The Charitable Incorporated Organisation October 2012 1
The Charitable Incorporated Organisation Introduction Nick Hurd, Minister for Civil Society, made the following announcement on 30 October 2012 on laying secondary legislation for the Charitable Incorporated Organisation ("CIO") before Parliament: "The CIO is a new legal structure, under the Charities Act 2011, designed specifically and only for Charities. Charities seeking the benefits of incorporation can currently set up as a company limited by guarantee, but many are put off by the additional administrative burden of dual registration and regulation under both charity law and company law (of the 162,000 registered charities only just over 30,000 are structured as a company limited by guarantee). The CIO has the benefits of legal personality and limited liability, but will be solely registered with, and regulated by, the Charity Commission for England and Wales. The CIO will add to the range of legal structures that charities can choose to adopt. Implementing the CIO supports the Government's aim of making it easier to set up and run a civil society organisation. Due to its limited liability, the CIO structure should make it easier for charities to recruit and retain trustees, and to engage in contracts and hold property. Implementation of the CIO is supported by the Charity Commission and will be welcomed by the voluntary sector." Nick Hurd, Minister for Civil Society, 30 October 2012 The CIO will be a new corporate structure designed specifically for charities and will add to the existing range of legal structures that charities can use. The CIO was introduced by the Charities Act 2006 which set out the basic structure and formalities for creating a CIO subject to the publication of detailed regulations. A consultation was launched in September 2008 which was a collaboration between the Charity Commission and the Office of the Third Sector. Following closure of the consultation the basic legal framework for the CIO was supplemented by the publication of the following draft regulations: the Charitable Incorporated Organisations (General) Regulations 2012 ("the General Regulations"); and the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012. There followed delays in the enactment of the secondary legislation needed to implement the use of the CIO. Secondary legislation has now been laid before Parliament. Legal structures available for charities With the introduction of the CIO, there will be four main legal forms that charities may take: Trust (here the governing document will be a Trust deed); Unincorporated association (here the governing document will be a constitution or rules); Company limited by guarantee (here the governing document will now usually be the articles of association); or CIO (here the governing document will be a constitution). Two forms of CIO Like companies, which must have both members and company directors, a CIO must have members and charity trustees. The Charity Commission has produced two model constitutions for CIOs: the "foundation" model for charities whose only voting members will be the charity trustees. In practice a CIO using the "foundation" model will be like an incorporated charitable trust, run by a small group of people (the charity trustees) who make all key decisions. Charity trustees may be appointed for an unlimited time and they will probably appoint new charity trustees. A CIO with the "foundation" model could change its constitution to the "association" model if it wanted a wider voting membership. the "association" model is for charities that will have a wider membership, including voting members other than the charity trustees. A CIO using the "association" model will have a wider voting membership who must make certain decisions (such as amending the constitution), will usually 2
appoint some or all of the charity trustees (who will serve for fixed terms), and may be involved in the work of the CIO. It is not essential to use a model constitution produced by the Charity Commission but it is recommended that a charity do so because a CIO's constitution must be in the form to be specified by Charity Commission regulations (or as near to that form as the circumstances allow). Advantages and disadvantages of a CIO Conversion It will be possible for existing charities or other bodies to convert to a CIO (subject to a body which is not currently charitable meeting the requirements of a charity under English charity law). Existing charitable trusts and unincorporated associations An existing unincorporated charity can change to a CIO by: The Charity Commission has published the following guidance which illustrates some of the advantages and disadvantages of the CIO: setting up and registering a new CIO; then transferring its property and operations to the CIO. A CIO is a corporate body (like a company) that can own property, employ staff and enter into contracts in its own name (rather than in the names of the trustees). Members of a company limited by guarantee have limited liability for its debts if it winds up (they only have to pay a fixed amount). Members of a CIO may either have no liability at all or (like a company) limited liability for its debts. Because they have additional legal protection, members of a corporate body (Company or CIO) must comply with extra regulations. Unlike companies, CIOs do not have to register with Companies House. Unlike companies, CIOs will not be fined for administrative errors like late filing of accounts, but some breaches of the CIO Regulations are legal offences. All CIOs must register with the Charity Commission, regardless of their income. It follows that an exempt charity cannot be a CIO, and a CIO may be unsuitable for other types of charity that don t have to register. CIOs must produce accounts under charity law, not company law. This allows smaller CIOs with income below 250,000 to produce simpler receipts and payments accounts. To simplify the CIO framework, there is currently no provision for CIOs to issue debentures, or for a register of charges (mortgages etc) over CIO