How to Convert Charity to CIC Without Mistakes in the UK?

In the UK, many charitable organisations are seeking alternative structures to meet their social objectives. Although a traditional registered charity is the standard for many, the strict regulatory requirements of the Charity Commission can sometimes feel restrictive. If your organisation wants to operate with fewer regulatory requirements and is looking to trade more freely, you might be wondering how to convert a charity to a CIC.  This guide explains how you can convert a charity to a CIC step by step. The guide also walks you through the legal requirements and key considerations.

What is CIC in the UK?

Before discussing how to convert charity to CIC, it is essential to understand what a CIC is. CIC stands for Community Interest Company, which is a special type of limited company designed for social enterprises that want to use their profits for the public good. Moreover, a CIC offers more operational flexibility and fewer restrictions on trading activities. It provides a middle ground between a charity and a standard business. A CIC allows commercial trading while ensuring the community remains the primary beneficiary.

Why Convert a Charity to a CIC?

Another crucial concept to understand before diving into how to convert charity to CIC is why you might move a charity to a CIC. Charities have restrictions on trading, but a CIC is designed to trade more freely. While a CIC cannot offer donors business rate relief or Gift Aid like a charity can, it allows directors to be paid more easily. It also offers a simpler reporting structure through the CIC Regulator rather than the Charity Commission. Additionally, a CIC has an asset lock to ensure assets are used for public benefit, just like a charity.

Can You Change a Charity To a CIC?

A key part of knowing how to convert charity to CIC is understanding whether you can change your organisation to a CIC, and the answer is yes. You can change a charity to a Community Interest Company, but the process depends on whether your charity is already incorporated as a company.

If Your Charity is Incorporated

You can use a direct conversion process if your charity is currently a company limited by guarantee (CLG). However, you must first get approval from the Charity Commission for England and Wales. It will approve the change if charitable assets are properly transferred or protected. After approval, you can amend your Articles and change the company’s name. Then submit the required documents to Companies House with approval from the Office of the Regulator of Community Interest Companies. Your organisation is then removed from the charity register.

If Your Charity is Unincorporated

If your organisation is unincorporated, you cannot convert it directly into a CIC. You must set up a new CIC and transfer the assets and staff into it, and then close the original charity. However, you must get permission from the Charity Commission for England and Wales and ensure all assets are properly transferred.

How to Convert Charity to CIC in the UK

Follow these steps to convert a charity to a CIC.

• Approval and Governance

The first step is to get trustee approval and review governance. Your board of trustees must review the governing documents. You need to pass a formal resolution to convert the organisation. Moreover, you cannot simply withdraw funds because the assets are locked for charitable purposes. They must be handled in accordance with your existing dissolution clause.

• Receive Permission From Charity Commission

It is not possible to convert a charity into a CIC with a single click. You need to inform the Charity Commission, and for that, you must apply to the Charity Commission for England and Wales. It will assess whether the conversion benefits the public. If your charity has significant assets, it will ensure they are transferred to an organisation with similar objects. Note: Approval from the Charity Commission is necessary because, without it, you cannot proceed with the conversion.

• Identify Your Charity Type

When deciding how to convert charity to CIC, you must first identify your charity type. As mentioned above, the process differs depending on the structure. For example, if you are a charitable company, you may convert directly into a CIC. But if you are an unincorporated charity,  you are not directly converted. You are required to set up a new CIC and transfer operations.

• Protect and Transfer Assets

An important part of how to convert charity to CIC is protecting and transferring assets. Your organisation must ensure that your charitable funds remain dedicated to public benefit. You must have a statutory asset lock that ensures the company’s profits and assets cannot be distributed among members. Prepare a community interest statement, which will be reviewed by the Office of the Regulator of Community Interest Companies.

•  Filing With Companies House

File form CIC36 for a new CIC and form CIC37 to convert an existing company. With form CIC36, you also need to file incorporation documents and Articles of Association. The CIC Regulator will review your community interest test to ensure your activities are benefiting the community.

• Transfer Operations

If a new CIC is created, staff are transferred under the Transfer of Undertakings (Protection of Employment) Regulations. Also, the assets are transferred in line with regulatory approval.

• Close The Charity

The last step in the process of how to convert charity to CIC is to inform the Charity Commission. Your charity will be formally dissolved.

Is a CIC Better Than a Charity?

Whether a CIC is better than a charity depends on your goals. A CIC allows you to trade and gain profits. It can be an opportunity to attract investment while keeping its social goal. Additionally, it is suitable for social enterprises that want to operate more like a business. On the other hand, a charity benefits from tax reliefs. It may recieve 80% to 100% business rates relief and does not pay Corporation tax on most profits. Moreover, it can claim Gift Aid and enjoy higher public trust. Choosing between these two options depends on your priority. If it is operational flexibility and growth, select a CIC, and if you want tax advantages, choose a charity.

What are the Disadvantages of a CIC?

Common questions people ask include “how to convert charity to CIC” and “ are there any disadvantages of a CIC”. The answer is yes, there are a few disadvantages, such as:

• CIC cannot claim Gift Aid on donations like charities do
• It has free tax reliefs, which can make it difficult to raise funds
• It has an asset lock and dividend caps, which limit returns to shareholders. It also restricts reinvestment flexibility
• The Office of the Regulator of Community Interest Companies monitors CICs and requires them to submit annual community interest reports and comply with the asset lock.
• A CIC can sometimes be perceived as less trustworthy compared to a charity

How Many Directors Does a CIC Need?

A CIC in the UK is legally required to have at least one director if it is limited by shares. However, if it is limited by guarantee, it must have at least two directors. All directors must meet the UK standard legal requirements for company directors and must act in the company’s best interest.

The Bottom Line

In conclusion, knowing how to convert charity to CIC is about balancing legal compliance with your social purpose. Although the transition involves more administrative work, the result is a more commercially driven organisation that can still benefit the community. Before making a decision, it is best to seek professional assistance because the loss of charitable tax status can have a major impact on your bottom line. MicroentityAccounts is the best accounting firm in the UK that can help you with your taxes. We have a team of professionals who handle your tax filing duties online. Receive the accounting services at a reasonable price, starting from £5+ VAT. The content provided on Micro-Entity Accounts, including our blog and articles, is for general informational purposes only and does not constitute financial, accounting, or legal advice.