Charitable Incorporated Organisations A Guide to ... · A CIO is an incorporated body with a ... Charitable Incorporated OrganisationsA Guide to establishing your ... 10. Charitable

Charitable IncorporatedOrganisations A Guide to establishingyour charity as a CIO

Contents

Preface 1

1. What is a CIO? 2

2. Establishing a new charity as a CIO 6

3. Converting an existing charitable company to a CIO 10

4. Converting an existing unincorporated company to a CIO 13

5. Taxation of CIOs 17

6. Auditing and accounting for CIOs 22

Charitable Incorporated Organisations A Guide to establishing your charity as a CIO 1

For the first time in 400 years there is now a legal structure designed exclusively for registered charities. The “CharitableIncorporated Organisation” or “CIO” is intended to provide charities with a practical and effective incorporated vehicle.

As charity trustees become increasingly concerned about the personal financial risks associated with running charitiesthere has been a growing trend towards the use of limited liability companies to try and mitigate personal liability notonly for the trustees, but also for any members that a charity may have.

Charities that have adopted the limited company structure have, however, discovered that the legal framework withinwhich companies operate was never intended for charitable organisations, and there is a constant tension between the regulations which charities face under the Charities Acts, and the obligations which are imposed on companies bycompany law.

Under these two legal regimes charities are required to file separate sets of annual returns and accounts with theCharity Commission and Companies House. Although this dual regulatory burden has generally not proved problematicfor larger charities, for some smaller charities it has been an unwelcomed additional burden.

The CIO is intended to provide the benefits of incorporation to registered charities within a more attractive legalframework that is regulated purely by the Charity Commission.

Many charities that have held back from incorporating will now wish to adopt the CIO structure in order to takeadvantage of the benefits of incorporation, while some existing incorporated charities will also wish to become CIOs in order to simplify their regulation and save costs.

Although CIOs enjoy a simplified regulatory regime, the process by which existing charities can convert to becomingCIOs can be quite complex. This guide is intended to provide individuals and organisations that are looking to either set up a new charity as a CIO, or wishing to convert an existing charity to a CIO, with a basic understanding of what is involved.

Inevitably this guide cannot go into all of the different options and permutations that may be involved, and at the timeof writing this guide the Charity Commission has yet to finalise the regulations that will apply to CIOs. We thereforerecommend that you obtain specialist legal and accounting advice before setting up your new charity or convertingyour existing charity to a CIO structure.

This Guide is intended for charities in England and Wales only, and any reference to the “Charity Commission” meansthe Charity Commission for England and Wales. Charities operating in Scotland and Northern Ireland are subject toseparate legislation and should contact the Office of the Scottish Charity Regulator (OSCR) or Charity Commission forNorthern Ireland.

Preface

Up until now charities in England and Wales have had tomake do with legal structures that were originally intendedfor other purposes, such as trusts and limited companies.

Chapters 1-4 © 2009-2011Jean-Paul da Costa (SherrardsSolicitors LLP) and Chapters5-6 © 2009-2011 RezaMotazedi (Deloitte LLP)

The right of Jean-Paul daCosta and Reza Motazedi tobe identified as the authorsof this publication have beenasserted by the authors inaccordance with theCopyright, Designs andPatents Act 1988. No part ofthis publication may bereproduced by any meanswithout the express consentof the authors.

Jean-Paul da Costa Reza MotazediHead of Charity and Social Enterprise Head of Charities & Not For ProfitSherrards Solicitors LLP Deloitte LLPwww.sherrards.com/sectors_charities.php www.deloitte.co.uk/charitiesandnotforprofit

2

1.1 IntroductionA registered charity can be set up in a variety ofdifferent ways and there is no legal requirement that acharity should adopt any one particular legal structurein preference to another.

Increasingly, however, many charities have movedtowards an incorporated structure because of thegreater legal protection which this provides to thetrustees and any members of the charity, as well as the commercial advantages that are perceived to existby having a more business like structure.

The majority of incorporated charities have adopted thecompany limited by guarantee form and today mostlarge and medium sized charities are set up as limitedliability companies.

It has been recognised for some time that although thelimited company structure has many benefits, because itwas never specifically designed for charities there arecertain drawbacks to its use for this purpose, the mostsignificant of which being:

• the dual regulation of charitable companies underboth the Companies Act and the Charities Acts;

• the need to prepare and file two sets of accounts andannual returns each year with the Charity Commissionand Companies House;

• the complex rules governing the rights and relationshipbetween a company and its members; and

• the large number of criminal offences to whichcompany directors are exposed for transgressions ofthe Companies Act.

This dual regulation burden has discouraged many smalland medium sized charities from adopting anincorporated structure.

In order to address this, the Charities Act 2006introduced a new legal structure exclusively forregistered charities wishing to enjoy the benefits ofincorporation without the dual regulation applicable tolimited companies. This new legal form is called theCharitable Incorporated Organisation or CIO.

A CIO is an incorporated body with a constitution and alegal identity that is quite separate from its trustees ormembers, but it is not a company and it is therefore not(on the face of it at least) subject to UK company lawor EU regulations affecting companies.

CIOs come in two “types”:

• “Foundation” CIOs where the same people are boththe trustees and members; and

• “Association” CIOs which may have a body ofmembers which are quite distinct from the trustees.

1.2 Types of structures for charitiesCIOs are an additional legal structure for charities overand above those that already exist, and charities thatwish to establish themselves or continue as a company,trust or unincorporated association are free to do so.

Although CIOs bring with them many advantages overother types of charitable structure it would be wrong tothink that they are right for every type of charity andcareful consideration needs to be given before decidingto go down the CIO route.

In order to understand the benefits and drawbacks ofCIOs it is necessary to look at the other popular typesof charitable structure.

1.2.1 TrustsTrusts were amongst the first legal form to be used for setting up charities, and are often used when anindividual wishes to gift specific assets such as abuilding or a lump sum of money, either during their life time or through their will on their death, for aparticular charitable purpose.

A charity formed in this way will typically have a smallgroup of individuals to act as its trustees.

Charitable trusts are generally well suited to charitiesthat intend to act as grant making bodies rather thancharities that wish to carry on a more active role, since the trustees of a trust do not enjoy any personalprotection from the liabilities and obligations of thecharity.

1. What is a CIO?


Trusts are also not particularly well suited to charitiesthat wish to have a large group of members thatparticipate in carrying out a collective charitable activity,as trust law makes no specific provision for the role andrights of members. For this type of activity charities setup as unincorporated associations or limited companiesare often more appropriate.

The governing instrument of a trust is normally a “trust deed” or a will.

1.2.2 Unincorporated associationsIf a group of people come together to pursue acommon purpose that does not have the intention ofmaking a profit then an “unincorporated association”,will be formed.

Typical examples of unincorporated associations are:

• parent and teacher associations; and

• local members’ golf and tennis clubs.

