Locked and loaded: the rise of Community Interest Companies (CICs)

30th July 2015

The rising trend in investing in social enterprises and renewable energy projects, for the good of the community.
Since their inception in 2004, Community Interest Companies (CICs) have become increasingly popular for limited liability companies wishing to invest their profits into the local community, or for the public good. There are two primary differences between a CIC and an ordinary limited company:
• CICs must benefit the community; and
• CICs must have an asset-lock (which extends to profits or any surpluses generated).

Due to their nature, the incorporation of CICs is more complex than for normal limited companies. As with charities, CICs cannot be a political party or involved in political campaigning. Additionally, they are prohibited from being a charity; a charity can become a CIC, but it will lose its charitable status. It is permitted for a charity to own a CIC, however.

There has been a recent shift within the renewable energy sector towards using CICs as part of the legal structure for projects, primarily driven by planning policy. According to the Department of Energy & Climate Change (DECC), more than 5000 community groups have set up an energy initiative in the last 5 years (including wind, solar and heat pump projects.).

A CIC will satisfy the mandatory community interest test if it can show that a reasonable person might consider that its activities are being carried out for the benefit of the community, and not just a particular body or person. In practice there is an emphasis on providing support to the immediate community in which the CIC operates. This community interest requirement must be evidenced by the proposed CIC in the community interest statement before incorporation; without it the application will be rejected by the regulator.

The asset-lock is an essential component of the CIC premise, requiring companies to ensure that their assets are not sold at an under-value, or if the asset is sold at an under-value it is to another CIC. Assets may be sold for less than their market value if it is for the public’s benefit, but this may require permission from the regulator. The purpose of the asset-lock is to ensure that a CIC’s assets (including profits) are applied for the benefit of the community and cannot be stripped out by a commercial enterprise.

Interestingly, the regulations in relation to CICs were relaxed in 2014. The maximum dividend per share cap was removed, along with the requirement that CICs report on the amount of dividends paid and any unused dividend capacity carried over in the four years preceding the report. Currently, the dividend cap still exists in only one form: to impose a maximum aggregate dividend of 35% of all distributable profits. Therefore, it seems that the community protection and public interest in renewable energy sources have led to CICs becoming a popular choice for companies with a social enterprise agenda, and more favourable regulations for CICs have encouraged their growth.
If you wish to discuss any of the issues raised in this article or would like assistance with updating your terms of business please contact Chris Wills, Director, on 01872 226992 or chris@murrellassociates.co.uk or Melanie Brown, author of the article.
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 30 July 2015. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, July 2015.