The introduction of charitable incorporated organisations (“CIO”) in 2013 gave those wishing to set up as a charity a new form of legal structure, unhindered by the often complex requirements of company law.  The CIO form has proved very popular but until recently organisations already operating under different legal structures could not easily convert to the new form.  The statutory framework for CIOs provided for such conversions but there has been a long wait for the necessary regulations to be introduced. That wait may soon be over, making it possible for charitable companies limited by guarantee and community interest companies to convert into a CIO.

Proposals

The Government has consulted on proposals to introduce the conversion process and is currently analysing the responses.

Under the proposals, charitable companies will be required to submit an application to the Charity Commission and will ordinarily be allowed to proceed, provided that they have complied with its filing requirements.

The proposed process for a Community Interest Company (CIC) limited by guarantee to convert is slightly more complex. The CIC will need to submit its application to the Charity Commission, which will then notify the CIC Regulator and registrar of companies. These three organisations will then liaise to decide whether the application to convert should be granted. The CIC Regulator will consider a number of factors, including whether a petition has been presented for the company to be wound up, before notifying the Charity Commission of its decision. If the application is granted, the Charity Commission will register the CIO and the registrar of companies will cancel the registration of the CIC.

Managing expectations

Organisations, particularly CICs, hoping to make use of the new conversion process will need to be aware that this is unlikely to be a quick process. The Charity Commission is already struggling to deal with demand without the additional work that will be generated by the conversion process. Further guidance from the Commission regarding estimated time frames will be needed in order for organisations to have clarity from the outset as to the likely length of time the conversion process will take.

Linked to this, the Government’s proposal includes a proposed timetable for conversion, under which there will be sliding scale approach to applications depending on an organisation’s existing income. Charitable companies with an income greater than £500,000 will be able to apply for conversion from 1 October 2016, whilst charitable companies with an income of less than £25,000 will not be allowed to apply until 1 July 2017. CICs will not able to apply to convert until 1 October 2017.  Whilst this phased approach may help the Commission to process applications more efficiently, it may cause frustration amongst organisations that are ready to convert but cannot simply due to the imposed timetable.

Any organisation wanting to convert will need to spend time preparing for the conversion and ensuring that all pre-conversion conditions have been met, including for example the requirement for a charitable company’s accounts to be filed before applying for conversion, even if the accounts are not yet due. The conversion process will require input from a charity’s management team and professional advisers.  For many charitable companies the advantages of CIO status will be limited so that conversion is not a priority.  The introduction of a conversion process is welcome but it remains to be seen how easy it will be to secure the potential benefits of conversion.

For more information

Please contact Rebecca Ward.

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