If the activity which the members wish to promote is“wholly and exclusively” charitable then theunincorporated association will be a charity, and if itsturnover exceeds the registration threshold (currently agross annual income of £5,000 or more) the charity willnormally be required to register itself with the CharityCommission.

The governing instrument of a charity set up as anunincorporated association is often called its“constitution”.

Like a trust, an unincorporated association has noseparate legal identity of its own. As a consequence the trustees will take on personally the obligations andliabilities of the association on behalf of the members.These obligations and liabilities can include employingstaff, renting premises and entering into contract withsuppliers. As a consequence the trustees and membersmaybe personally exposed to all of the liabilitiesconnected with the charity, which may be significant.

1.2.3 CompaniesAs the obligations associated with running a charityhave become increasingly complex and onerous, so the issue of personal liability has become ever moreimportant for both the trustees and members ofunincorporated charities and charitable trusts. As aconsequence, over the past decade charities haveincreasingly looked to adopt an incorporated structure – typically as a company limited by guarantee.

The nature and extent of the liabilities that an individualmay be exposed to as a charity trustee will depend to alarge extent on the legal structure of the charity ofwhich they are a trustee.

As an overriding principle a charity trustee will alwaysface personal liability were he or she to act negligentlyor recklessly in carrying out their role as a trustee. Many of the principles relating to the obligations andliability of trustees of trusts are in fact applicable to thetrustees of all types of charitable organisation whatevertheir legal form and owe their origins to the Trustee Act1925 and its predecessors.

Normally a trustee will not be personally liable for a lossarising from an investment decision or unsuccessfulactivity provided the trustee has acted with due andreasonable care and there has been no breach of duty.This will be the case even where the loss is occasionedthrough the conduct of an agent or employee, providedthat the care exercised by the trustee was that of anordinary prudent business person in the management of their own affairs. This assumes that the charity hassufficient resources to meet any loss that has beensuffered. In those circumstances the issue of personalliability will only become an issue if the charity hasinsufficient funds with which to meet the liability thathas arisen.

The risk of personal liability is not normally such animportant consideration for the trustees of charitabletrusts that are simply concerned with the investment ofassets and the application of income, provided thetrustees act prudently in dealing with the investmentand application of funds.

4

In the case of an unincorporated association, since itdoes not have a legal identity distinct from its trusteesor members, it cannot be liable for conduct undertakenin its name and, therefore, where there has been abreach of the law, a breach of contract or damage to athird party, the liability will fall either on the trustees orthe members (or both), depending on thecircumstances.

The trustees of charitable trusts and unincorporatedcharities are entitled to be reimbursed out of the assetsof their charities for any personal liability which theyincur in the course of carrying out their duties, providedthe liability is incurred properly and reasonably, anddoes not arise through negligence or misconduct.

Difficulties will arise where a charity has insufficientassets to meet its liabilities. If an unincorporated charityis unable to meet its liabilities then its trustees and/ormembers will be personally liable for any shortfall. This liability may be a “joint and several” one, whichmeans that any single trustee or member may be heldliable for the entire shortfall. For charities that aretaking on significant commitments, this lack ofprotection will be of greater concern to both trusteesand members.

One reason behind the trend towards establishingcharities as limited companies has been the mistakenbelief that it is the trustees of such charities who receivethe benefit of limited liability protection. This isincorrect, and is based on a fundamentalmisunderstanding of how a limited company works.

The limited liability company was invented to allowindividuals to invest in a business secure in theknowledge that if the business venture in which theyhad invested failed their entire liability would be limitedto the amount of their initial investment. This was veryimportant in the early days of international commerce,as investing in such early businesses was a highlyspeculative affair, and without the protection of limitedliability investors would have been reluctant to providethe capital that was required. It was the invention ofthe limited liability company that enabled Britain tobecome one of the world’s great trading nations in the18th and 19th centuries.

Limited liability companies were not established to, nor do they, provide limited liability protection to theirdirectors. The directors of a limited liability companyappear to enjoy protection from a company’s activitiesbecause an incorporated company in law is treated ashaving a legal identity quite separate from that of itsdirectors and members. This is just as true, however, ofan unlimited company which gives no protection to itsmembers. It is this feature of “incorporation” whichmeans that a company can enter into contracts andincur liabilities for which it is solely responsible. This is incontrast to an unincorporated association or trustwhere there is no separate legal identity and whereresponsibility for any liabilities will rest either with thetrustees or members.

It is the incorporated status of a company, therefore,which provides protection to the trustees of a charitablecompany, and the limited liability aspect which providesprotection to its members.

It is important to appreciate that operating through alimited company does not excuse the trustees fromtheir normal legal obligations and they will continue torisk personal liability in the following circumstances:

• when they fail to exercise the normal skill and carerequired of a charity trustee;

• when they are in breach of their fiduciary duty;

• where they fail to carry out the requirements of theCompanies Act;

• where they fail to comply with the requirements ofthe Charities Acts;

• where they act outside of the powers and authorityconferred on them by the company’s memorandumand articles of association;

• where they act in contravention of insolvency law(e.g. “wrongful trading” and “fraudulent trading”);

• where they fail to account for tax or VAT as requiredby law; and

• where they contravene any other legislation whichholds the directors of a company personally liable forany contravention.


1.3 The benefits of CIOsWe have seen that a limited liability company offers anumber of advantages over an unincorporatedassociation or trust as a legal structure for charities,particularly those that are very active or take onsignificant liabilities. Balanced against this is the factthat charitable companies are obliged to comply withboth company law and charity law, and also have toanswer to two masters: the Charity Commission andthe Registrar of Companies.

CIOs are intended to address a number of these issuesby introducing an incorporated structure that is solelygoverned by charity law and registered with the CharityCommission. The Charity Commission believes that CIOswill have the following advantages over ordinarycharitable companies:

i. Single registration – CIOs only need to register withthe Charity Commission and do not need to botherwith Companies House;

ii. Simplified reporting – CIOs only need to prepareand submit accounts and annual returns to theCharity Commission and do not have to complete a separate annual return for Companies House;

iii. Simplified filing – CIOs only have to supply a morelimited range of information to the CharityCommission at lower cost. Unlike CompaniesHouse, the Charity Commission will not charge forthe filing of information;

iv. Simplified constitution – CIOs are given certainstatutory powers which cover a number of matterswhich would otherwise have to be spelled outmore fully in a charitable company’s constitution;

v. Greater flexibility – although there are certainregulatory requirements stipulating the contents ofa CIO’s constitution, overall there should be slightlymore flexibility for CIOs to establish their owngovernance procedures;

vi. Simplified mergers – the Charities Act 2006introduced various provisions intended to simplifythe merger and restructuring of CIOs which are notavailable to other types of charity;

vii. Less punitive – the regulations governing CIOs donot penalise CIOs for the misconduct of theirtrustees; and

viii. Clear duties – the regulations governing CIOs setout clear duties for trustees and members.

