Converting a Charitable Company into a CIO

Regardless of size, any charitable company is now able to convert into a Charitable Incorporated Organisation (CIO). Because for a company this is simply a change of structure, the organisation retains its ‘corporate personality’ but is no longer required to follow Company Law regulations.

This means:

• no more sending accounts to Companies House, including the soon-to-be-implemented requirements to file accounts only using electronic software
• no need to comply with the new onerous requirements for charitable companies to verify the identity of directors with Companies House or maintain a physical ‘appropriate address’
• the possibility of being able to produce accounts on a receipts and payments basis rather than the accruals basis, which is a requirement for all companies

With this scheme now having been in place for some time, there are a number of aspects which are relatively straightforward compared with a conversion of one form of charity to another. In particular:

• Name - Generally the CIO can retain the name of the charitable company.
• Charity Number - the organisation can continue to use the same charity registration number.
• Bank accounts - it should be possible to retain existing bank accounts, although this may differ from bank to bank.
• Legacies - legacies that were payable to the company should be payable to the CIO.
• Employees - expected to be minimal disruption under the TUPE (Transfer of Undertakings protection of Employment) regulations.
• Contracts - existing contracts with the company should continue into the CIO, but this should be confirmed with the contracting party.
• Data consents - no new data consents are required under GDPR regulations.
• Property - in theory, a change in details in the title for land register will deal with this. However, given the potential value of this asset, taking professional advice would be sensible.
• Accounts - there are no going concern disclosures, or need for merger accounting, in the CIO’s first accounts. Because it is the same legal entity, just in a slightly different legal ‘wrapper’, it carries on as one entity from the last set of company accounts (with appropriate disclosure in the trustees’ report and notes regarding the conversion). Contact our team if you have any questions.

Where there might be problems

So far so good, but we can see areas for more consideration as well.

The Constitution

As part of the conversion process, a constitution for the CIO must be submitted and accepted by the Charity Commission. This constitution could:

• be written from scratch, most likely with the help of charity lawyers
• be based on a model constitution template (normally drawn up by an umbrella organisation, for example, Baptist Union) already agreed with the Commission and easily adapted to individual conversions
• be based on the Commission’s own model constitution templates, but here it should be noted that these templates do not allow for the employment of trustees or connected persons. This means that in their raw state they will not be suitable for many churches.
• use the company’s existing governing documents as the basis for the new constitution. This may appear a straightforward approach, but as the mind-set of the Commission evolves over time, what may have been acceptable previously may no longer be now. The employment of trustees, omitted from their own model constitution templates, is one particular area that may cause problems.

Note that, whichever approach to drafting the CIO constitution is followed, the Charity Commission require that the new constitution supplied to them as part of the application to convert, shows and explains any differences between that and the Charity Commission’s template CIO constitution. From more recent experience, this is not proving as simple as had been expected. This is one of the reasons we are recommending that experienced charity law advice is used to help with the process.

Additional changes prior to conversion

There are some ‘regulated amendments’ that will be required to be approved by the Charity Commission prior to the conversion process, these include:

• widening the trustee benefit rules, which will often be the effect of adopting the Charity Commission’s standard CIO provisions. In addition, for churches intending to pay its pastor or minister, who is also a trustee, this clause will need to be drafted differently.
• fundamental changes to the dissolution provisions.

It may seem that legal help with the conversion is a cost that could be avoided but I believe, unless the result is for the new constitution to be almost identical to the Charity Commission current model CIO constitution, this is a cost worth paying. This may change in the future but at the time of writing I believe it to be the case.

Other areas to look out for

• Loans - where the charitable company has a loan, it will need to determine whether conversion could be construed as an event of default. If you have mortgages or bank loans, you must check with them before embarking on this process to understand whether they would continue to lend to the charity if you become a CIO. If so, no problem. If not, however, you would either have to remain as a charitable company until the mortgage is repaid or seek to refinance the loan from a lender who will lend to a CIO.
• Pension obligations - where the company has pension obligations, particularly a deficit on a defined benefit pension scheme, it will need to determine whether the conversion will trigger the payment of employer debt. Given the size of some debts, this will almost certainly require specialist advice.

The conversion process

Applications are made using an online form found on the Charity Commission website. Each application will require:

• a resolution confirming the decision to convert
• the proposed constitution
• the resolution adopting the proposed constitution
• a declaration that the trustees of the CIO are eligible to serve as trustees

Following checks carried out by the Charity Commission, they will ask Companies House to remove the Company from the register of companies, at which time the conversion will be complete.

Conclusion

With the changing requirements for limited companies coming in the near future and the expectation of further changes so that Companies House becomes a more effective regulator, there are likely to be increased burdens on charities which remain as companies.

We do see CIOs as the way forward for the vast majority of charities, and moving to them is very likely to be a good long-term investment for most. We expect the likely benefits to outweigh the costs and short-term issues in most cases.

We are caveating this with the recommendation to have legal help with the conversion process at the moment. Also, it is vital to make sure before you start that, where there are lenders to the charity, they will be happy to be lending to your charity as a CIO.