A look at the differences between CICs and charities
The activities of a community interest company (CIC) must be for the benefit of the community.
This can embrace either the community or population as a whole, or a definable sector or group of people either in the UK or elsewhere.
A company will not be eligible if any of its activities benefit only the members of a particular body or the employees of a particular employer.
CICs are regulated by the Regulator of Community Interest Companies. To register, a company must provide the regulator with evidence that it satisfies the community interest test, in the form of a community interest statement, and it must continue to satisfy the test for as long as it remains a CIC.
CICs are taxed in the same way as normal companies. They are subject to corporation tax and VAT and a CIC that makes donations to charity can deduct this as a charge when calculating its profit for corporation tax purposes.
Charities have tax advantages that CICs do not; however, charities are subject to more onerous regulations. The definition of community interest that applies to CICs is wider than the public interest test for charity.
A charity may own a CIC which would be able to pass assets to the charity. A charitable company may convert to a CIC and a CIC may convert to a charitable company in the UK. However, a company cannot be both a charity and CIC.
For more information on conversion, visit the 'Related links' section on this page.
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, subject to meeting its obligations, either permanently retained within the CIC and used for the community purposes for which it was formed, or transferred to another asset-locked body, such as another CIC or charity.
Any transfer of assets must satisfy certain requirements, which means that, subject to the CIC meeting its obligations, its assets must either be retained within the CIC to 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:
With only limited exceptions, such as the payment of dividends and the return of paid up capital on liquidation, a CIC’s assets cannot be returned to its members unless they are themselves asset-locked bodies.
However, the asset lock should not be seen as a bar to the CIC using its assets for normal trading or other business activities and meeting its financial obligations.
Unlike most companies, CICs may only declare a dividend by ordinary or special resolution of the members (ie a dividend cannot be declared by the directors alone).
Dividends are subject to the constraints that apply to an ordinary company such as the rules on distributable profits.
If the dividend is payable to other asset-locked bodies or otherwise for the benefit of the community (ie not to private investors), the dividend cap does not apply; the dividend cap applies to other distributions.
The Community Interest Companies Regulations 2005 set the first caps for dividends to private investors as follows:
These rates may be varied from time to time by the regulator after consultation and with the approval of the secretary of state.
To form a new company as a CIC the following must be delivered to the appropriate Registrar of Companies for England and Wales, Scotland or Northern Ireland:
To convert an existing company to a CIC the following must be delivered to the appropriate Registrar of Companies for England and Wales, Scotland or Northern Ireland:
Forms 10, 12, CIC 34, CIC 36, CIC 37, model resolutions and model memorandum and articles of association can be obtained free of charge from the regulator’s website; visit the 'Related links' section on this page.
All the directors of a CIC have an obligation to prepare an annual community interest company report (form CIC 34) to be filed with the accounts.
The report is to be made up to the same date as the accounts, regardless of the size of the company or the exemptions that they have taken advantage of.
The report is delivered to the Registrar of Companies who will file it on the public record and pass a copy to the regulator.
The regulations prescribe minimum requirements which include:
Although the report has to be submitted with the annual accounts, it must be in a separate document and be accompanied by the £15 fee.