Partner Nick Burrows, in our Charities & Education team, explains the benefits and drawbacks of converting to a CIO.
Private Client analysis: Will the government’s long-awaited proposals make converting to a charitable incorporated organisation (CIO) a more attractive option for charitable companies and community interest companies (CIC)? Nick Burrows, partner and head of the charity and education team at Blandy & Blandy Solicitors, and Amber Knight, trainee, explain the advantages and disadvantages of the CIO structure.
Why does the government want to create a route for charitable companies and community interest companies to convert to charitable CIOs?
The government has published a consultation paper regarding the introduction of secondary legislation under the Charities Act 2011. The aim of the legislation is to give charitable companies and CICs the opportunity to convert to a CIO via a route that is both quick and simple. Currently, if a company limited by guarantee (CLG) or a CIC converts to a CIO it may need to consider issues such as:
- the transfer of employees
- assets
- pensions, and
- property
The government hopes that the proposed process will do away with those considerations and enable a CIC or CLG to transition smoothly to a structure that will allow it to keep its charity number, but change its legal status.
What are the benefits/drawbacks of the CIO structure?
CIO
In general the CIO structure is suitable for most sizes of charity, and has become popular since its introduction. It has some similarities to the CIC and CLG, such as limited liability, but there are differences in the CIO structure which CICs/CLGs will need to consider carefully before undergoing a conversion:
Funding
One of the concerns about a CIO is that the Charity Commission does not maintain (and has no intention of maintaining) a register of charges and therefore some commentators have feared banks may be reluctant to lend to CIOs—however, our research indicates that both private and high street banks are generally happy to treat a CIO in the same way as other charities.
International charities
CICs and CLGs should be aware that few people outside the UK know anything of CIOs. The only evidence that a CIO exists is on the Charity Commission website and this may not be sufficient comfort for non-UK funders or agencies who often like to see a physical certificate of registration. Those charities operating outside the UK may therefore prefer to remain as CLGs.
Delay
The government is saying that this proposed legislation will make conversion simpler, cheaper and smoother. However, a CIO can already take a relatively long time to register compared to the initial formation of a CLG and CIC. Additionally the CIO is only able to commence business once it is registered at the Charity Commission.
It is unlikely that the timescale for registrations will speed up given the lack of resources at the Charity Commission.
CIC
A CIC is not as common as a CLG and it is often formed for purposes that are not wholly charitable—it therefore may not be able to convert to a CIO without altering its objects to satisfy the Charity Commission. If it does satisfy the criteria for becoming a charity then the CIC should be prepared for greater scrutiny of its accounts, policies and governance. The CIC would become subject to the sole regulation of the Charity Commission, which has wide-ranging powers—however there are tax advantages to being a charity which may outweigh the disadvantages for a CIC.
CLG
A CLG that is a charity has to be registered with, and file accounts at both the Charity Commission and Companies House. Therefore a significant incentive for a CLG converting to a CIO is that it will no longer be subject to dual regulation—it will only need to be registered and submit accounts and other information to the Charity Commission.
What would any conversion mean for the charity in practical terms?
In practical terms a charitable CLG will be able to keep its name and its charity number. If a CIC chooses to convert to a CIO it will have to amend its constitution to satisfy the charitable criteria.
One very important provision of the government’s proposal is that under the new regulations any legacies made to the original entity (pre-conversion) will automatically accrue to the new entity—there will be no need to note the conversion/transfer on the register of mergers.
How is this consultation likely to be received by the charitable sector?
For most this will be welcome news especially as it has taken some time to reach this stage. Originally it was thought that these regulations were to follow swiftly the creation of CICs in 2008. CIOs have proven to be very popular vehicles and these new regulations will allow already established entities to consider whether the benefits of the CIO are suitable for them without being deterred by as many administrative burdens in converting.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
