Community Interest Companies and corporate social responsibility

By Julian Smith and Robert Datnow
Farrer & Co

What are CICs?

The CIC is a new type of company, aimed at "social enterprises". It became possible to register them from 1 July 2005. It is fairly clear that the Government did not see the CIC as being of use to the commercial sector. However, in our view, the CIC offers companies significant opportunities for their community programmes.

Social enterprises need to reconcile conflicting principles. They are commercial entities, so there is no guarantee that their profits will be dedicated to the public good. On the other hand, as social organisations, they are not focused solely on the financial bottom line; the returns they look for are social as well as financial.

The CIC reconciles these principles in a single legal form. CICs can be private companies (limited either by guarantee or by shares) or public limited companies, in both cases with special features. These features mean that their assets can only be used for community purposes and can only be disposed of at full value if the recipient is either a beneficiary of the CIC's work, or is another similarly asset-locked body.

CICs will be regulated. To be registered as a CIC, an applicant must satisfy the CIC Regulator that the company's activities will benefit the community. A CIC will then have to file annual reports with the Regulator, explaining how its activities have benefited the community. These factors provide comfort to philanthropic investors.

On the other side, CICs can offer dividends to equity investors, take loans at commercial interest rates and provide security. Although dividends and interest on loans must be capped (the cap will be set by the CIC Regulator and is expected to be generous), a CIC's ability to offer a return on investment makes it a more attractive prospect for commercial investors.

What are the opportunities for Companies?

The CIC is a new form. As one of the first to create a CIC, you can position yourself as a leader in a new form of community investment. Currently, most companies either run their community programmes 'in-house' or establish a charitable foundation and make donations to it. The CIC offers most of what these forms offer, without some of the downsides.

For instance, a charitable foundation can attract external support and benefit from tax reliefs, but cannot be created in order for it to produce a commercial benefit to its sponsoring company, or easily attract venture capital funding. It must also be independent, with the trustees acting only in the best interests of the foundation, not according to the company's agenda. Furthermore, a charitable foundation cannot undertake commercial trading activities, unless it establishes a subsidiary trading company.

The upside of in-house programmes is that they remain completely under your control and you can derive as much benefit from them as you want. However, they have difficulty attracting external investment, so their scope for growth (and thus for brand enhancement for you) is limited to the size of the CSR budget.

By contrast, as a separate organisation, a CIC can attract external finance, be it philanthropic, governmental or venture capital, allowing unlimited growth. It can also raise funds through commercial trading. At the same time, it can provide a return to your company, through loan interest, dividend payments and brand enhancement. Provided the CIC's activities benefit the community, it does not matter how much you dictate its activities. In other words, you can both retain control of the organisation and benefit from the growth afforded by external funding.

It is sometimes said that charitable foundations are better because donations can be made tax-effectively, via Gift Aid. However, if you finance your CIC as a form of business development expenditure, you should be able to deduct the cost from your profits, giving you the same effect, tax-wise, as Gift Aid.

In conclusion, unlike in-house programmes and charitable foundations, the CIC offers a vehicle for community programmes that allows those programmes to develop a life of their own and yet, at the same time, remain under your control - enabling your brand to enjoy the boost afforded by large-scale social projects. If the project is profitable, it can also give you a financial return.

Frequently Asked Questions

1. What does a CIC offer that a non-charitable company limited by guarantee does not?

We recognise that companies can - and do - successfully use guarantee companies for CSR purposes. Nevertheless, there are a few things that, in our view, give CICs an edge over them:

• CICs contain an in-built asset lock. It is possible to create a guarantee company with an asset lock, but it is not an intrinsic part of the format;

• CICs can attract share capital as well as loan capital, and offer dividends. Guarantee companies can only raise capital by taking loans. Both may accept donations;

• CICs will be approved and monitored by the CIC Regulator, giving your community programmes an official stamp of approval. Non-charitable guarantee companies do not enjoy this endorsement. The CIC Regulator has said that regulation will be light-touch, with his powers of intervention being used only in extremis. So it seems unlikely that a CIC will have to 'pay' for this recognition by subjecting itself to stringent regulation.

2. Does taking profits from a CIC dilute the brand enhancement aspect of the programme, perhaps even having a negative reputational effect on the company?

At this stage, it is impossible to know whether this would happen. That said, our experience is that people want to see social programmes thrive. Indeed, the whole premise of social enterprise is that it is possible for social action to be a game in which both society and the investor win. With charities also becoming more involved in social investment (as opposed simply to making grants), our view is that opinion is changing on this point.

3. How much benefit can a sponsoring company gain from its CIC before it can no longer be said that the CIC's activities are conducted for the benefit of the community?

As a CIC's activities must, as a whole, benefit the community, as a matter of law, this is an important question. The simple answer is that the more successful the social programme, the greater the benefit to the sponsoring company. Provided the success of the programme is put first, we imagine that any resulting benefit to your company (be it through reputation enhancement or financial return) is unlikely to be viewed as disproportionate.

4. Other points confirmed include:

• That Directors could be paid;

• Investments in CICs are tradeable although their value will be based primarily upon their capacity to generate income;

• Any assets left on dissolution of a CIC must go to another CIC or to a charity;

• A CIC can form part of a group structure involving a charity as well as a CIC. However, a CIC cannot be a charity.

Useful Links

For more general information about CICs, visit the Community Interest Companies Regulator, or the website of the Department of Trade & Industry (DTI).

Farrer & Co is a London-based law firm that offers wide-ranging specialist advice to a large number of prominent private, institutional and commercial clients. It has a solid practice of innovative solutions for clients across the charitable, not-for-profit and community sectors. To access the full article, visit www.farrer.co.uk.