1.4 The drawbacks of CIOsCIOs appear to suffer from four obvious drawbacks:

1) Firstly, while the law governing companies, trustsand associations has evolved over hundreds of years,CIOs are a new form of legal entity and it will besome time before the law surrounding them hasevolved.

2) Secondly, although CIOs are not supposed to fallwithin the Companies Act regime in practice, asincorporated bodies, CIO are likely to findthemselves subject to many of the same regulationsas companies, since if they were not it would benecessary for Parliament to enact a whole raft ofadditional legislation solely applicable to CIOs inorder to replicate the law related to companiescovering such areas as insolvency.

3) Thirdly, if a charity established as an incorporatedcompany ceases to qualify as a charity for anyreason (for example if its stops being able to meetthe public benefit test), this does not mean that itceases to exist. This affords the trustees theopportunity to decide what to do with the charityand its assets and perhaps to convert the charityinto a non-charitable social enterprise or CommunityInterest Company. In the case of a charity set up asa CIO this is not possible, as charitable status is aprerequisite of registration as a CIO, and so if a CIOstops being charitable it will cease to exist and itsassets will be distributed to other charities.

4) Finally, unlike a company, a CIO will have no way tooffer a debenture or secured charge over its assetsas a security for any borrowing. This means that if aCIO wishes to borrow money, the individual trusteesmay be called upon to give a personal guarantee,which defeats the purpose of operating through anincorporated entity. As a result, the CharityCommission has already acknowledged that largercharities are likely to continue to use the limitedcompany structure.

2. Establishing a new charity as a CIO

6

2.1 Charitable objectsProbably the hardest part of setting up any new charityis to devise a set of “objects” which meet the test ofbeing “wholly and exclusively charitable”.

In order for any new charity to be registered it isnecessary that the aims or “objects” of the charity arewholly and exclusively charitable and must fall withinone of the thirteen charitable purposes identified in theCharities Act 2006. These are:

a) The prevention or relief of poverty;

b) The advancement of education;

c) The advancement of religion;

d) The advancement of health or the saving of lives;

e) The advancement of citizenship or communitydevelopment;

f) The advancement of the arts, culture, heritage orscience;

g) The advancement of amateur sport;

h) The advancement of human rights, conflictresolution or reconciliation or the promotion ofreligion or racial harmony or equality and diversity;

i) The advancement of environmental protection orimprovement;

j) The relief of those in need by reason of youth, age,ill health, disability, financial hardship or otherdisadvantage;

k) The advancement of animal welfare;

l) The promotion of the efficiency of the Armed Forcesof the Crown or the efficiency of the Police, Fire andRescue Services or Ambulance Services; and

m) Any other purposes currently recognised as beingcharitable under the law.

If the objects of the prospective CIO include anypurposes which are outside of the list, or involve anexpressly prohibited activity such as a political orcommercial objective, then the CIO will not beregistered by the Charity Commission.

Considerable care needs to be taken to ensure that theobjects of the CIO are clearly stated, fall within one ofthe thirteen permitted purposes and are not drafted sowidely as to potentially encompass non-charitable aims.

If you are thinking about setting up a new charity as a CIOthere may be a strong temptation to start by downloadingand filling in forms from the Charity Commission website.There is, however, a process that must be gone through beforeany forms are filled in or submitted and if you miss thesesteps then your application is likely to be rejected or takemuch longer to complete than otherwise needs to be the case.


2.2 Public benefit testEnsuring that the CIO’s objects are wholly and exclusivelycharitable is not sufficient. It is also necessary to answerthe question whether the new CIO will provide sufficient“public benefit” to be able to satisfy the public benefittest introduced by the Charities Act 2006.

In simple terms the public benefit test is the requirementthat every charity must be able to demonstrate that it hasan identifiable benefit that is enjoyed by the public atlarge or a sufficient section of the public.

It is important that the benefit that the public enjoysmust be related to the aims and objectives of the CIOand not be purely incidental to its activities.

The introduction of the public benefit test has been ofparticular concern to charities that charge fees for thepublic to be able to enjoy the activity or service whichthey carry on, such as fee paying schools and hospitals.

The Charity Commission has produced a very helpfulpublication called Charities and Public Benefit1

explaining the public benefit test and its impact ondifferent types of charities and we recommend that youlook at this guide if it is not clear whether your new CIOwill benefit the public generally.

2.3 Types of CIOAlthough strictly speaking there is only one type of CIO,in practice when setting up a new CIO you will need to decide whether the CIO will adopt a “Foundation”format, in which the trustees are the same as themembers, or an “Association” format, where thetrustees and members may be different and where there may be a much larger body of members.

2.4 NameChoosing a name for your charity may seem like a simpletask, but in practice it can turn out to be far morecomplicated and time consuming than you might imagine.

You will need to select a name which has not beenused by any other existing organisation. Once youhave thought of a name you can check this by going on to the Charity Commission website atwww.charitycommission.gov.uk and checking thename that you wish to use against the names of themany thousands of charities that have already registeredwith the Charity Commission.

The fact that the name that you have chosen does notappear to conflict with the name of any existingregistered charity is not, however, the end of the story.You also need to be careful to ensure that the namethat you have chosen does not conflict with anyunregistered charities, companies or businesses,otherwise your new charity may find itself the subjectof legal proceedings for what is called “Passing Off” or trade mark infringement.

“Passing Off” is a common law right acquired by anindividual or organisations that has built up a reputationand goodwill in a brand name to obtain protectionagainst anybody trying to trade off of that reputationby adopting a similar identity. Passing Off is acomplicated area of the law, and the best advice is toensure that you adopt an identity for your new charitywhich is clearly distinct from any other existing charityor business. One way to do this is to check the namethat you wish to use has not been registered by anyexisting company by checking on the register ofcompanies at www.companieshouse.gov.uk and alsoby carry out a name search with a reputable internetsearch engine to see if there are any existing businessesor other organisations using a similar identity.

It is also advisable to make sure that your proposed nameor logo does not infringe any registered trademarks. To do this you can either get a firm of trade markagents to carry out a search, or you can conduct an on-line search of the Trade Mark Register held by theIntellectual Property Office at www.ipo.gov.uk,although this method is not entirely foolproof becauseof the time that it can take time for new trade markapplications to be published to the public at large.

It is important that thebenefit that the public enjoysmust be related to the aimsand objectives of the CIO andnot be purely incidental to itsactivities.

