From the 1 January 2018, charitable companies can be converted to become Charitable Incorporated Organisations (CIOs), in accordance with a phased implementation timetable that allows the smallest companies to convert first. Community interest companies (CICs) will also be able to convert to become CIOs later on in 2018.
Since the CIO was introduced in 2013, it has proved to be a popular choice for new charities, with over 2,500 now registered by the Charity Commission (the Commission). While conversion to CIO status was legislated for in the Charities Act 2006 it has taken until now for the secondary legislation to be passed that is necessary for conversions of existing charitable companies to take place.
CIO status offers the advantages of limited liability and the ability for a charity to enter into contracts in its own name without the administrative burden of complying with Companies House filing requirements. At present, a downside of CIO status is that it still does not have high levels of public recognition and there is no publicly accessible Register of Charges to allow a charge to be registered against a CIO in the same way that it can be against a company at Companies House. This has resulted in the CIO structure being slightly less attractive to charities that may wish to borrow.
It is anticipated that the attractions of conversion to CIO status are likely to be greatest for smaller charitable companies, who may find regulation by Companies House burdensome. The Commission predicts that between 20% and 35% of existing charitable companies may convert to become CIOs in the next ten years. The Commission also (somewhat surprisingly) expects that between 1% and 5% of CICs may convert to CIOs in the same time period, which would of course result in them becoming charities.
Advantages of the conversion process
In a sense, it has been possible for charitable companies and CICs to "convert" ever since the CIO was introduced, by creating a new CIO and transferring their assets and undertakings into it. However, this process involves the "old" and "new" organisations entering into a transfer agreement, the CIO opening a new bank account, and making sure all the contracts held by the old organisation – including employment contracts – can be taken over by the CIO. Under the new process, the company/CIC will need to jump through certain legislative hoops, but it will then simply be transformed into a CIO – with (in the case of a charitable company) the same registered charity number. As such, the new conversion process should – we hope – be cheaper and quicker.
At the time of writing, we await detailed guidance from the Commission on the conversion process.
Phasing applications for conversion
To make things manageable for the Commission, the conversion process will be phased. According to a timetable published by the Commission, from 1 January 2018, applications will be open to companies with an annual income of less than £12,500. Every month or two, the size of company entitled to apply for conversion will be raised and from 1 August onwards companies with income over £500,000 can apply to convert. The timetable says nothing about CIC conversions, but the consultation report – published when the new laws were first drafted – said that CICs would be able to apply from 1 September 2018.
This publication is a general summary. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2017