The Office of the Regulator of Community Interest Companies celebrates 10 years of the CIC legal form this year, and it had hoped that it might simultaneously celebrate the number of CICs on its register reaching 10,000. But from its earliest days the uptake of CIC status has been quicker than predicted, and the 10,000 mark was actually reached in November last year. It is now approaching 11,000.
That rapid growth and the fact that the number of CICs has already outstripped both the number of cooperatives in the UK and the number of mutuals registered with the Financial Conduct Authority – both much older structures – is seen as proof that CIC status has, broadly speaking, been a success.
Social enterprise experts talk about two areas where CICs have been most relevant: smaller, local enterprises and large spin-outs from the public sector. Nick Temple, deputy chief executive of Social Enterprise UK, says most CICs are start-ups, but the biggest tend to be the spin-outs, especially from the NHS but also from local authorities.
This is reflected in the monthly list of newly registered CICs published by the regulator, which includes nurseries, community groups, cafes and other small-scale enterprises across a range of sectors; and the CIC is increasingly the standard structure for spin-outs from health, youth services, leisure and other public sector areas, whose budgets can be tens of millions of pounds.
Sarah Rowley, an associate at the law firm Charles Russell Speechlys, says the CIC structure can also be suitable for charity trading subsidiaries, particularly if the trading activities have a community interest element.
"The use of a CIC can also be advantageous in a joint venture, because of the protection provided by the asset lock," she says (see "What is a CIC", below). However, the most common option is still for a trading subsidiary to be an ordinary company rather than a CIC, she says.
More than three-quarters of CICs to date have been constituted as companies limited by guarantee rather than by shares, which means they can never pay out dividends. However, even among CICs limited by shares, few have ever paid dividends, which are reported to the CIC regulator in the annual community interest reports that all CICs must submit. Sara Burgess, head of the regulator, says dividends paid so far have been sums of hundreds rather than thousands of pounds.
That paucity of private profit is seen by some as a failing of the CIC model. In an attempt to address this, changes to the law governing the CIC dividend cap were approved last year. Luke Fletcher, head of social finance at the law firm Bates Wells Braithwaite, says the structure needed to be updated.
"We could see that people were choosing traditional company-limited-by-share structures because they thought it was easier to raise capital," he says.
Cliff Prior, chief executive of UnLtd, the foundation for social entrepreneurs, says he thinks it is too narrow to characterise CICs mainly as small groups and spin-outs, arguing that there is a well-populated middle ground as well. He says that the dividend rule changes and social investment tax relief should help to expand the use of CICs by a much wider range of social enterprises.
John Mulkerrin, managing director of the CIC Association – an online network with more than 3,500 members – says the area of renewable energy CICs is ready to take off, thanks to the recent changes and to existing green energy incentives. "That's the area that is most oven-ready in terms of attracting generic investors looking for returns," he says. "Because of the tax advantages, it's a very positive social investment and a very positive financial investment." Mulkerrin adds that there are a number of other areas where CICs could grow in the future, particularly the provision of care for older people.
Loosening the dividend cap might have opened the door for changes in the CIC market, but it remains a legal form with some downsides. The most obvious is that there are no tax reliefs for the CIC itself, as there are for a charity, although Fletcher says this could change. "Government ought to be looking at improving support for CICs, maybe through some sort of mandatory rates relief," he says. He adds that a lower rate of corporation tax should also be considered.
Another disadvantage is that some grant funders do not give money to non-charities, although this is slowly changing. There are also some cases of CICs setting up supporting charities to make it easier to receive public or institutional grants.
Toby Blume, a social enterprise consultant, says he was initially unsure of the merits of CIC status. "Charity and company governance allowed you to do what you wanted to do, so why muddy the water?" he asks. He says he saw CICs as a vehicle for "weasely people who wanted to hide behind a veneer of social benefit without the same level of accountability". He says he has come to recognise their virtues in some cases, but thinks they are not a social enterprise panacea. "I still believe that charities and limited companies are the appropriate model for most social ventures," he says.
Although social principles can be stipulated in the articles of ordinary limited companies, this is a less visible reassurance that the organisation is a good thing than having the letters CIC after its name. That branding opportunity is frequently cited as one of the advantages of CIC status – and the more CICs there are, the greater that halo effect is likely to be.
CIC status offers the simplicity of company structure without the extra level of governance of a charity. There is also a less intense regulatory regime than for charities – the annual community interest report is the sole requirement – although that lack of scrutiny is also a concern for some. Burgess says the regulator is light-touch and rarely goes public when following up complaints – a marked difference from the publicity given to Charity Commission statutory inquiries.
Temple at SEUK and Prior at UnLtd are both keen to emphasise that organisations must choose wisely from a number of valid options when starting up. Prior says: "Start from what you want to do and what sort of money you want to put in, then you get to the answer of whether to be a CIC, a charity or a company. It is useful for an organisation, when it starts out or considers changing structure, to have that range of different options, from charity to CIC to private company."