1 http://www.charitycommission.gov.uk/Charity_requirements_guidance/Charity_essentials/Public_benefit/public_benefit.aspx

8

f) The rules governing the appointment of proxies;

g) Any rules governing postal voting, if applicable;

h) Any rules permitting members to pass resolutionsother than at a general meeting;

i) The voting rights of each class of membership;

j) How trustees can retire or be removed;

k) Any powers which members have to removetrustees from office;

l) The minimum number of trustees that must holdoffice at any time;

m) The rules governing the conduct of meetings of thetrustees;

n) Any procedures for trustees to pass resolutions otherthan at a trustees meeting;

o) The use of the CIO’s seal, if any;

p) Any rules governing the sending of electroniccommunications to members;

q) Any rules governing the means by which the CIOcan communicate with its members and debentureholders via a website;

r) Any rules governing the extent to which trusteesmay benefit personally from any arrangements ortransactions entered into by the CIO;

s) The CIO’s principal office in England or Wales; and

t) A CIO’s constitution must not contain anyrestrictions on the CIO’s ability to dispose of itsproperty.

Finally, almost any new charity will want to set up awebsite and having chosen your name you will want tospend time securing a domain name that can be clearlyassociated with your new charity.

2.5 ConstitutionEvery registered charity must have a governinginstrument which sets out its charitable objects and therules by which it will operate. For an unincorporatedcharity this will normally be called its “Constitution”. Fora charity established as a trust this will typically be a“Trust Deed” and for a charity established as a limitedliability company this will be its “Memorandum andArticles of Association” (for a company formed beforeSeptember 2009) or “Articles of Association” (for acompany formed since then).

The governing instrument for a CIO is called its“Constitution” and in many ways is not dissimilar to theconstitution for an unincorporated association.

The regulations governing CIOs prescribes that theconstitution of a CIO must contain the following:

a) The names of the persons who are to be the firsttrustees;

b) The names of the first members;

c) How members retire from membership;

d) The circumstances and method by whichmembership may be terminated;

e) In connection with general meetings:

i. The procedure for calling general meetings;

ii. The appointment of a chair at such meetings;

iii. The quorum for such meetings;

iv. The rules governing the calling of a poll at suchmeetings; and

v. Where there are bodies corporate who aremembers the means by which they can berepresented at such meetings;


In addition, a CIO’s constitution may contain certainrestrictions preventing the amendment of theconstitution by a resolution of its members unlesscertain conditions are met or particular procedures arecomplied with. Any such restrictions are called“provisions for entrenchment”.

The Charity Commission has produced modelconstitutions2 for:

i) A CIO whose only voting members are its charitytrustees (“Foundation” format); and

ii) A CIO with voting members other than its charitytrustees (“Association” format).

These model constitutions are a good starting point,but when reading the guidance notes to them you mayform the view that you are not allowed to do any morethan fill in the blanks and otherwise use them word forword. This is not in fact the case and it is possible toamend these models to suit your particularrequirements, though professional advice in doing thisis recommended.

2.6 TrusteesEvery charity needs a board of trustees and a CIO is nodifferent to any other charity in this respect. Theprocess of identifying and inducting a board of trusteesfor a new charity is outside the scope of this guide, butis something which can take time and it is not possibleto submit an application for registration of a CIO untilat least a core of trustees have been found that arewilling to stand.

The Charity Commission produces a number of helpfulguides for prospective trustees explaining the role andthe responsibilities involved and it is recommended thatanyone considering becoming a CIO trustee should takea look at these.

2.7 Application formsOnce you have chosen a name for your charity,established its objects, drafted its constitution andfound your trustees it is time to complete the CharityCommission’s application documents. It is possible todo this either by filling in the documents in paper formand submitting these by post or by submitting yourapplication on-line.

Which of these you choose to do is entirely up to youbut you may find that a postal application is easier,particularly if you have a number of trustees ormembers. Even if you decide to complete theapplication on-line it is easiest first of all to print off acopy of the application documents and fill these in byhand, so that you have all of the requisite informationwhen you come to complete the on-line application.

You will need to complete two documents in order toregister your new CIO:

(i) Form CC5a – Application for Registration; and

(ii) Form CC5c – Trustee Declaration.

Form CC5a is the main registration form and requiresyou to provide details not only of what the CIO’sobjects are and how they are to be achieved, but alsoasks questions about how income will be generated,where in the world the CIO will be operating andwhether the CIO will involve working with children orvulnerable people.

Normally a charity is only eligible for registration if it has a gross annual income of more than £5,000 a year.This threshold does not, however, apply to CIOs whichmust be registered with the Charity Commissionirrespective of their level of income.

The second document you will need to complete is Form CC5c – Trustee Declaration. This is essentially adeclaration signed by each of the trustees that they arewilling to act as trustees of the CIO, are not disqualifiedfrom acting and that they are able to give thedeclarations contained in the form.

Once you have completed both forms and prepared the new constitution they can be submitted to theCharity Commission so that the CIO can be constitutedand registered.

Once the Charity Commission confirms that your newCIO has been registered it becomes not only aregistered charity but also a corporate body with thename specified in the constitution, whose first trusteesand members will be the people notified to theCommission at the time the application was submitted.

2 http://www.charitycommission.gov.uk/Start_up_a_charity/Do_I_need_to_register/CIOs/model_constitutions.aspx

10

3. Converting an existingcharitable company to a CIO

Because a charitable company is already a corporatebody, the process for conversion should be much easierthan for other types of charity and it is anticipated thata specific conversion process will exist.

3.1 New constitutionThe constitution for a CIO is different from that of acharitable company, which will have a set ofMemorandum and Articles of Association (or just Articlesof Association if formed after September 2009) and oneof the first steps when contemplating conversion will beto develop a new constitution for the CIO.

A CIO constitution will either have a “Foundation” formatin which the trustees are the same as the members, or an“Association” format where the trustees and membersmay be different, and where there may be a much largerbody of members. Normally a charitable companyconverting to become a CIO will adopt the Associationformat of CIO constitution because it will have amembership that is distinct from its trustees. This is not,however, always the case and charitable companies thatare converting should consider carefully which structure isthe most appropriate.

As mentioned in Chapter 2, the Charity Commissionhas produced two model constitutions for CIOscovering both the Foundation and Association formats.These documents are a good start for new charities, but for a charitable company with an existingconstitutional structure which has been carefullyprepared or developed over a number of years changeswill be needed and it would be advisable to obtainprofessional advice in order to create a CIO constitutionwhich accurately reflects the existing trustee,management and membership structure.

The regulations governing CIOs prescribe that theconstitution of a CIO must contain the following:





The law anticipates that it will be possible for an existingcharitable company to apply for conversion to become a CIOprovided it is not an exempt charity. If it is a charity with ashare capital then its shares will need to be fully paid up. At the time of writing this guide the regulations governingthis conversion have yet to be finalised and it is likely to besome time before the Charity Commission is ready to process applications from charities wishing to convert tobecome a CIO.






















t) A CIO’s constitution must not contain anyrestrictions on the CIO’s ability to dispose of itsproperty.

