For the community 

Community interest companies can help you to promote your community projects without taking on charitable status, writes Chloe Brunton

In a recent article, (http://se.ludwood.info/strategic/legal/trading_companies.html), we reviewed using a school's assets to:
• further its duty to promote community cohesion; and
• tap into additional revenue streams.

In seeking to do either of these things, schools may encounter community interest companies (CICs).

What are CICs?
There are now more than 3,000 CICs registered at Companies House. The CIC was introduced in 2005 primarily as a vehicle for those interested in promoting community-based projects or "social enterprise" where there is no desire, or it is not possible, to take on charitable status (and the regulatory burden that comes with charitable status). A social enterprise is a business with primarily social objectives whose profits are mainly reinvested for that purpose in the business or in the community, rather than being driven by a desire to maximise profit for shareholders and owners.

Before the introduction of the CIC, it was always possible to establish a not-for-profit company to promote community interest purposes. But it was also always possible for the members of a company of this kind to vote to take the company's assets personally. One of the aims of the CIC legislation was therefore to provide a legal vehicle which could only ever apply its assets for the not-for-profit community purposes for which it was established.
CICs have been set up to promote projects ranging from community-owned village shops and nurseries to facilitating access to digital media for young people and are increasingly seen as the "brand" for social enterprise.

CICs and schools
CICs are most likely to be engaged in social enterprise and schools may encounter them more often as they continue to develop their engagement with the community. Where this involves a legal agreement for, say, the provision of services, schools should approach a CIC in the same way as they would approach an agreement with a commercial company.

A CIC may also be used by schools as a vehicle for particular activities where there is a desire to ring-fence liabilities, to focus expertise or to attract outside investment (or perhaps to achieve all of these things). This was an approach taken by the Florence Brown Community School in Bristol which established a CIC to develop the skills of pupils and to educate the wider community on the benefits of waste management and recycling.

In the wider voluntary sector, many charities are using subsidiary CICs as vehicles for social enterprises which involve trading activities. Schools may wish to adopt a similar approach in certain circumstances.

How are CICs set up?
In many respects, a CIC is no different to an ordinary private limited company. A CIC can be set up as a company limited by shares or by guarantee, with a constitution set out in a set of memorandum and articles of association and subject to the provisions of the Companies Acts. A CIC will be under the control of one or more directors and will have at least one member. And both the directors and members of a CIC can take advantage of the limitation on liability conferred by its incorporated status. Having said this, there are two requirements of CIC status which distinguish a CIC from an ordinary private limited company:
• it must satisfy a community interest test; and
• its articles must contain an asset lock.

These requirements are intended to ensure that a CIC has been set up for a purpose that will benefit the community and that its assets can only be applied for that purpose.

The CIC regulator
CICs are regulated by the CIC Regulator, which has a much less extensive regulatory role than the Charity Commission. Its main focus is checking that an applicant for registration as a CIC has been established using articles which satisfy the community interest test and incorporate an asset lock.

A CIC cannot apply for registration as a charity and does not qualify for any of the exemptions and reliefs from tax that are available to registered charities. However, a CIC is free from regulatory oversight by the Charity Commission and is able to operate much more flexibly than a charity in many respects. This includes, for example, the ability to pay its directors for acting as directors (this is not generally possible for the trustees of a charity) and to raise capital by issuing shares.

The community interest test
An applicant for registration as a CIC must satisfy the CIC Regulator that a reasonable person would consider that the activities of the CIC are, or will be, carried out for the benefit of the community. This is a fairly flexible test encompassing a wide range of activities (including a much wider range of activities than those which would qualify as charitable activities), although there are limits. The CIC Regulator recently turned down an application by a CIC set up to promote sado-masochism on the basis that its activities would not benefit the community.

The asset lock
As mentioned above, one of the aims of the CIC legislation was to provide a legal vehicle which could only ever apply its assets for the not-for-profit community purposes for which it has been established.

This is reflected in the asset lock, which restricts a CIC's ability to dispose of its assets for anything other than a full market value and places restrictions on the rate of interest that a CIC can pay on loans and the level of dividends it can pay to its members out of its profits. This does not prevent third party equity or loan investment in a CIC, although the investor must be willing to accept a more limited return than the return generally available from a commercial company.

The asset lock does not apply to disposals of assets to other asset-locked bodies, including charities and other CICs.

Chloe Brunton is a senior staff solicitor at Veale Wasbrough Lawyers. Chloe can be contacted on cbrunton@vwl.co.uk or on 0117 314 5301.

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