Spire Accountants

  CICs are limited companies which operate to provide a benefit to the community they serve. They are not strictly 'not for profit', and CICs can, and do, deliver returns to investors. However, the purpose of CIC is primarily one of community benefit rather than private profit..

Whilst returns to investors are permitted, these must be balanced and reasonable, to encourage investment in the social enterprise sector whilst ensuring true community benefit is always at the heart of any CIC.

This company type was created by Companies (Audit, Investigations and Community Enterprise) Act 2004 (“The Act”).

The Office of the Regulator of Community Interest Companies decides whether an organisation is eligible to become, or continue to be, a community interest company (CIC).

All CICs are required to file with their accounts an annual CIC report (CIC 34) that will be placed on the public register at Companies House and will be copied to the Regular.

The essential feature of a Community Interest Company (CIC) is that its activities are carried on for the benefit of the community.

The Act provides that for the purposes of the community interest test, “community” includes a section of the community. The Regulations state that any group of individuals may constitute a community if they share a common characteristic which distinguishes them from other members of the community and a reasonable person might consider that they constitute a section of the community.

A company can only be eligible to become a CIC if it satisfies the community interest test.

All companies applying to be registered as CICs must provide the Regulator with evidence that they will satisfy the community interest test. To enable the Regulator to decide whether they will satisfy the test, applicants are required to deliver a community interest statement to the Registrar.

Once a company has been registered as a CIC, it must continue to satisfy the test for as long as it remains a CIC.

The legislation provides that there are two kinds of activities, which in ordinary circumstances might be considered “beneficial”, but which will prevent a company being eligible to be a CIC. As they do not meet the community interest test. These are:

(1) Political campaigning and activities intended to support political campaigning. 

(2) Activities which a reasonable person might consider to benefit only the members of a particular body or the employees of a particular employer: this is a crucial distinction between CICs and most “ordinary” companies.

The Asset Lock is a fundamental feature of Community Interest Companies (CICs). 

“Asset Lock” is a general term used to cover all the provisions designed to ensure that the assets of the CIC (including any profits or other surpluses generated by its activities) are used for the benefit of the community.

The assets of a CIC must be used for the community purposes for which it was formed, or, if they are transferred out of the CIC, the transfer must satisfy one of the following requirements:

1. It is made for full consideration (i.e. at market value),

2. It is made to another asset-locked body (another CIC or a charity for example) which is specified in the CIC’s articles of association; 

3. It is made to another asset locked body with the consent of the Regulator; or 

4. It is otherwise made for the benefit of the community.

CICs can be limited by guarantee or limited by shares. They must always be private.

CIC limited by guarantee

A CIC limited by guarantee is a company which has no share capital and cannot pay dividends. The owners agree to meet the company’s debts up to a specific limit if it was to fail. Beyond that, they have no further liability for the company’s debts.

Some funding bodies, including local authorities, will only fund CIC’s that are limited by guarantee because they view the practice of individual receiving dividends as inconsistent with the aim of benefiting the community.

CIC limited by shares

In a CIC limited by shares,  the company will have a stated amount of capital which is divided into a number of shares. Once a shareholder has paid the full nominal value of his or her shares to the company, he or she has no other liability.

One advantage of CICs limited by shares is that dividends can be paid to shareholders. This can make a CIC an attractive investment proposition. However, given the social mission of a CIC, the amount of profits paid out to shareholders is capped at 35 per cent by law. The remaining 65 per cent of distributable profits must be reinvested back into the company or used for the community it serves. 

However, dividends are not capped if a CIC’s shareholders are all asset-locked bodies (that is, organisations with a charitable or community purpose).

Community Interest Companies (CICs) will not receive tax breaks by virtue of their legal status. They will be subject to corporation tax and VAT law.

A CIC that donates its surpluses to a charity will be able to deduct the amount of any such donations as a ‘charge’ when working out its profits for corporation tax purposes. This may be of particular interest to those CICs which are set up as ‘trading arms’ of charities. 

There is no general exemption from VAT for social enterprises that undertake trading activities. VAT is a tax on turnover and is based on the nature of the goods or services supplied. 

Enterprises operating without a profit motive are still liable to pay VAT, however, those engaged in provision of the following activities might find exemptions:

1. Education, sporting and training
2. Insurance, finance and credit
3. Fundraising events by charities
4. Some medical treatments
5. Subscription to membership organisations
6. Leasing, letting and selling of commercial lands and buildings ( it can be waived).

 There can be confusion over what is a charity and what is a CIC. The main differences are summarised below:

1. Charities must be established exclusively for charitable purposes whilst community interest companies (CICs) can be established for any lawful purpose, as long as their activities are carried on for the benefit of the community;

2.  Charities have certain tax advantages that CICs do not have. In return for those advantages, charities are subject to more onerous regulation than CICs;

3.  CICs are free to operate more commercially than charities (e.g. CICs limited by shares can pay dividends to individual shareholders, subject to a cap);

4. Charities are subject to Charity Law whilst CICs are subject to Company Law;

5. The definition of community interest that applies to CICs is wider than the public interest test for charity.

6. Charities can apply to HMRC for Gift Aid status whilst CIC’s cannot.

Charitable Companies Converting to CICs

CIC legislation specifically excludes a company from being both a Community Interest Company (CIC) and a Charity. The legislation does allow charitable companies to convert to a CIC company with the permission of the Charities Commission but this would mean it would lose its tax advantages.

A charity may, however, own a CIC and the CIC is permitted to pass assets to the charity. This for example enables a CIC to run a charity shop and pass all the profits to the charity that owns it.

To form a new CIC you need to deliver the following documents to the appropriate Registrar of Companies for England and Wales, Scotland, or Northern Ireland: 

1. Memorandum of association;

2. A printed copy of the articles of association that comply with the requirements imposed by the Companies Act 2006 and CIC legislation; 

3.  Form IN01. This gives details of the company’s proposed name; whether limited by shares or guarantee public or private; the first directors (and secretary if applicable), the intended situation of registered office; a statement of compliance etc; 

4. A form CIC36. This contains the company’s community interest statement. The purpose of the community interest statement is to confirm that the company will provide benefit to the community. and

5.  A cheque for £86 made payable to “Companies House”.

The name of a CIC must end with “Community Interest Company” or “CIC”. 

Forms IN01, CIC 36 and model memorandum and articles of association, including explanatory notes, can be obtained free of charge from the government’s website. 

The Registrar of Companies (Companies House) cannot incorporate a company as a CIC until the Regulator decides that it is eligible to be a CIC and notifies the Registrar of this decision.

To form a new CIC you need to deliver the following documents to the appropriate Registrar of Companies for England and Wales, Scotland, or Northern Ireland: 

1. Memorandum of association;

2. A printed copy of the articles of association that comply with the requirements imposed by the Companies Act 2006 and CIC legislation; 

3.  Form IN01. This gives details of the company’s proposed name; whether limited by shares or guarantee public or private; the first directors (and secretary if applicable), the intended situation of registered office; a statement of compliance etc; 

4. A form CIC36. This contains the company’s community interest statement. The purpose of the community interest statement is to confirm that the company will provide benefit to the community. and

5.  A cheque for £86 made payable to “Companies House”.

The name of a CIC must end with “Community Interest Company” or “CIC”. 

Forms IN01, CIC 36 and model memorandum and articles of association, including explanatory notes, can be obtained free of charge from the government’s website. 

The Registrar of Companies (Companies House) cannot incorporate a company as a CIC until the Regulator decides that it is eligible to be a CIC and notifies the Registrar of this decision.