In addition, a CIO’s constitution may contain certainrestrictions preventing the amendment of theconstitution by a resolution of its members unlesscertain conditions are met, or particular procedures arecomplied with. Any such restrictions are called“provisions for entrenchment”.

If provisions for entrenchment are included these canalways be overridden by either the agreement of allmembers, an order of the court or the CharityCommission.

3.2 Pre-conversion requirementsBefore a charitable company can convert to becoming aCIO it will normally need to obtain the consent of itsmembers.

Depending upon the charitable company’s constitution,this may be done by holding an Annual GeneralMeeting (AGM) or an Extraordinary General Meeting(EGM) at which a resolution is considered by themembers to convert the charity. Alternatively, it couldbe done by way of a written resolution.

As well as obtaining the members’ consent, the trusteeswill also need to ensure that the charity is up to datewith its fillings with both Companies House and theCharity Commission, particularly with regard toaccounts and annual returns.

If the charity has any outstanding accounts or annualreturns which have not yet been filled it is stronglyrecommended that these are filed before an applicationis submitted, as otherwise the Charity Commission maybe compelled to decline an application for conversionuntil these have been dealt with.

12

3.3 Application formsOnce the charity has obtained any necessary approvalfrom its members the charity will need to complete andfile Charity Commission form CC5a – Application forRegistration and form CC5c – Trustee Declaration,together with a copy of the new constitution and theresolution passed by the members that the companyshould be converted to a CIO.

Normally these will be the only documents that theCharity Commission will require, however theCommission may request additional documents if itbelieves that it requires further information.

The Charity Commission will notify Companies House ofits decision whether or not to proceed with re-registrationas a CIO.

If the Charity Commission decides that the applicationfor re-registration will be granted a provisionalregistration will be entered into the Register of Charitiesand the Registrar of Companies will then be notified ofthe Charity Commission’s decision.

As soon as the Registrar of Companies cancels thecharitable company’s registration the charity will ceaseto be a company and will simultaneously become anincorporated CIO.

Because the process of converting an incorporatedcharity to a CIO retains the original legal identity of the charity, the new CIO will retain the same charitynumber, but will cease to have a company number.

There is no need to deal with the transfer of assets orliabilities from the charitable company to the CIO as the new CIO will automatically inherit these, whichsimplifies considerably the process of conversion.

If the charitable company is set up as a companylimited by guarantee and its members are required tocontribute £10 or more in the event of a winding upthen the constitution of the new CIO must ensure thatthe members are liable to make a contribution in theevent of a winding up which is not less than waspreviously the case.

4. Converting an existingunincorporated charity to a CIO


For unincorporated associations and charitable truststhere is no specific conversion process. This is becausetrusts and unincorporated associations do not have anincorporated structure that can simply be re-registeredand so it is necessary to follow a two step process:

1. Form a new CIO.

2. Transfer all of the assets and liabilities of the existing charity across.

4.1 Forming the new CIOThe process of forming a new CIO is exactly the sameas described in Chapter 2.

Since the new CIO will have charitable objects that areidentical to those of the existing unincorporated charitythe trustees should not have to spend any timeconsidering the objects of the CIO or whether it passesthe public benefit test. There should also be nodifficulty with the name, as the new CIO will have thesame name as the existing unincorporated charity.

As with the formation of any CIO, it is necessary tocreate a constitution that will govern the new charity.There are two types of constitution which a CIO canadopt: The “Foundation” format is used in which thetrustees are the same as the members and the“Association” format where the trustees and membersmay be different and where there may be a much larger body of members. For most unincorporatedcharities the Association form of constitution will be the more appropriate, although this will not necessarilybe the case.

Charities that are looking to convert from anunincorporated structure to a CIO will need to considercarefully how they draft their new constitution to reflectthe existing trustee, management and membershipstructure which they already have and it isrecommended that professional advice is sought wereappropriate. The Charity Commission provide modelconstitutions for CIOs, but these will normally requireamendment in order to be suitable for existing charitiesthat are converting.

The regulations governing CIOs prescribe that theconstitution of a CIO must contain the following:











Many charities that will consider conversion to a CIO willeither be unincorporated charities or charitable trusts. The process of conversion for a charitable trust is likely to bemore complicated and we would therefore recommend thatany unincorporated charity or charitable trust consideringconversion obtain specialist professional advice.

14















t) A CIO’s constitution must not contain any restrictionson the CIO’s ability to dispose of its property.

In addition, a CIO’s constitution may contain certainrestrictions preventing the amendment of theconstitution by a resolution of its members unlesscertain conditions are met, or particular procedures arecomplied with. Any such restrictions are called“provisions for entrenchment”.

If a CIO wishes to include provisions for entrenchmentwithin its constitution these either need to be includedin the constitution at the time of the original applicationfor registration, or introduced by a subsequentamendment to the constitution approved by allmembers.

If provisions for entrenchment are included these canalways be overridden by either the agreement of allmembers, an order of the court or the CharityCommission.

4.2 Application formsHaving drafted the constitution for the new CIO, thenext step is to complete the Charity Commission’sapplication documents. It is anticipated that it will bepossible to do this either by filling in the applicationform on-line, in much the same way as any new charityis currently registered, however at the time of writingthe precise process of conversion has not yet beenfinalised by the Charity Commission.

It is anticipated however that the two documents youwill need to complete in order to register your new CIOwill still be:

(i) Form CC5a – Application for Registration; and

(ii) Form CC5c – Trustee Declaration

although these may be modified for unincorporatedcharities and charitable trusts that are converting.

Form CC5a is the main registration form and requiresyou to provide details not only of what the CIO’sobjects are and how they are to be achieved, but alsoasks questions about how income will be generated,where in the world the CIO will be operating andwhether the CIO will involve working with children orvulnerable people.


Normally a charity is only eligible for registration if it hasa gross annual income of more than £5,000 a year. Thisthreshold does not, however, apply to CIOs which mustbe registered with the Charity Commission irrespectiveof their level of income.

The second document you will need to complete isForm CC5c – Trustee Declaration. This is essentially adeclaration signed by each of the trustees that they arewilling to act as trustees of the CIO, are not disqualifiedfrom acting and that they are able to give thedeclarations contained in the form.

Once you have completed both forms and prepared thenew constitution they can be submitted to the CharityCommission so that the CIO can be constituted andregistered.

4.3 Members’ approvalOnce the new CIO has been formed the trustees of theexisting charity will need to obtain the approval of themembers of the charity to dissolve the charity andtransfer its assets to the new CIO.

We would normally recommend that the members’approval to the whole process is obtained before theprocess of conversion is started. The members shouldnot resolve to dissolve the existing charity until the newCIO has been formed, in case there is a problem withforming the new charity. Members’ approval can beobtained on a conditional basis, so that onceregistration of the new CIO has been confirmed by theCharity Commission, the process of transfer anddisillusion can take place without further delay.