property. There may be other advantages and disadvantages depending on the specific circumstances of a charitable organisation. It may be necessary to obtain authorisation from the Charity Commission if the trust deed does not provide the necessary powers to allow the transfer of charity assets to the CIO. Once the transfer is complete, the original charity can normally be wound up and removed from the register although different arrangements may apply to charities with permanent endowment. Existing charities with permanent endowment Where charitable trusts have permanent endowment (i.e. assets that cannot be expended as income) the charity may not have power to wind up or transfer the permanent endowment as part of their own (corporate) property. The General Regulations allow charities with permanent endowment to transfer to a CIO. The trustees of the permanently endowed charity will need to: set up and register a new CIO with the Charity Commission; then make a vesting declaration to transfer all property of the original charity to the new CIO. The vesting declaration will: transfer expendable property to the CIO as part of its corporate property; vest legal title to the permanent endowment in the CIO, to be held on its original trusts; and appoint the CIO as trustee for the permanent endowment trust and give it the powers of a trust corporation for that trust; 3
The Charitable Incorporated Organisation As a result of the vesting declaration the CIO and the permanent endowment trust are treated as a single charity for registration and accounting purposes. Existing charitable companies, community interest companies and industrial and provident societies Once secondary legislation is published and implemented it will be possible for an existing charitable company, community interest company or charitable industrial and provident society to convert directly into a CIO. There will be specific procedures for this. Implementation A phased implementation timetable is proposed due to the expected levels of demand for the CIO. Implementation is subject to Parliamentary approval of the secondary legislation needed to implement the CIO. The Charity Commission may vary the following timetable in response to demand for the CIO. The Charity Commission's timetable Date As soon as secondary legislation is approved by Parliament Applications for the CIO structure Window opens for Charity Commission to receive applications to set up CIOs from brand new charities with anticipated annual income of over 5,000. 1 March 2013 Window opens for existing unincorporated charities with annual income over 250,000 to set up a CIO and transfer assets into it. 1 May 2013 Window opens for existing unincorporated charities with income between 100,000 and 250,000 to set up a CIO and transfer assets into it. 1 July 2013 Window opens for existing unincorporated charities with income between 25,000 and 100,000 annual income to set up a CIO and transfer assets into it. 1 Oct 2013 Window opens for existing unincorporated charities with income between 5,000 and 25,000 annual income to set up a CIO and transfer assets into it. 1 Jan 2014 Window opens for existing unincorporated charities with annual income of less than 5,000 to set up a CIO and transfer assets into it, and for brand new charities with anticipated annual income of less than 5,000 to set up a CIO. During 2014 Window opens for corporate conversions into CIOs (subject to Parliamentary approval of separate conversion regulations to be made during 2013). This may also be phased by income bracket. 4
Conversion of existing corporate and other charitable bodies to CIOs The current draft secondary legislation does not make provision for the conversion of charitable companies limited by guarantee, community interest companies, or charitable industrial and provident societies. Separate secondary legislation will be brought forward in due course to provide a mechanism for the conversion for these entities into CIOs. Summary It has been many years since the CIO was announced in the Charities Act 2006. The Government and the Charity Commission are now ready to proceed with implementing CIOs. The secondary legislation covering the creation of new CIOs and conversion of existing unincorporated charities to CIOs has now been laid before Parliament and an implementation timetable for registration of the CIO agreed with the Charity Commission. The implementation timetable may vary according to demand and details of the current timetable will be available on the Charity Commission website. Secondary legislation is anticipated during 2013 to allow the conversion to CIOs of existing incorporated charities, community interest companies and charitable industrial and provident societies. Registration of these bodies as CIOs is currently anticipated to commence during 2014. The type of charity structure to be adopted for a new or existing charity remains a matter to be decided taking careful account of all of the charity's circumstances. Where an incorporated charity is required, the CIO, which is specifically tailored for charities, may provide the best alternative when this model becomes available. 5
6 The Charitable Incorporated Organisation
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The Charitable Incorporated Organisation Contacts Graeme Nuttall Partner t: (0)20 7861 4307 e: graeme.nuttall@ffw.com Penny Wotton Partner t: (0)20 7861 4300 e: penny.wotton@ffw.com Neil Palmer Partner t: (0)20 7861 4268 e: neil.palmer@ffw.com This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed. Copyright Field Fisher Waterhouse LLP 2012. All rights reserved. Field Fisher Waterhouse LLP is a limited liability partnership registered in England and Wales with registered number OC318472, which is regulated by the Solicitors Regulation Authority. A list of members and their professional qualifications is available for inspection at its registered office, 35 Vine Street London EC3N 2AA. We use the word partner to refer to a member of Field Fisher Waterhouse LLP, or an employee or consultant with equivalent standing and qualifications. 8