In the UK, there are four primary legal structures you can adopt if you are a charity:
- Trust – registered with The Charity Commission
- Unincorporated charity – registered with The Charity Commission
- Charitable company limited by guarantee – registered with Companies House and The Charity Commission
- Charitable Incorporated Organisation (CIO) – registered with The Charity Commission as an incorporated charity
The CIO structure became available to charities in England and Wales in March 2013 under the Charities Act 2011. The Office of the Scottish Charity Regulator (OSCR), began registering Scottish CIOs in April 2011.
CIOs were designed to combine the benefits of being a charity with those of being a company.
Since its introduction, CIOs have become an increasingly popular legal structure for not-for-profit organisations in the UK to adopt.
From an accountant’s viewpoint, understanding the specific reporting requirements of a CIO is important. What’s more, weighing up the benefits and drawbacks of this structure against other types is crucial for understanding whether this structure is right for you.
Benefits offered by the CIO structure
One benefit of the CIO structure is that the entity benefits from having the status of an incorporated company which results in limited liability, without the burdens of company law.
- The accounts do not have to comply with company law requirements
- The accounts do not need to be submitted to Companies House
- Annual returns and accounts submissions need only be made to the Charity Commission or OSCR respectively.
Other benefits of an CIO compared to other not-for-profit structures are:
- As a separate legal entity, they can enter into contracts and hold property in their own name.
- CIOs have limited liability, thereby providing trustees with a level of protection for their personal assets.
- From an accounting and reporting perspective, a CIO is required to follow charity law rather than company law, as it is not a company.
Additionally, a CIO with an annual income below £250,000 is not required to use the accruals basis or apply the Charities SORP, unlike charitable companies.
This means that smaller CIOs are allowed to use the receipts and payments basis for their accounts, making things much simpler.
Clearly, the legal structure of a CIO can offer some advantages. However, it does not exempt the entity from meeting the requirements and thresholds that would determine whether it would be subject to an audit or an independent examination.
Furthermore, unlike other unincorporated charities, there is no exemption to submit the annual reports and accounts where income is less than £25,000. One of the key requirements for CIOs is that regardless of size, the annual report and accounts must always be filed with The Charity Commission (by 10 months after the year-end at the latest in England & Wales and by 9 months after the year-end for Scottish charities).
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Steps to become a CIO:
- If you are a charitable company limited by guarantee
The process of becoming a CIO for an entity that is currently operating as an incorporated charity is known as a conversion. This means that there is no requirement to “close down” the incorporated charity and set up a “new entity”.
The trustees will need to pass a resolution to convert the charitable company to a CIO. Of course, this is subject to the entity’s governing document, and adopting a new constitution.
The entity retains the same name and remains a registered charity (with the same charity registration number).
However, the pre-existing company on Companies House (referring to the memorandum and articles of association of the incorporated charity) is updated, and the entity is issued with a new company number. This will refer users of the Companies House website to the Register of Charities for more information on the newly converted CIO.
Following conversion, the annual accounts are only submitted to the Charities Commission, rather than at both Companies House and the Charities Commission.
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If you are an unincorporated charity
The process of becoming a CIO in this instance is known as a transfer to CIO status.
Under this route, the transfer of assets is formally approved by trustees, subject to the charity’s governing document. Existing funders will also need to be contacted if the charity has any ongoing funding or unspent funds from these sources. The charity will need to get consent from these funders before such funds can be transferred to the new CIO entity.
Following this, the “old” charity is closed, with the final set of charity accounts showing the transfer of all assets and leaving the charity with a nil balance sheet, thereby closing down this entity.
The assets are then transferred to the “new” CIO entity, which is issued with a new charity registration number, along with a company number. After the transfer, all subsequent annual accounts are submitted against the newly created CIO entity on The Charity Commission website.
If you would like further information or guidance on this subject, please get in touch with our in-house expert on charities and the author of this blog, Sumeet Bajaria
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