Depending on the constitution of the existing charity,the members’ approval will either need to be soughtthrough a resolution presented at an AGM or an EGM(or possibly by a written resolution if the charity hasrelatively few members or the members are essentiallythe same as its trustees).

Once the new CIO has beenformed the trustees of theexisting charity will need toobtain the approval of themembers of the charity todissolve the charity andtransfer its assets to the new CIO.

16

4.4 Transfer of assetsHaving established the new CIO and obtainedmembers’ approval for the transfer, the next step is toactually transfer the assets. The Charities Act 2006amended Section 74 of the Charities Act 1993 so that a resolution passed by a two thirds majority of thetrustees can be used to transfer all of the assets of theexisting charity over to the CIO.

The trustees will have to note, however, that sinceassets are being transferred over to a new charity thenew charity will have a different charity number andthis will inevitably also result in the need to changethings such as bank accounts.

Once the assets of the existing charity have beentransferred, a set of cessation accounts for the oldcharity must be produced showing that all of the assetsand liabilities have been transferred. These accountsneed to be filed with the Charity Commission togetherwith an application for the old charity to be wound upand struck off the charity register.

Since the process of converting an unincorporatedassociation involves the formation of a new legal entity,the charity will need to notify its bankers and any thirdparties that it deals with, including creditors, relevantGovernment departments, HM Revenue & Customs andits own staff.

Contracts will also need to be transferred across. There are two ways to transfer a contract: “Assignment”and “Novation”. When a contract is novated this meansthat the new party taking over the contract will betreated as taking over all responsibility right from thestart of the contract, whereas when a contract isassigned the new party only takes over responsibilityfrom the date of assignment. In this case it will normallybe more appropriate for contracts to be novated to thenew CIO, but this may not always be possible.

If the old charity has a defined benefit pension schemethen specialist advice should be obtained before atransfer takes place, as this may constitute a NotifiableEvent. A Notifiable Event is an event that must benotified in writing to the Pensions Regulator as it maygive rise to a call on the Pension Protection Fund.

Staff should also be consulted ahead of the transfer and given written notice of the changes taking place, as technically there will be a change of employer andtherefore the provisions of TUPE will apply. It may besensible to obtain employment advice if the process ofconversion could affect any existing staff.

Finally, it is very important that the trustees of the newCIO notify everybody dealing with the charity of thechange that has taken place, since if they do not thenthe charity will not be able to take full advantage of thebenefits of limited liability which incorporation brings.

Staff should also be consultedahead of the transfer andgiven written notice of thechanges taking place, astechnically there will be achange of employer andtherefore the provisions ofTUPE will apply. It may be sensible to obtainemployment advice if theprocess of conversion couldaffect any existing staff.

5. Taxation of CIOs


Although CIOs are a new type of legal entity, the taxrules that apply to them are the same as apply tocharities in general, and therefore this commentary is of general application to all charities. However, giventhe ability to convert from an existing charity structure(i.e. limited company, unincorporated association ortrust) into a CIO, we first need to consider the direct tax consequences of conversion.

5.1 Conversion to a CIOFor existing charitable companies limited by guarantee,the process of converting to a CIO should be relativelystraightforward, although the detailed regulations inthis area are awaited. It is envisaged that a charitablecompany converting to CIO status will continue inexistence and simply re-register under a different part of charity legislation.

However, a deemed transfer of assets may take placefor VAT purposes and although existing registrationswith HM Revenue & Customs (HMRC) for corporationtax and Gift Aid claims should remain the same, a newVAT registration may be required.

If you are converting an unincorporated association to aCIO, HMRC will need to be informed for direct taxpurposes and a new VAT registration obtained. Atpresent HMRC becomes aware of any new incorporatedcompany as they are automatically informed byCompanies House. CIOs do not need to register atCompanies House so it is anticipated that there will atsome point be a mechanism in place between theCharity Commission and HMRC, informing HMRC ofnew CIOs. Otherwise the CIO will not be prompted toinform HMRC of their existence and activities. Trusteeswill need to make sure that in any event they do notoverlook this.

Perhaps more importantly, the new CIO will have to re-register for Gift Aid. Hopefully re-registration will bequick to ensure no gap in Gift Aid recovery from HMRC.

5.2 Direct tax issues on transferThe conversion of an unincorporated charity to a CIOshould attract so-called “incorporation reliefs”. Charities do not typically pay tax on capital gains (which could potentially arise on incorporation, asstrictly transactions to transfer assets to a corporatebody should be effected at market value). There shouldtherefore be no additional tax arising as a result oftransferring an unincorporated charity’s activities andassets to a new CIO which has compatible charitableobjects.

If an existing charitable company is converted to a CIOthere is no actual transfer of assets involved so thissimilarly should not result in the crystallisation of a taxliability in respect of any chargeable gains.

To the extent that a charity holds any assets which arenot applied for charitable purposes, then the situationmay be slightly more complex. However, the Taxes Actsspecifically provide relief for other unincorporatedactivities which incorporate.

It should be borne in mind that a charitable companymay be carrying on one or more taxable trades, inaddition to its normal non-taxable charitable activities,and consideration will need to be given to the taxeffect of transferring these to the new CIO.

This chapter summarises the direct tax rules as they affect CIOs.

18

5.3 Direct taxes on ongoing activitiesThe general tax rules for charitable companies willsimilarly apply to CIOs. To be eligible for charitable taxstatus, the CIO will have to satisfy the normal tests interms of its charitable objects, Charity Commissionregistration and the “fit and proper” management test.From a practical point of view there should be littlechange for existing charities which adopt the structureof a CIO, although it is possible that the corporation taxcompliance process, in particular online filing of taxreturns for a non-Companies Act entity, may be a littlemore straightforward.

There are some very specific exemptions and reliefsfrom tax for all charities which will also be applicable to CIOs.

Exemptions from direct taxMost income of charities including CIOs is automaticallyexempt from direct tax. This includes donations andsimilar gifts such as legacies and amounts paid tocharities under the payroll deduction scheme.

Otherwise sources of income are subject to different taxrules. However, most charities do not, on the whole,pay tax on their income, whatever the source. Whilstchanges elsewhere in the tax legislation invariably resultin unexpected consequences for charities, the Treasuryis generally sympathetic to the needs and expectationsof the charity sector.

The following sets out the tax treatment of variouscommon sources of income as well as setting out thepitfalls and foibles of some of the exemptions.

Trading profitsA charity may carry on a trade. As with other sources ofincome, there is a statutory exemption from tax fortrading income where a ‘charitable trade’ is carried out.There are two sides to this exemption. The first dealswith the way in which income is generated. The seconddeals with how the resulting profits are expended bythe charity. Both are required for the exemption, but webegin here with how the income is generated.

