The emergence of the new CIO status

In England and Wales, we are extremely fortunate in that we benefit from a dynamic and energetic charitable sector. Our charities encompass huge diversity in terms of size, activities undertaken and the wide range of causes that receive funding. Retaining and enhancing the burgeoning reputation of the sector is a responsibility that we all share and effective accountability is a vital factor in achieving this.

As a part of this, the Government has set out a framework which maps out the way in which charities should report and account – this is supplemented by the charities Statement of Recommended Practice and must be adhered to by law. Recently, changes have been made to this legislation, making it even more important for charities to be up to speed on how they may be affected and ensure that internal processes are kept up to date.

You may think that the differences between a corporation and a charity are vast – and in many respects they are. However, until recently, charitable organisations were expected to comply with the same mainstream corporate structures used to shape limited companies.

Similar arrangement

This was until the latest changes, when a new legal entity was introduced by the Charities Act 2011 – the Charitable Incorporated Organisation (CIO). The CIO is a similar arrangement to that of a company limited guarantee – the structure currently favoured within the third sector. Unlike a limited guarantee, a CIO can only be issued to a charity where its activities are believed to be "charitable in law" – a positive enforcement which limits the arrangement to organisations which act in the public benefit.

The main provisions of the Act, which are necessary to complete the legal framework for a CIO, came into force on 2 January 2013 and implementation has been phased in by the Charity Commission during 2013. The remaining provisions will be implemented during 2014.

From 1 January 2014, CIOs will extend to include:

• Brand new CIOs with anticipated annual incomes of less than £5,000.

• Existing unincorporated charities with an annual income of less than £5,000 which will be able to set up a CIO and transfer assets to it.

One repercussion of the CIO introduction is that different legal accounting requirements now apply across the third sector. These requirements depend on whether the charity is a company or CIO and into which income category it falls.

If a charity’s gross income is less than £250,000, adopting a CIO policy allows for preparation of accounts to be based on receipts and payments. Higher grossing CIOs, however, must operate in accordance with the Charities Regulations 2008 and the Statement of Recommended Practice, preparing accounts on an accruals basis.

As with any legislation, the CIO will be more suited to some charities than others. There will also be a period of settling in before we’re really able to gauge its impact on the industry as a whole.

Recognisable advantages

Despite this "waiting game", there are several recognisable advantages that will attract attention in certain quarters – most notably the fact that a CIO only has to be registered with the Charity Commission, as opposed to Companies House. This will allow charities to benefit from less time-consuming and often costly administration, whilst enjoying a higher level of flexibility.

Being registered with the Charity Commission also enables an organisation to conduct business under the name of the charity itself, rather than the names of its trustees. This allows an increase in brand exposure, whilst protecting trustees against any contractual liabilities by ring-fencing the charity’s assets within the CIO.

With this in mind, the introduction of a CIO seems extremely advantageous. There is some concern however, about the length of time that registering a legal entity of this type could take. Under Companies House, a new organisation can become incorporated in just one day. Until the CIO system has been fully tried and tested, the length of the registration process is unclear and could take months.

It’s not only this that has thrown up concerns – the entire operation of a CIO is yet to be truly proven. As with any legislative changes, there are bound to be teething problems which will need to be ironed out over time. This could make for a bumpy ride for early adopters and be much less straightforward than running an unincorporated association or charitable trust.

Reduced burdens

Essentially, the primary intention of a CIO is to provide qualifying organisations with the benefits of a company, whilst relieving them of some of the burdens. Only time will tell whether its introduction will have the desired effect, or simply create additional layers of complexities and bureaucracy in an already over-burdened sector.

Finally, here are some tips for charities converting to the CIO framework:

1. WEBSITES – take advantage of the free (and very useful) websites that are available for information. For example, if you are not sure about the right structure for your charity take a look at the Charity Commission’s guidance on the structures available for charities set out in its detailed guidance (choosing and preparing a governing document). This is available through the Commission’s website.

2. PURPOSE – careful consideration should be given to how the trustees are appointed, the identity of the members and the purpose of the charity itself.

3. ADVICE – charities should take specialist legal and accounting advice from the outset about the form and structure of the charity, to ensure that it achieves the charity’s aims and to avoid making costly and time consuming mistakes.

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