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New legislation regarding conversion to Charitable Incorporated Organisation

January 16, 2018

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Type: Charities & Not for Profit Blogs, Latest Blogs, Trending

A Charitable Incorporated Organisation (CIO) is a relatively new structure available for charities registering since January 2013. To change to the new structure, charities registered as limited companies previously had to register a new CIO and then transfer assets and liabilities to the new entity. This could potentially resulted in significant legal and administrative costs and have implications for staff contracts, leases and other issues relating to funding and resources.

 

The Charity Commission has recently announced legislative changes which mean that limited company charities are now able to convert to CIO status without the need to establish a completely new entity. The ability to convert is being staggered depending on the level of income of the Charity, with the first conversions for charities with income less than £12,500 available from 1 January 2018. The Charity Commission has said that the conversion process should be straightforward and will require a special resolution of the company and the submission of a new CIO constitution. A template for the constitution is available on the Charity Commission website.

 

It is the responsibility of the Trustees to establish the most appropriate structure for the Charity.  There are advantages and disadvantages to conversion that Trustees will need to consider.

 

Advantages

 

A CIO is a separate legal entity in the same way that a limited company is. This means that in converting to the new structure, the Trustees will retain their limited liability. However, the entity will cease to be registered at Companies House and information, including accounts and details of the Trustees, will only need to be filed with the Charity Commission. In addition to savings relating to the direct cost of filing documents with Companies House, this will also reduce the administrative burden on the Charity. The CIO will not be subject to Company Law which means that resources will not be spent ensuring compliance and dealing with instances where Charity law and Company law are not compatible.

 

For charities with income below £250,000 the preparation of accounts as a CIO can be completed on a receipts and payments basis whereas companies are always required to prepare accounts on an accruals basis. Again there may be a cost and time saving in preparing the more simplified accounts for smaller entities.

 

Disadvantages

 

Given that the structure is relatively new, funders may be unfamiliar with it and may be more reluctant to provide funding. If the change in legislation encourages more charities to convert and makes the structure more common the impact of this is likely to reduce over time.

 

There is no provision of a register of charges by either a CIO or the Charity Commission, making it difficult for CIO’s to issue floating charges. The CIO structure will not therefore be appropriate for charities who raise funds through borrowing.

 

In the event that a CIO loses its charity registration it will cease to exist and all property will vest in the Official Custodian. If a company loses its charity registration it still exists as a company.

Trustees will need to consider the advantages and disadvantages of converting before deciding whether a CIO is the most appropriate structure.

 

If you would like to discuss the new legislation regarding conversion to a Charitable Incorporated Organisation, or you would like to speak with a member of our team, please contact Nicola Mason or call 01772 821021 to be put in contact with a member of our Charity and Not for Profit team.

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