Charitable tradeFor charities (including CIOs) the exemption for tradingincome is conditional on:

(a) The profits being applied to a charitable purpose(see above); and

(b) Either:

(i) The trade being exercised (whether or not in theUK) in the course of the actual carrying out of aprimary purpose of the charity (the “primarypurpose test”); or

(ii) The work in connection with the trade beingmainly carried out by beneficiaries of the charity(the “work done test”)

The “primary purpose” testTo meet the so-called “primary purpose” test, a charity(including a CIO) must ensure that the trading activitiesare carried out in the course of achieving the charity’sobjectives. A charity’s objectives are outlined in its trustdeed, constitution or governing document.

The exemption also extends to profits from activitieswhich, although not “primary purpose” activitiesthemselves, are ancillary and support the overall“primary purpose”.

The “work done” testThis test is met where the work in connection with thetrade is mainly carried on by the beneficiaries of thecharity. Examples include a canteen run by students at acatering college.

Where the trade is exercised partly in the course ofcarrying out a primary purpose of the charity and partlyotherwise, each part is treated as a separate trade.Similarly, where the work is carried out partly but notmainly by beneficiaries, the part carried on by thebeneficiaries and the other part are treated as separatetrades. Expenses and receipts are to be apportionedbetween the separate trades. Any profit arising fromthe non-exempt trade is then taxable, subject to thefurther exemptions outlined below.


Turnover limits for the small trading tax exemptionMost charities could be expected to carry out activitiesof a trading nature which do not meet the work doneor the primary purpose tests. However, provided theincome is applied for the purposes of the charity anddoes not exceed certain limits, such income will not betaxable.

In this context it is the charity’s annual turnover whichis relevant:

Trades that do not qualify for exemptionIt can be seen from the above that it can be fairlydifficult for the exemption regarding trading income toapply and a large number of charities will not meet thespecific exemptions.

HMRC actively promote one method of tax avoidancewhereby a non-qualifying trade is carried on by a non-charitable company which then donates its profits fromthat trade to the charity via a gift aid donation or deedof covenant. The donation is deductible from its taxableprofits and therefore effective tax exemption isachieved.

Under the CIO regime, it will therefore be possible for a similar structure to be used so that a non charitablecompany may donate such income to the CIO which is then exempt from tax on the donated income.

This is best achieved by the non-charitable companybeing a subsidiary of the charity (CIO). In this way, the subsidiary company has nine months following itsyear end to make the donation of profits and obtainthe deduction. Otherwise, the donation will have to be made in the following accounting year and thatcould cause practical difficulties.

Fundraising eventsOne of the most common ways of fundraising is byorganising charitable events. Profits from events such as bazaars, jumble sales etc arranged by voluntaryorganizations or charities are not taxed if:

(a) The organization or charity is not regularly carryingon these trading activities;

(b) It is not competing with other traders; and

(c) The profits are transferred to charities or otherwiseapplied for charitable purposes.

This exemption allows up to 15 of each type of event in one location in a financial year. Helpfully, events with takings of £1,000 or less do not count towardsthese limits.

Total incoming resourcesof your charity

Turnover limit for atrading activity's profits to be exempt from tax

Under £20,000 £5,000

£20,000 to £200,000 25% of your charity's totalannual income

Over £200,000 £50,000

Partial exemption is possible even where the abovelimits are exceeded. The qualifying and non-qualifyingactivities are treated as two separate trades andexemption granted on the profits of the notionalqualifying trade, the income and expenditure of thewhole trade being apportioned between the twonotional trades on a reasonable basis.

There are some very specificexemptions and reliefs fromtax for all charities which willalso be applicable to CIOs.

20

Lotteries, raffles, tombolaYou should always obtain legal advice as you need toensure the above are promoted and conducted inaccordance with Gambling Act 2005.

‘Non-charitable’ expenditureA further point to note is that where a charity incursnon charitable expenditure which is anything otherthan “charitable expenditure”, relief for “relievableincome and gains” is restricted to the amount by whichthey exceed such non-charitable expenditure. In otherwords, the charity is then taxed on the amount of thenon-charitable exemption. If a charity’s non charitableexpenditure exceeds its “total income and gains” theexcess is treated as non charitable expenditure of theprevious period.

This restriction therefore will affect the limits to which a charity is entitled to claim tax exemption.

Rental incomeProfits or gains in respect of rents or other receiptsfrom an estate, interest or right in or over any landvested in any person for a charitable purpose areexempt to the extent they are applied to charitablepurposes only. This is the case also for the new CIO structure.

Interest, distributions etcIncome from investments and deposits of a charitablecompany is exempt, again, in so far as it is applied tocharitable purposes (see above) and consisting of:

• non-trade loan relationship profits (net interestincome);

• overseas income which is equivalent to net UKinterest received; or

• dividends or other distributions from companies.

5.4 Capital Gains TaxGains accruing to charities are exempt from taxation as long as they are both applicable and applied forcharitable purposes. This applies also to tax on offshoreincome gains if applicable and applied for charitablepurposes.

5.5 Employment taxesCharities which are employers are treated like any otheremployer for PAYE.

HMRC’s PAYE investigations do not exclude charitiesand therefore CIOs. The PAYE position of anyone paidby a CIO must be considered carefully.

There are minor tax advantages to being employed by a charity which will also apply in the context of a CIO:

1) Benefits in kind – A director is not chargeable underthe benefits in kind provisions if his totalemoluments are less than £8,500.

2) Accommodation – A charge may not apply underthe Taxes Acts for accommodation provided to anemployee.

5.6 Gift AidThe detailed rules regarding Gift Aid claims will alsooperate under the CIO regime.

Charities (and CIOs) receiving Gift Aid donations canreclaim basic rate tax on the donations, provided theywere in receipt of a valid certificate from the donor andcan demonstrate a clear audit trail linking the donationto the donor. In order to operate the Gift Aid scheme,charities need to keep records to show how much hasbeen received from each donor who has made adeclaration. Charities must keep sufficient records toshow that their tax reclaims are accurate.

Since 1 April 2010, the window available to make Gift Aid claims has reduced from six years to four years.This has largely gone unpublicised and the time limitwill also apply to CIOs.

It is recommended that before a charity transfers itsactivities to a CIO, it ensures that its Gift Aid claims are brought up to date.


5.7 VAT Depending on whether the conversion to a CIOconstitutes the creation of a separate legal entity, a newVAT registration is likely to be required as theconversion is treated as the transfer of a business as agoing concern, otherwise known as a “TOGC”. Therewill be some administrative issues to consider, inrelation to the VAT registration, particularly if a VATgroup registration is required and there are any propertyassets transferred. It will be important to avoidadministrative errors that may prove to be costly.

VAT registration and property interestsProvided the CIO has taxable business activities over theVAT registration threshold, it will be required to applyfor VAT registration.

