Removal of asset lock on dividends from CICs 'will encourage social investment', say lawyers

New legislation means community interest companies will be able to pay dividends of more than 20 per cent of their share value to individual shareholders in one year

Dividends: the sky is now the limit
Dividends: the sky is now the limit

The removal of the limit on how much community interest companies can pay out to individual shareholders in dividends should encourage more social investment, lawyers have said.

CICs are currently unable to pay dividends to a shareholder exceeding 20 per cent of the value of their shares in any one year. But this cap will be removed on 1 October by the Community Interest Company (Amendment) Regulations 2014, which were given parliamentary sign-off last month.

The move follows a government consultation last summer in which two-fifths of respondents said that one or both elements of that asset lock should be removed.

The maximum amount that a CIC can pay out in dividends will remain at 35 per cent of its distributable profits.

An explanatory note accompanying the legislation says that only about one in four CICs operates as a company limited by shares. "Those that do have found the existing process complex and confusing," it says. "Investment has been limited owing to limited returns on the investment."

Gerry Morrison, a partner at the law firm Rollits, said that some clients had created CICs as companies limited by guarantee, rather than by shares, because of the perceived complexity.

She said: "The change might cause some clients to rethink their business models, particularly if down the line we see more investors being encouraged to invest in CICs. The more profit a CIC makes, the more can be distributed to investors and retained for the benefit of the community."

Simon Steeden, a partner at the law firm Bates Wells Braithwaite, said: "It is hoped that the new legislation will increase the impact of social investment tax relief by increasing the number of social entrepreneurs registering CICs and encouraging investment into them."

Steeden said that existing CICs would need to remove the dividend restriction from their articles of association before they could benefit.

There are currently just under 9,700 registered CICs across the UK, and the Office of the Regulator of Community Interest Companies is putting in place plans to celebrate 10,000 CICs in 2015.

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