CIOs: An end in sight…

November 27, 2012 at 12:02

The Small Charitable Donations Bill isn’t the only thing happening that’s good for charities this week – we also, after a wait the  equivalent of the Marathon de Sables, have real progress on CIOs (Charitable Incorporated Organisations).  With their statutory instruments finally seeing the light of day and up for debate somewhere in the quieter corridors of Westminster today – in the mysteriously named Third Delegated Legislative Committee no less –   this new legal form looks likely to overcome its last outstanding hurdles. The slow introduction has been a source of frustration for many charities, some of whom unfortunately could no longer afford the wait or uncertainty and  have had to incur the expense of becoming a company limited by guarantee.   However, while they’ve been a long time in the making, we’re pleased to see movement and believe that it will be a valuable legal structure that allows many charitable companies to reap the benefits of a one-stop-shop for registration and reporting.

CFG has long been an advocate of balanced regulation and campaigned against unnecessary dual reporting  –  the overlapping Companies House and Charity Commission regulatory regimes being a prime example. At the time of its origination, the CIO was seen as a panacea to this, but while it still has its advantages, as charity and company law have become more aligned over time and IT solutions become a more feasible means of reducing this, the original case for its creation, while still there, is no longer as strong.  Of course it will be helpful, but today we see it as only one part of in the puzzle of reducing dual regulation by these two regulators.

The CIO will mean that charities don’t have to accept a dual regulatory burden if they want to have a corporate personality – being registered only by the Charity Commission should reduce administrative time and costs (so one annual report, one annual return, less onerous requirements re constitutional and governance changes) and be simpler as only charity law will apply to the legal structure. So those with income of less than £250,000 will be able to submit simplified accounts.  While in the past many have welcomed the reprieve that the CIOs would provide from Companies House penalties and fines regime, this may have been slightly pre-emptive as the Charity Commission have recently mooted  the introduction a more sophisticated range of sanctions to improve compliance.   However, another immediate and tangible benefit should be the comfort that it provides trustees, many of whom may prefer its limited liability structure to unincorporated models where they have to bear more of the risk.  And it couldn’t be more timely as recently a Charity Commission representative suggested that due to the tough economic climate, financial challenges and uncertainty faced by the sector, many charities were finding it difficult to find trustees. We hope that the CIO may make it easier for organisations to recruit and retain trustees.

We’ve seen from the Scotland example that there is clearly demand for this model – in the first year take up was by 20-30% of new registrations. We will watch with interest what happens in England and Wales and would encourage the Commission  to actively promote the benefits of incorporation through CIOs to new registrants. While we would have liked a speedier timetable for introduction, we are mindful of the Commission’s resource limitations and their need to manage demand –  the staggered approach is understandable. So at first, as of the 10th December 2012, only new CIOs with a budget of more than £5k will be permitted to register; from 1st March 2013 existing unincorporated associations, starting with the largest will be able to convert and from April 2014 new charities with an income of less than £5k can apply. After that the conversion of existing charitable companies, whose trustees already benefit from limited liability, will be allowed.

The 15 years in the making does not make the CIO the model of perfection however, rather its reflective of the complicated nature of the underpinning law.  There’s no actual conversion process for unincorporated charities meaning that these charities would need to create a new CIO, transfer assets and wind up their existing charity; this may not be straightforward, in particular where permanent endowment is involved. And until rules around the register of mergers are resolved, the shell charity may need to be retained in order to guarantee future legacies.   For the smallest charities, if income is less than £5k, they will be required to register and file returns and accounts – negating some the reduced reporting benefits the CIO structure should encompass.   For those charities that are part of multi-employer DB schemes,  the pensions set up will need further consideration to avoid triggering a section 75 debt – and may ultimately prevent some charities, whose trustees could really benefit from this protection, from converting.

The overall challenges now will be to ensure that the CIO  becomes embedded in the charity and business landscape, that it is perceived by both business, banks and the public as being a legitimate and recognised charitable form and that any teething problems with registration are resolved hastily by the Charity Commission. That it has finally arrived though is an accomplishment in itself!

Brand new charities with an income over £5,000 can begin registering with the Charity Commission as of the 10th December