It will be particularly important here to consider anyproperty interests that may be transferred to the CIO.These property interests should be capable of beingtransferred without any VAT issues, but it will beimportant to consider if there are any options to tax inplace whereby the charity has made an election tocharge VAT on its properties and notified HMRC.

Care should be taken with any opted to tax propertyinterests to ensure, these will qualify as a part of thetransfer of the deemed business to the CIO. The CIOwill be required to provide a specific VAT anti-avoidancestatement that it will not use the opted property for anyexempt activities to avoid a VAT charge arising on thetransfer of the opted to tax property interest by thetransferee (the previous entity). Also the new CIO will,where there is an option to tax in place, be required tonotify to HMRC, prior to conversion, its own option totax otherwise an irrecoverable VAT charge at 20% ofthe total value of the opted properties could betriggered unwittingly.

Where appropriate, if the property interests are withinthe VAT Capital Goods Scheme, then the transferor (thenewly created CIO) will take over responsibility for anyunexpired period for the Capital Goods Scheme.Therefore the new CIO will be required to retain thedetails of the VAT previously recovered in case there willbe a requirement in the future to repay any of the VATpreviously recovered by the previous existing entity.

Professional VAT advice must be obtained where anyproperty interest will flow with the conversion to a CIOto ensure any major VAT issues are averted in respect ofthe VAT administration of the conversion to a new CIOentity.

VAT GroupingAt this stage we are not aware of any consideration byHMRC in respect of possible trading subsidiaries andwhether the new CIO can or will be required to set uptrading subsidiaries.

The VAT grouping rules allow a “body corporate” toform a single VAT group registration with its tradingsubsidiaries. Many charities benefit from forming a VATgroup registration to enable increased VAT recovery andsimplified VAT administration of submitting a single VATreturn for all trading businesses.

It is quite likely that a CIO will qualify as a “corporatebody” for VAT grouping purposes but HMRC mayrequire persuading that the CIO and associated tradingentities will qualify for this beneficial structure.

It would appear reasonable to assume that some formof branch or further CIO subsidiary may be required.

Care should be taken withany opted to tax propertyinterests to ensure, these willqualify as a part of thetransfer of the deemedbusiness to the CIO.

6. Auditing and accounting for CIOs

22

6.1 Requirements for audits or independentexaminationsThe current proposal is for all CIOs to submit annualaccounts and reports to the Charity Commission.

As far as regulations and guidelines concerning auditsand independent examinations are concerned, there are unlikely to be any differences between charitablecompanies and CIOs. In the case of audits, the auditorwill be expected to report on whether the accountspresent a “true and fair” view.

It is likely that the audit and independent examinationthresholds currently applicable to charitable companieswill continue on conversion or establishment of CIOs.

6.2 Accounting provisionsAll companies, other than charities, are permitted toreport under International Financial Reporting Standards(IFRS). However, most unlisted companies continue touse UK Generally Accepted Accounting Practice (GAAP).

The Accounting Standards Board (ASB) of the FRC haspublished Financial Reporting Exposure Draft (FRED) 45.This sets out proposals to be included in a FinancialReporting Standard for Public Benefit Entities (FRSPBE)to accompany the proposed Financial ReportingStandard for Medium-size Entities (FRSME).(http://www.frc.org.uk/asb/press/pub2546.html)

The FRSPBE has been developed because IFRS basedstandards are written for the ‘for-profit’ sector and donot address some transactions that are more specific to the public benefit entity sector.

It is proposed that the FRSPBE will be mandatory forentities which meet the definition of public benefitentity that apply the proposed FRSME.

The FRSPBE has beendeveloped because IFRSbased standards are writtenfor the ‘for-profit’ sector and do not address sometransactions that are morespecific to the public benefitentity sector.


A public benefit entity has been defined as:

An entity whose primary objective is to provide goodsor services for the general public, community or socialbenefit and where any equity is provided with a view tosupporting the entity’s primary objectives rather than aview to providing a financial return to equity providers,shareholders or members.

In light of this definition, it is very likely that whateverform the new standard takes in due course, will beequally applicable to CIOs.

The most important point outlined in the initialconsultation paper issued by the Cabinet Office andCharity Commission relating to the accountingprovisions was the decision on the right accountingframework for CIOs.

The issue arose as company and non-company charitieshave different accounting frameworks; smallerunincorporated charities can opt to prepare accountson a receipts and payment basis rather than an accrualsbasis. However, all companies must prepare accrualaccounts.

There is nothing to stop a CIO preparing accrualsaccounts even with a an income of less than £250,000 – If, however, the gross annual income is likely to be over£250,000, then accrual accounts must be prepared.

Bearing in mind that CIOs could have been initiallyregistered as charities that were either unincorporatedor companies, which provisions should they use? The majority of responses to the consultation paperfavoured a proportionate approach to the accountingrequirements of CIOs based on the level of income. In other words, up to a certain level, the CIOs couldprepare accounts on the receipts and payments basis – and thereafter on accruals basis. This is the approachthat has now been adopted. However, there is still aquestion to be discussed – the current level ofpreparation of accruals accounts for unincorporatedcharities is £250,000 – should this remain unchangedfor CIOs? It is the government’s intention to keep thislevel initially but assess its effectiveness or otherwiseafter a (as yet to be determined) review period.

The other important accounting issue is what accountsto prepare on conversion to a CIO.

As it stands, regulations make it clear that it would notbe appropriate to grant an application for conversionwhere relevant documents for complete financial yearshave not been filed with either Companies House or the Charity Commission as appropriate. Where a CIO isregistered, following conversion, the trustees must send the conversion financial statements to the CharityCommission within six weeks of conversion. In addition,the CIO trustees will be required to submit a closingfinancial year report and return to the CharityCommission.

The policy aim is to ensure continuity of accounting and reporting for organisations that use the conversionprocess to become a CIO. Immediately prior toconversion, the trustees of a charitable company arerequired to comply with the accounting provisions ofthe Companies Act – from the date of conversion it isaccounting provisions of charity law that will apply toCIOs. However, the government is considering severaloptions that may enable a converting entity to continueits annual reporting cycle without the need for aconversion statement.

The most important pointoutlined in the initialconsultation paper issued by the Cabinet Office andCharity Commission relatingto the accounting provisionswas the decision on the right accounting frameworkfor CIOs.

Notes

24

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of theprinciples set out will depend upon the particular circumstances involved and we recommend that you obtain professional advicebefore acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readerson how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care orliability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

© 2011 Deloitte LLP. All rights reserved.

Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registeredoffice at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.

Designed and produced by The Creative Studio at Deloitte, London. 12294A

Member of Deloitte Touche Tohmatsu Limited

Documents

Charitable Incorporated Organisations A Guide to ... · A CIO is an incorporated body with a ... Charitable Incorporated OrganisationsA Guide to establishing your ... 10. Charitable