Comments and analysis by Kathryn Parker and Andrew Passey, ACCORD

Enterprise for Communities: Proposals for a Community Interest Company, is a consultation document, published recently by the UK Department of Trade and Industry, HM Treasury and Home Office. The document sets out proposals for developing a new kind of incorporation - the Community Interest Company (CIC). The proposals stem from a previous British government report Private Action, Public Benefit that reviewed voluntary sector law and regulation, and recommended the development of proposals for a CIC.

The aim of the proposals is for a new entity that will have the flexibility of the company form, but with special features that protect community interest by locking in profits and assets for the public good. This combination, will hopefully, appeal to social investors and venture capitalists alike, and endow a strong brand image on social enterprise in the UK. As the paper notes:

"CICs will be registered as companies in the usual way, but with an additional requirement to show that they are dedicated to the community interest. They will use their assets and profits for the benefit of the community or the wider public. They will report to an independent regulator on how they are delivering on that commitment, and on how they are involving their stakeholders in their activities".

The consultation asked, especially, for comments on: the role of the regulator; the parameters of a community interest test; the limits to CIC status (especially the proposed exclusion of political parties and organisations working for them); the issuing by CICs of tradable fixed or capped rates shares (and the level of any cap); reporting requirements (over and above annual statements, to include how stakeholders have been involved in the organisation); involvement of stakeholders in governance (whether or not, this should be a statutory requirement); and limits to investor powers.

The consultation closed in June 2003

The community interest test, finance issues, regulations, and international best practice aspects are summarised below:

The proposal to grant Community Interest Companies special regulatory and legal status for community and social enterprises is innovative and worthy of careful examination in view of potential transferability to Australia. The new company CIC form enables profits and assets to be used for the public good. It presets new opportunities for social enterprises to benefit communities. CICs are easy to establish and flexible with special features that guarantee public and community benefits.

A community interest test is required to demonstrate that a CIC is operating in the 'community's interest.' The requirements of the test are detailed in the 'Working Paper: The Community Interest Test' by the UK Department of Trade and Industry (DTI) http://www.dti.gov.uk/cics/paper.htm. The CIC's purposes are described in the company's object clause in its memorandum of association, and supplemented by additional explanatory material in a community interest statement.

Communities are defined in terms of geographical area or as a community of interest. The test is seen as wider and more flexible than the test of public benefit used by the Charity Commission, and the courts, to determine charitable status in England and Wales.

The main 'finance consideration' of the CIC structure, is to determine how it could use its assets and profits for the benefit of the community and public interest. The requirements on CICs' use of assets, profits and equity are detailed in a separate 'Working Paper: Finance for CICs' by the DTI. The intention of the CIC structure is to improve access to finance for social enterprises that face serious demand and supply issues. These issues are identified in the May 2003, Bank of England (BOE) report, 'The Financing of Social Enterprises: A Special Report'.

The CIC proposes a special 'lock on profits and assets' that is applied by the regulator on registration to ensure that CICs use their profits and assets for the public good. This means that CICs must demonstrate that assets are purchased and sold in accordance with stated community or public purpose objectives. In the event of a default, creditors of a CIC have the same rights as other companies, except that residual assets (assets remaining after creditors have been paid) are safeguarded by the regulator for public benefit purposes.

In terms of debt, CICs will have the capacity to raise debt (loans, bonds, lease agreement, etc) in commercial markets on the same terms as other companies. Currently, there is a debate about whether CICs should be able to issue equity shares. The concept of unrestricted distribution of profits to shareholders is seen as incompatible with the proposed 'lock on profits and assets'. The UK Government is proposing that the lock on profits be relaxed for a limited period, to enable CICs to offer a return on equity investment, for example, by issuing fixed or capped rate investor shares that can be traded (similar to preference shares). The UK Government is also seeking views on the issues raised by the involvement and powers of investors in CIC governance, as well as possible markets for shares in CICs.

The independent regulatory reporting requirements on CICs are detailed in the 'Working Paper: The CIC Regulator' by the DTI. Companies House will register CICs as companies with, and subject to, ordinary company law. However, the special registration and reporting functions required for CIC status, will be assessed separately by Companies House, who has the power to investigate any CICs suspected of breaching their regulatory obligations.

It is expected that there will only be a small number of CICs because of their community and public benefit requirements, as well as the lock on assets and profit distribution, and that they are geared more towards not-for-profit operations.

The 'Information Paper on CICs: International Comparisons' by the UK DTI provides an international perspective on policy developments that encourage social and community enterprises. The paper discusses some of the following issues:

Definitions of social enterprises, mainly drawing on the European experience in the non-for-profit co-operatives sector, and their defined legal forms and support mechanisms. The DTI's social enterprise definition focuses mainly on businesses whose surpluses are reinvested for community benefit rather than the need to maximise profits for shareholders and owners;

• How these businesses are recognised internationally - this recognition differs substantially from country to country, generally by their non-profit characteristics;
• Finance issues mainly relate to the restrictions that social enterprises have in raising equity finance. Comparisons in the way Non-Profits distribute profits are made with reference to Spanish co-operatives, Italian social co-operatives, and Finnish government tax incentives to retain profits.
• Recent UK Government policy changes that support social enterprises are discussed. The UK's Phoenix Fund and Community Investment Tax Relief are discussed in terms of the way they encourage investment in Community Development Finance Institutions (CDFIs), provide tax relief and loan possibilities for social enterprises and conventional small businesses in disadvantaged and poor areas.