Well over a year since the original consultation closed, on 13 September the Government finally published the response to its consultation on the statutory instruments required to allow conversion from CIC or charitable company to a CIO structure, along with an updated phased implementation plan and guidance on the process.
A brief history of the CIO
The CIO structure was initially introduced in the Charities Act 2006 (since consolidated into the Charities Act 2011) as a new incorporated legal structure specifically for the sector.
Before the introduction of the CIO structure, charities often were created with (or converted to) a limited company structure to obtain the benefits of an incorporated charity structure, which provides significant protection from personal liability to both its trustees and members.
However, such charities were subject to what could be perceived as an additional administrative burden, because they were subject to both charity and company law, and regulated by both the Charity Commission and Companies House.
The CIO structure was designed to offer the benefits of incorporation to CIO trustees and members, without the dual regulation. CIOs would only be regulated by the Charity Commission.
It has been possible for new charities to be created as CIOs for some time, and it is now a popular structure. Over fifty per cent of new registrations with the Charity Commission in its last financial year took the form of CIOs.
The latest legislative developments
On 7 December 2017, the following secondary legislation to allow conversions for existing charities and CICs to the CIO structure was made:
- The Draft Charitable Incorporated Organisations (Consequential Provisions) Order: This is intended to allow Community Interest Companies to appeal any decision by the Charity Commission not to allow its application for conversion to a CIO and registration as a charity.
- The Charitable Incorporated Organisations (Conversion) Regulations 2017: This will allow charitable companies to convert to a CIO structure.
- The Index of Company Names (Listed Bodies) Order 2017: This requires all CIOs to be listed on the Business Names Index maintained by Companies House.
All three pieces of legislation will come into force on 1 January 2018.
Why the ongoing involvement of Companies House?
The Index of Company Names (Listed Bodies) Order 2017, which requires all CIOs to be listed on the Business Names Index maintained by Companies House, has been an interesting development.
The intention of this legislation is to protect the names of CIOs, in case a situation arises in which a person wishes to set up a company or another CIO with a similar name.
However, it also means that from 1 January, Companies House will have to give prior approval to any CIO’s name that contains a “sensitive word or expression” under the provisions of The Company, Limited Liability Partnership and Business Names (Sensitive Words and Expressions) Regulations 2014. Such words and expressions include: “charitable”, “charity”, “foundation” and “fund”, amongst many others.
Any charity seeking to convert to a CIO structure with a name including such a word or expression will have to include a letter of non-objection from Companies House in its application to the Charity Commission for conversion to a CIO. Failure to do so will result in the application being rejected as incomplete.
While the protection of the names of CIOs may be a sensible precaution, this involvement of Companies House in this aspect of the conversion process seems contrary to expectation, in the light of the original aims of the CIO structure.
When can charities convert?
The new phased implementation timetable provides for incorporated charities with annual incomes of under £12,500 to be able to convert to CIOs from 1 January 2018. Charities with incomes of more than £500,000 will only be able to convert from 1 August 2018.
The full implementation timetable can be found in the Charity Commission’s guidance.
But will charities want to convert…?
The explanatory note to the new legislation states that the Charity Commission “estimates that between 20% (7,200) and 35% (12,600) of existing incorporated charities could decide to convert under the proposed CIO conversion legislation over ten years”.
The conversion process is intended to be relatively straightforward, with no need for changes of registered charity numbers, or transfers of assets or liabilities. The existing charity will simply be re-registered as a CIO.
However, while some charities may wish to convert to escape dual regulation, and to benefit from a reduction in administration, the CIO structure is not necessarily suitable for all charities.
In particular, there will be no searchable register of charges for CIOs – such as that held at Companies House for limited companies – and this means that the CIO structure is likely to be much less attractive to larger charities, especially those that issue debentures or regularly seek to borrow funds against the security of their property.