On 30th October 2012 Nick Hurd the Minister for Civil Society laid the draft secondary legislation before Parliament which is needed to give effect to the Charitable Incorporated Organisation (CIO). Subject to Parliament’s approval the charity sector could have a new corporate and legal structure designed specifically for them, with the possibility of the Charity Commission receiving the first applications to set up CIOs by the end of this year.

Currently the Charities Act 2011 sets out the basic legal framework for CIOs. Secondary legislation will, however, govern the operation of CIOs as well as setting out the model constitution.

One of the main benefits of CIO is that it will enable charities to have their own legal personalities with reduced personal liability for their members and trustees. At present charities suffer a dual regulatory burden from both the Charity Commission and Companies House. The regulatory burden on CIOs will be simplified. The key characteristics of a CIO are as follows:

• They only need to register with the Charity Commission and are regulated by charity law and not company law;
• All CIOs are registered charities and as soon as an organisation is accepted by the Charity Commission its details will be entered in the register for charities;
• CIOs will have a separate legal personality which will enable them to contract and hold property in their own name, which will limit liability of the trustees and members;
• The reporting process and accounting requirements will be less onerous as the CIO will be governed by Charities Act alone rather than the Companies Act. Furthermore, due to the fact that the CIO will be governed by the Charity Commission only it will need to prepare one set of annual returns and send them to the Commission and not to Companies House;
• Setting up a CIO will also be a simpler and cheaper process. The Commission has produced two forms of model constitution which should be used by the CIO, and the registration and filing of information is currently free of charge. The Commission aims to decide on an application within 40 days of receiving the application documentation.

Implementation will be phased in, and a proposed timeline has been put forward by the Minister for Civil Society in his recent Written Ministerial Statement for the receipt by the Charity Commission of applications for the CIO structure:

1. From brand new charities with anticipated annual income of over £5,000, as soon as the Secondary Legislation is approve by Parliament
2. From existing unincorporated charities with annual income over £250,000, March 2013
3. From existing unincorporated charities with annual income between £100,000 and £250,000, May 2013
4. From existing unincorporated charities with annual income between £25,000 and £100,000,  July 2013
5. From existing unincorporated charities with annual income between £5,000 and £25,000, October 2013
6. From all unincorporated charities,  January 2014

The current proposal being considered by Parliament does not make provision for the conversion of charitable companies limited by guarantee, community interest companies, or charitable industrial and provident societies. These entities will considered separately by other secondary legislation in due course.

As mentioned before we believe that the CIO structure will be most appealing for small to medium sized organisations which employ staff and / or enter into contracts. However, the CIO structure might be less suitable for larger charities or charities which seek to raise funds through issuing debentures or routinely borrow money against the security of their property.

This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in November 2012. If you would like further information, please contact Robert Macro, Head of Druces’ Private Client team.