Charity Commission changes view on industrial and provident societies

IPSs that pay interest on share capital could register as charities, regulator says

Charity Commission
Charity Commission

Industrial and provident societies that pay interest on share capital might be able to register as charities, according to the Charity Commission – a contrast with its previously expressed position.

After consultation with Dominic Grieve, the Attorney-General, the regulator announced last July that it was "confirmed in our view" that "IPSs with power to pay interest or dividend on shares will not be registered by the commission".

"If they have never been charitable, they will be able to continue to operate as non-charitable organisations," the commission said.

However, a spokeswoman for the commission said this week that, in the wake of discussions with the Financial Services Authority and HM Revenue & Customs, the commission had decided "there are circumstances in which limited payments of interest may be made, which would not amount to a distribution of profits and would therefore still be consistent with the requirement for charities to operate for the public benefit".

She said the commission had not changed its principle that "a power to distribute profits is fundamentally incompatible with charitable status".

Interest payments are usually seen as part of an organisation's normal expenditure, and are made before the level of profit or surplus is determined, unlike share dividends.

There have historically been a small number of industrial and provident societies that have issued shares and have the power to pay interest on them. These are currently exempt charities and are likely to register with the Charity Commission in the future, although this has not been confirmed and no date has yet been set.

In the past two years, the number of industrial and provident societies set up to issue interest-bearing shares has increased by almost 150 per cent. Most are community organisations set up to provide clean energy or preserve local assets such as pubs, shops and sports clubs. Many have also expressed an interest in registering as charities.

Jim Brown, a consultant who supports community share programmes, said that the decision was a major step forward.

"This will make life much easier for property-based charities," he said. "It’s a complete volte-face, and it’s extremely welcome."

Malcolm Lynch, a partner at Wrigleys specialising in charity law, said the commission’s decision was a correct interpretation of the law. "The law has never said that paying interest on shares is incompatible with charitable status," he said.

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