Burgess, who steps down in September after completing her term of office, agrees: "The office of the regulator is keen to ensure entrepreneurs choose the business model that suits them and their communities best. This might not be a CIC. To this end, we will signpost entrepreneurs to other suitable advisers."
CIC status, in short, is not the be-all and end-all of social enterprise, but after 10 years it appears to be a success story and to be ready to grow further.
What is a CIC?
The key thing distinguishing community interest companies is the asset lock. Only 35 per cent of a CIC's distributable profits in any one year can be paid out in private dividends to shareholders; the rest is locked in to further the CIC's mission. Until the law changed on 1 October last year, there was a double asset lock: in addition to the 35 per cent restriction, dividends could total no more than 20 per cent of the value of the shares held.
A CIC cannot be a charity. A CIC will be constituted either as a company limited by shares or a company limited by guarantee. More than 75 per cent of CICs are limited by guarantee, so they cannot pay dividends because they have no shareholders.
The law says that a CIC's objects must stipulate that it carries out "activities that a reasonable person might consider are activities carried on for the benefit of the community". In practice, that reasonable person is the Office of the Regulator of Community Interest Companies, which is part of Companies House, and is also responsible for post-registration regulation, including investigating complaints. CICs are also registered at Companies House.
FATHER OF THE CIC: STEPHEN LLOYD
The late Stephen Lloyd, a lawyer at Bates Wells Braithwaite who died in a boating accident last summer, is widely regarded as the founding father of CICs.
In 2006 he gave a speech at a conference to mark the structure's first birthday and outlined how the idea was first formed. "The CIC idea was initially hatched over a bottle of claret in Balls Brothers Wine Bar in Cheapside by myself and Roger Warren-Evans, a serial social entrepreneur," he said. Lloyd said they bemoaned the reduced status and low profile of industrial and providence societies, talked enviously about the active US not-for-profit sector, in which a number of public activities were being run by non-charitable non-profits, and discussed the merits of various legal forms for social enterprises.
Out of this came a plan for what Lloyd and Warren-Evans called the public interest company. The government adopted the idea, although the initials PIC were taken by public interest corporations, the name planned at the time for organisations that ran foundation hospitals. The Community Interest Company Regulations, which set out the CIC form, eventually came into force on 1 July 2005.
A big CIC
City Health Care Partnership in Hull began operating in 2010. Five years earlier Andrew Burnell, now its chief executive, was working for West Hull Primary Care Trust and was tasked with responding to the Department of Health strategy outlined in Commissioning a Patient-Led NHS. "We looked at a range of options and decided that being a CIC would fit with our passion and commitment and the fact that staff come from the community – so it was a nice find," he says.
Burnell says CHCP has more than a million patient interactions a year across the 80 services it provides in Hull and surrounding areas. It made a surplus of £1.1m on an income of £67.5m in the year to 31 March 2014. "A lot of people said staff and patient satisfaction would go down, but they've gone up each year," he says. Most staff are shareholders, but this has happened with the aim of creating "an attitude of ownership and pride" rather than paying dividends. Burnell says he is now spreading the word on CICs and sharing advice with other potential spin-outs.
Partners in Creative Learning registered with the Charity Commission in 2009 with the object of advancing education. In October 2012 it became a CIC, designing and delivering creative learning projects and programmes in businesses, schools and communities.
As a charity it had an income of £900,000 in both 2009/10 and 2010/11, almost entirely from the government-funded Creative Partnerships programme. After this ceased, PiCL started the process of becoming a CIC. Erica Love, director of PiCL, says: "It meant that we could do more things; there were fewer restrictions and fewer concerns about trading."
Permission to convert was granted by the Charity Commission in June 2012 and, after the remaining charitable funds were spent over the next two years, PiCL left the register of charities in March 2015.
It has four staff, and Love sits on the board alongside two non-executives, neither of whom are former trustees. Income is now about £700,000 and PiCL has bid for public funding through various consortia, including a project funded by the Esmee Fairbairn Foundation and another with Arts Council England, Love says.
A new CIC on the block
Katy MacLeod and Michelle O'Loughlin, the directors of Chill Welfare, set up this Glasgow-based CIC to complement their day jobs with drugs charities. It provides what its website describes as "informed, non-judgemental harm-reduction advice and support" around alcohol and drugs at music events and festivals.
Neither MacLeod nor O'Loughlin takes a salary from Chill Welfare, nor could they pay themselves dividends, because the CIC is limited by guarantee. MacLeod says the two directors are delivering its services with the help of volunteers, including users in recovery. "We have charitable aims and I don't think that setting up as a charity would have been a problem," she says. "But we found that when you contact event promoters as a charity, they don't want to pay for your services."
MacLeod praises the CIC regulator for processing its application quickly. Its documents were submitted by Senscot Legal, the law firm set up by the Scottish social enterprise body Senscot, on 26 March, and it was registered on 8 April.