Fundraising for Community Interest Companies

Some time ago we wrote an article asking “What’s the point of Community Interest Companies?”. In it we highlighted that one of the key drawbacks of CICs, compared with charities, is access to funding.

In particular, while there are grant schemes that CICs can access (e.g. from the National Lottery or local government), most charitable grant makers will not fund CICs. This is understandable because, legally speaking, charitable trusts and foundations are only allowed to fund activities that are charitable and for public benefit. The safest way for them to make sure of this is to limit eligibility to charities, because charities must be established for exclusively charitable purposes and for public benefit. CICs, on the other hand, are not charities and can deliver a mix of charitable and non-charitable activities.

In addition, corporate donors are often reluctant to donate to CICs. This is because CICs are not charities, which means that the company making the donation does not benefit from any tax relief on their donation. The same can be true for individual donors who are higher rate tax payers (and, of course, a CIC cannot claim gift aid on individual donations like a charity can).

Nonetheless, the number of people choosing to set up a CIC rather than a charity is growing, even when their business model relies on access to funding sources that are more traditionally for charities (such as grants and donations). This is almost certainly because it is much simpler (and cheaper) to register a CIC rather than a charity and the regulatory burden and constraints are much less for a CIC. In some cases it is because the founder wants to remain in control and earn a living from the work of the CIC. The reduced access to funding for CICs is just the price they choose to pay.

However, there is evidence both from our experience and regulators, that many CIC founders do not understand that a CIC is not (by definition) a charity. For example, the Fundraising Regulator reports that 1 in 9 complaints it receives are about fundraising by CICs. A common reason for these complaints is that a CIC has been misleading in its fundraising, often holding itself out to be a charity. Many of the CICs we come into contact with also describe themselves as a charity on their website and in their literature. To present an organisation as a charity when it is not is a serious matter (and potentially fraud).

Therefore, it is important that CICs understand the distinction and respect the limitations that not being a charity brings to fundraising.

Nonetheless, there are some things a CIC can do to improve access to funding when their business model relies on grants and/or donations. For example:

• When seeking funding from a corporate partner, the CIC could work with the company to structure the relationship so that the company is purchasing services from the CIC (even if on behalf of others), rather than making a donation. The company could then treat that as a business expense, with attendant tax benefits. Of course the company should get its own accountancy advice on this and the CIC needs to be aware of the potential VAT implications of increasing its trading income.

• Rather than applying for grants itself, a CIC could consider partnering with a registered charity, with the charity leading the grant application and “subcontracting” some of the services to be funded by the grant to the CIC. Again the CIC and the charity should get advice on the VAT implications of such arrangements and the charity must be confident that the services it is buying from the CIC are a legitimate use of its funds (i.e. that they are charitable services for public benefit or genuinely ancillary to charitable services).

These options will not be appropriate for many CICs.

As a result, we are now seeing significant growth in the number of enquiries about converting a CIC into a CIO (charitable incorporated organisation). In some cases this is because the wrong structure was chosen in the first place, while in other cases it is driven by the limited access to funding that CICs have and the increasingly challenging grant funding landscape in the UK.

While such conversions are possible, often the CIC will will need to restructure its activities to meet the requirements to be a charity. For example:

• The founder and any other employees who are Directors of the CIC will need to leave the Board and accept accountability to a Board of Trustees.

• Non-charitable activities may need to stop, or be transferred to a trading subsidiary, to ensure that the CIO (after conversion) is established for exclusively charitable purposes.

All this means that setting up a CIC rather than charity because it is simpler and/or so the founder can retain control, may ultimately be a false economy, highlighting the importance of getting good advice on legal structures before setting up a new non-profit organisation.

To find out more about the support we offer for charities and CICs please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion.