CIC or Charity?

When you begin a new venture, whether business or social enterprise, you have some ideas about how it will go. But, however much research you do, those ideas are really guesses. By definition, a forecast is a prediction of future events and none of us know the future. Precedent may give some guide; we predict that an acorn will grow into a mighty oak; but it may get eaten by a squirrel. And the size of a seed is no predictor of growth; a cherry is much the same size as an acorn.


Oak or Cherry?

The decision whether to register as a CIC or a Charity has just these kinds of problems. Are you planting a cherry or an acorn? Will your Social Enterprise grow to be a fruitful tree – but a small one? Or will it become a mighty oak. If the venture becomes huge it is probably best to registered as a Charity. If it stays small and local, a Community Interest Company is likely to be more appropriate. If you really can’t guess which way it will go, the good news is that you can convert a CIC into a Charity when it grows to an appropriate size.

 

Charity can’t be “limited by shares”

Let’s get one matter out of the way first. If your Social Enterprise is a business with social aims, rather than a community venture of a charitable nature, you will probably want to register a CIC “limited by shares”. And a company of any kind that is “limited by shares” cannot be registered as a Charity. But, if your activities are of the type that could be a Charity, the question comes down to the relative advantages and disadvantages of the two registration options. What can a CIC do that a Charity cannot? And what are the relative costs?

 

Charity tax relief

Financial considerations must come high in the reckoning and the big advantage enjoyed by Charities is tax concessions. That does not mean that charities can forget about Corporation Tax; they must file a Tax Return just like a normal profit-making business. And they must comply with the rules for VAT registration. But most of the income and gains received by charities are exempt from Corporation Tax (or Income Tax, if the charity is not registered as a company). And the charity can claim back tax on income received from individuals through Gift aid Donations, provided the income is used only for charitable purposes. On the same basis, the charity can claim exemption from tax on donations received from companies. (Donations from companies don’t have tax deducted from them so there is nothing to claim back). However, these reliefs are not automatic. The charity must first apply to HMRC on form CHA1 for recognition as a charity for tax purposes.


Charity business rates relief

Charities are also entitled to relief from business rates – they pay no more than 20 per cent on non-domestic properties used for charitable purposes.

 

Tax relief on trading profits

On the other hand, any profits that your charity makes from trading activities – selling goods and services to customers – may be taxable (with some exemptions, depending on the nature of the charity’s trading activities). Many charities deal with this problem by conducting their trading activities through a subsidiary and the best way to do this is to create a Community Interest Company (CIC) “limited by shares” for which the charity is the sole shareholder and the profits are dedicated to the charity as a donation.
Don’t get confused about the word “profit”; as a social enterprise or charity you are not out to make “profit” in the sense of making gains for your personal benefit. But “profit” in taxation terms is whatever money the venture has left over after deducting expenses from income. Every business, club, profession, social enterprise and, yes, every charity that has a plus figure in their accounts at the end of the year is making a taxable profit – unless they qualify for some legally approved exemption.

 

CICs can trade as businesses

That takes us back to the benefits of a CIC. A Community Interest Company is allowed to trade like a normal business venture. In this respect it has more freedom than a charity and is a usefully flexible instrument for earning income for charitable purposes by business-style trading (providing goods or services). For the best of both worlds, many charitable ventures register a Charity to gain the tax advantages and a CIC (owned by the Charity) to enable them to trade without restriction.


Advantages & disadvantages

So how do these factors compare?

Charity Community Interest Company
  • Donation income is free from Corporation Tax
  • Accounts must be audited annually (typical cost for £100,000 turnover would be £3000). Audit is mandatory whatever the turnover
  • High level of regulation imposes high administration burden
  • Not permitted to “permanently trade”
  • Must be able to show at least one year’s Accounts before registration is approved
  • Profits are subject to normal Corporation Tax
  • Requires only normal company Accounts (typical cost for £100,000 turnover would be £1200). Not subject to audit until turnover exceeds £5.6 million
  • Moderate regulation requiring admin appropriate to a small business
  • Free to trade like a normal business
  • Registration can be approved at outset, subject to satisfactory statement of aims
  • Can later convert to a Charity

 

So, the choice between Charity and CIC depends on your view of the future. Your best predictions can only be guesses, but your objectives will give you some clues. If you are aiming to meet needs that are purely local it is likely that your turnover will remain relatively small. If your turnover is small and your profits are modest then your potential tax bill is also likely to be low; on that basis it may not be worth the trouble and expense of registering a full charity. If that is your situation, register your Social Enterprise as a CIC.

But, if you have high aspirations and seek to serve a wide area, you may be looking at large turnover and significant taxable profits. In that case, registering as a charity will ensure that the money given to the cause is used for that purpose, rather than paid over to the tax man.


Converting a CIC into a Charity

To convert a CIC into a charity the company needs to replace its Articles of Association with a format approved by the Charity Commission and to change its name into one that does not include the CIC suffix (or the words “Community Interest Company). This requires Special Resolutions and certain Companies House forms. The company then applies for registration by the Charity Commissioners.