Since the legislation enabling the formation of Community Interest Companies (CICs) came into force in 2005/6, the CIC Regulator reports that there have been around 50,000 CICs registered and around 30,000 remain on the register of companies. The rate of registrations has grown from a few hundred a year in the early years, to 5000-7000 a year in the last 3 years, with a dramatic increase in the rate of registrations since 2019/20.

What is driving this growth?

Put another way, what is the point of CICs?

CICs exist primarily to provide benefit to the community they serve rather than investors (although they CICs limited by shares can deliver a reasonable and balanced return to investors). Given that the large majority of CICs (around 84%) are limited by guarantee, it is reasonable to conclude that most CICs do not need to raise capital through shares or deliver a return to investors. They do not exist to make a profit; their focus is on delivering benefit for their community

That begs the question, isn’t that what charities are for?

Well… sort of.

Charities are a much more heavily regulated and restrictive option, in particular because their purposes must be exclusively charitable and for public benefit. Key restrictions this brings include:

• Charities generally cannot pay members of the Board (Trustees). This means that if the key people involved need to make a living from the work of the charity they cannot usually be on the Board and must give up control.

• In a charity, any private benefit from its activities must be incidental to the public benefit and there are stricter rules about trading by charities. For some non-profits, that may preclude registration as a charity. In any case, given that the original point of CICs was to create a vehicle for social entrepreneurs to trade more freely than a charity can but with community benefit in mind either in the point of the trading itself and/or in how the profits are used, the loss of some of that freedom in registering as a charity is often not what genuine social entrepreneurs want or need.

• The general burden of charity law and Charity Commission regulation is sometimes too much for small scale non-profits to manage and a CIC offers a less burdensome option.

That all sounds pretty good but what are the downsides of CICs?

The main disadvantages of CICs relate to taxation and funding:

• CICs are not exempt from Corporation Tax, whereas charities are.

• CICs do not generally enjoy the reliefs from Business Rates that are available to charities.

• CICs cannot claim Gift Aid on donations like charities can.

• CICs often find themselves ineligible for charitable grant funding (because CICs are not charities).

Therefore, in a nutshell, the point of CICs is to provide a vehicle for social entrepreneurs to establish a company that is demonstrably and legally “not for profit” and for the benefit of the community it serves, particularly if it cannot be set up to be wholly charitable and for public benefit. Even if it could, you may not want to structure your organisations to be a charity to avoid the the restrictions and burdens that come with being a charity; but remember an organisation established for exclusively charitable purposes and for public benefit must usually register as a charity.

CICs will usually fare better if they generate their income from “commercial” trading, without the need for significant charitable grant funding and/or donations.

Charities are usually a better option if significant funding is needed from traditionally charitable sources such as grants and donations, providing, of course, that the organisation is established for wholly charitable purposes for public benefit and can comply with all the requirements of charity law and regulation.

These complex issues are explored a little further in one of our previous blogs.

To find out more about the governance support we offer for charities or CICs please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion.