Charitable Incorporated Organisations (CIO's)

What are Charitable Incorporated Organisations?

Charitable Incorporated Organisations (CIO's) provide a means for charities to incorporate and gain the benefits currently available to companies without the burden of dual regulation by both the Charity Commission and Companies House.  CIOs will be administered by the Charity Commission who will have sole responsibility for their formation and registration.

What are the benefits of being a Charitable Incorporated Organisation?

A Charitable Incorporated Organisation will be a legal entity and will be able to enter into contracts in its own right. It will also hold property in its own name which has advantages with regard to succession of the charity. As a separate legal entity, the members and trustees will normally be protected from becoming personally liable for any liabilities incurred by the CIO. Contrast this with the current situation for an unincorporated charity where the members and trustees remain personally liable for such debts, property has to be held in the name of the trustees and trustees must undertake transactions on behalf of the charity. Trustee insurance is available but always at a cost.

In terms of administration there are other advantages. Smaller Charitable Incorporated Organisations will be able to prepare receipts and payments accounts. This option is unavailable to companies. Accounts and Annual Returns will only need to be filed with the Charity Commission and there are currently no filing fees or late filing penalties for this, unlike Companies House.

How will Charitable Incorporated Organisations operate?

Currently Charitable Incorporated Organisations are only available in Scotland for Scottish charities. The regulations governing CIOs in England and Wales have yet to be agreed.

The Charity Commission will register all new Charitable Incorporated Organisations. Registration will be regardless of income levels and because of this a CIO cannot therefore be an exempt charity. To register with the Charity Commission of England and Wales the principal registered office must be situated in either England or Wales and the CIO will be required to submit an annual return and accounts to the Charity Commission regardless of its income level. Charitable Incorporated Organisations will have to keep a register of trustees which is available for inspection, as well as one for members. Its constitution must contain certain provisions and for this reason the Charity Commission have provided model constitutions, one tailored to Associations where the members are not necessarily the trustees and the other suited to CIOs where the trustees are also the members. Amendments to the constitution will need to be registered with the Charity Commission before they become valid and in some cases the Charity Commission will need to give prior consent to the changes. Insolvency law will be applicable to Charitable Incorporated Organisations.

Are there any disadvantages to becoming a Charitable Incorporated Organisation?

As the regulatory legislation and guidance has yet to be released it is less clear as to what the disadvantages will be. We can therefore only refer to the guidance issued by OSCR with regard to Scottish Charitable Incorporated Organisations to determine what some of the possible disadvantages might be.

As a distinct legal entity formed and registered by OSCR, SCIOs cannot convert into something else. Equally, they can only be removed from the SCIO register by their dissolution as they cannot exist outside of the regulatory framework.

So, if the SCIO legal form is subsequently found to be unsuitable for the charity, the only apparent course of action is to transfer the assets to another charity with similar objects to the SCIO and then dissolve the SCIO. How the regulatory legislation in England and Wales operates will only become clear once the regulations are approved by Parliament and come into force. However, these regulations are not expected to be substantially different to the Scottish model.

One particular problem with Charitable Incorporated Organisations in England and Wales is that the draft regulations make no provision for either the CIO or the Charity Commission to keep a register of charges e.g. mortgages over CIO property. The Charity Commission has therefore suggested that Charitable Incorporated Organisations may be unsuitable for larger charities with significant assets and will probably only suit smaller to medium charities.

When will registration be available?

Registration is already possible for Scottish charities and this is dealt with by the Office of the Scottish Charity Regulator, OSCR. Registration will be available in England and Wales once the regulatory legislation has been approved by Parliament. When it becomes available it is expected to be implemented in phases with new charities being registered first followed by existing charities.

What will be involved in registering as a Charitable Incorporated Organisation?

For new charities you will need to complete one of the model constitutions and apply on-line for registration with the Charity Commission. The model constitutions have been designed to make the process simple for charities although the trustees may need to seek legal advice if they wish to tailor their constitution.

For existing unincorporated charities, the Charities Act 2006 does not allow for conversion to a Charitable Incorporated Organisation. The charity will therefore need to set up a new CIO using the model constitution which will be registered with the Charity Commission. Once the Charitable Incorporated Organisation is in place, the old charity can then transfer the assets and undertakings to the CIO. The old charity will then be dissolved in accordance with its constitution and the trustees will then apply to the Charity Commission to remove the charity from the register. As the process is more complicated we would suggest that legal advice is sought as there will be additional issues such as staff contracts and pension arrangements.

For existing charitable companies, the provisions of the Charities Act 2006 allow them to convert directly to a Charitable Incorporated Organisation and this is expected to be a more straightforward process. The company will simply re-register as a CIO with a new constitution. Again, we would suggest you obtain legal advice regarding the process to ensure nothing is overlooked in the conversion.

How will registration as a Charitable Incorporated Organisation affect the old charity?

For charitable companies, registration as a Charitable Incorporated Organisation will have no effect on the legal personality of the organisation or its business relations. It can therefore continue with its existing contracts as before.

However, for unincorporated charities a new legal entity with a new registered charity number is being formed. This means that banks, funders and suppliers will all need to be notified of the new CIO. Any existing contracts of the old charity will need to be assigned to the new Charitable Incorporated Organisation. This will include staff contracts and rental leases and will normal involve obtaining legal advice before the transfer.

If the old unincorporated charity has a defined benefit pension scheme care is needed as the transfer of the scheme to the CIO may be deemed as a cessation event by the Pensions Regulator.

Permanent endowments held by the unincorporated charity must also be transferred to the Charitable Incorporated Organisation. This requires the permanent endowment trust to be brought within the powers of the CIO which will act as the trustee under the terms of the original trust. The Charity Commission will treat the CIO and the permanent endowment trust as one charity for registration and accounting purposes so separate registration and accounts will not be required. It is suggested that where a charity has such permanent endowments it should obtain legal advice regarding the transfer.

Can other entities register as a Charitable Incorporated Organisation?

The Charitable Incorporated Organisation legal form is also available to non-charitable entities such as Community Interest Companies (CICs) as well as charities which are currently exempt from Charity Commission registration e.g. Industrial and Provident Societies.

The Charities Act 2006 allows both CICs and Industrial and Provident Societies to convert to CIOs but in the case of the Industrial and Provident Societies this will only be possible once their exempt status has been removed.

The Future

The regulatory legislation still requires approval by Parliament so no Charitable Incorporated Organisation registrations will be possible in the near future unless the charity is Scottish and is eligible to register with OSCR. No significant changes are expected to the draft regulatory legislation but we will keep you informed of any which occur between now and their approval. In the meantime, if you would like further information on Charitable Incorporated Organisations please contact our Charity Team.