchment will make a provision effectively unassailable. Some social enterprises may feel that this power offers sufficient protection to their social credentials and that, all things considered, taking on the extra responsibilities of being a CIC is not worth their while.

CICs and charities

Charities are subject to tight controls on what they can and cannot do. CICs are not. As a rule, charity trustees cant be paid. When the Charities Bill is enacted, there will be a statutory power to pay trustees for providing services to their charity, but this power is still hedged with provisos. This means that, if the person who comes up with the idea for the charity in the first place wants to be paid, he cannot be a trustee. Nor can he take it for granted that the trustees of the charity will appoint him. Charity trustees must act independently and in the best interests of the charity. In reality, appointing the charitys founder may well be in the charitys best interests, but the founder cannot assume this, or assume that the trustees will do what he thinks they should. Voluntary trusteeship can also make it difficult for charities to recruit trustees who have appropriate experience and expertise and can make the necessary time commitment.

By contrast, the directors of a CIC can be paid for their work, whether as employees of the CIC or as independent contractors providing services to the CIC. The only proviso is that the amount the directors are being paid must not be such as to compromise the CICs status as an asset-locked body acting in the interests of the community.

With limited exceptions, charities can only trade if the trade directly furthers the charitys objects or the services or goods being sold are provided/made by the charitys beneficiaries. For instance, an educational arts charity can charge fees for running courses and can sell items made by students on the courses. But what if you want to raise funds by selling non-arts related goods or services? As a charity, you can only do this by setting up a subsidiary trading company, unless the amount you are likely to earn from these activities falls within prescribed (not particularly generous) limits. Although many charities have trading subsidiaries, they add extra layers of administration. CICs are not restricted in this way. They can carry out whatever trade they like, as long as, overall, their activities and assets are used to benefit the community.

Conversion

The big downside of being a CIC (as opposed to a charity) is that CICs dont get tax breaks. At the moment, there are no signs of this changing. Compared to companies, the only disadvantages of CIC status are the extra reporting and being more closely regulated. The form might appeal to arts organisations that are looking to do good in the community but find charitable status too much of a straitjacket and/or want to raise share capital. It is possible for a company or a charity to convert to CIC status, so you do not have to be starting from scratch to make the step.

Rachel Holmes is a Solicitor with Farrer & Co.
t: 020 7917 7561;
e: reh@farrer.co.uk