Draft Community Interest Company (Amendment) Regulations 2012
The Committee consisted of the following Members:
† Anderson, Mr David (Blaydon) (Lab)
† Barclay, Stephen (North East Cambridgeshire) (Con)
Blears, Hazel (Salford and Eccles) (Lab)
† Burt, Lorely (Solihull) (LD)
† Evans, Graham (Weaver Vale) (Con)
† Field, Mr Frank (Birkenhead) (Lab)
† Gyimah, Mr Sam (East Surrey) (Con)
† Holloway, Mr Adam (Gravesham) (Con)
† Lamb, Norman (Parliamentary Under-Secretary of State for Business, Innovation and Skills)
Lammy, Mr David (Tottenham) (Lab)
† Mitchell, Austin (Great Grimsby) (Lab)
† Morgan, Nicky (Loughborough) (Con)
† Murray, Ian (Edinburgh South) (Lab)
† Newton, Sarah (Truro and Falmouth) (Con)
† Ollerenshaw, Eric (Lancaster and Fleetwood) (Con)
† Ruane, Chris (Vale of Clwyd) (Lab)
† Shannon, Jim (Strangford) (DUP)
† Wright, Jeremy (Lord Commissioner of Her Majesty's Treasury)
Mark Etherton, Committee Clerk
† attended the Committee
First Delegated Legislation Committee
Tuesday 4 September 2012
[Mr Dai Havard in the Chair]
Draft
Community Interest Company (Amendment) Regulations
2012
10.30 am
The Parliamentary Under-Secretary of State for Business, Innovation and Skills (Norman Lamb): I beg to move,
That the Committee has considered the draft Community Interest Company (Amendment) Regulations 2012.
It is a great pleasure to serve under you, Mr Havard, for what I think is the first time. I am sure that we are all delighted to be back.
Mr Frank Field (Birkenhead) (Lab): Can we have a vote on that?
The Chair: We will not divide on that.
Norman Lamb: The community interest company form was introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005. It is fair to say that they are widely regarded as having been a great success. There are now about 6,900 CICs registered, with about 2,000 registrations per year. About 850 CICs have dissolved, but I think the form is widely regarded as successful.
The legislation created a new type of company, tailored for social enterprise, that wanted to use the familiar company form, but with the assurance that assets would primarily be used for the benefit of the community. The new form was intended to complement existing and well-established forms, such as charities and industrial and provident societies, which are also commonly used in the social enterprise sector.
Since the legislation came into force in July 2005, more than 6,900 social entrepreneurs or social enterprises have chosen to register as community interest companies. Community interest companies carry out a wide range of activities, taking in sectors such as health and social care, retail, manufacture, environmental, business support, working with young people not in education or training, older people, addressing cultural needs, and running community cafés and centres.
The regulator of community interest companies is an independent regulator for this legal structure. On registration, CICs must demonstrate to the regulator that they will operate for the benefit of the community. They are then monitored and supported to ensure that they continue to operate in the interest of community benefit and are transparent in the way that they do that. They are subject to restrictions on the transfer and distribution of their assets to ensure that there is limited or no private gain.
The community interest company report is a key feature of the model. The directors of a community interest company must produce the report annually to show to the public and to the regulator that the community
interest company is continuing to meet the community interest test and engaging appropriately with stakeholders.When the Companies Act 2006 came into force in 2009, it made a number of changes. One of these changes unfortunately created a gap, so while all CICs have to prepare an annual report, not all of them have to file a copy of it. Filing a copy of the report is optional for small companies, which benefit from certain accounts and reporting exemptions, but it was always intended that it should be compulsory for all CICs to file a copy of the report on their activities. The vast majority of CICs are small companies, and so inadvertently fall within the exemption. I am delighted to reassure the Committee that in practice CICs have filed reports, largely because they are blissfully ignorant of the mistake in the legislation. However, it is important to put the point beyond doubt; indeed, Parliament imposed a duty on Ministers to do so.
The draft regulations will reinstate the provision requiring the directors of all CICs to submit a copy of the annual community interest company report to the Registrar of Companies within the period for filing the CIC’s annual accounts. The reports will be placed on public record and sent by the registrar to the regulator to be monitored. As was always intended, the regulations will apply late-filing penalties if the CIC report is received after the filing deadline, and will also ensure that the transparency offered by the submission and publication of the CIC reports continues. I therefore commend the regulations to the Committee.
10.35 am
Ian Murray (Edinburgh South) (Lab): It is a pleasure to serve under your chairmanship, Mr Havard. It is great to be back after the summer.
I have a certain sense of déjà vu. There were dozens of sittings of the Enterprise and Regulatory Reform Bill Committee before the summer recess, and it seems to be exactly the same people on this Committee. They have either done something right or something wrong. I hope that the Minister has not turned his phone off, given the reshuffle that is going on today. The Minister is a Liberal Democrat—he will be very interested to hear that the chairmanship of the Conservative party is up for grabs.
I do not wish to delay the Committee because we are all in agreement. The Minister has already told us about the popularity of CICs and that many already submit these papers along the standard lines and are unaware of the loophole in the legislation. I want to pose some questions—perhaps he can respond to some of the issues that have arisen since the statutory instrument was published?
Can the Minister clarify the deadline and penalties that will apply to late submission of the community interest report and CIC accounts and reports? In that regard, do CICs have to comply with the Companies Act 2006 in the same way as normal companies?
What measures will the Minister take to ensure that CICs are aware of the change in the regulations and the fact that it is now compulsory to submit community interest reports as part of the normal cycle of accounts? He did not say whether he had received any representations from those organisations. Have any concerns been raised about the burden of these reports? Given that we rarely
talk about CICs in the House, will he take the opportunity to provide information about how the Government will promote the use of these vehicles, given the current economic climate and the fact that they are popular?Finally, Lord Hodgson, during the debate on the statutory instrument in the other place, raised concerns about whether it would place onerous burdens of cost and administration on those companies. Will the Minister indicate whether the situation will be monitored to make sure that we are not undermining the CICs? As the Minister said, many are very small enterprises and it would be a shame to place so many burdens on them that they become untenable to run.
I will not delay the Committee. We are very much in support of the SI, but I would welcome the Minister’s assurances on those questions.
10.38 am
Austin Mitchell (Great Grimsby) (Lab): It is a pleasure to serve under your chairmanship, Mr Havard. I have the renewed pleasure of coming back for the short, purposeless session to show that we are active in the summer rather than swanning on beaches around the world.
The measure is fairly simple. Since we are waiting with intense excitement for the results of the reshuffle to be announced—colleagues on the Government Benches must be in a state of real tension—perhaps it is pertinent to ask a couple of questions, which I could not answer from the analysis that has been given.
First, who draws up and audits the community interest reports, which are very desirable and are now being made standard? If an external auditor is employed by the not-for-profit company, do they audit the report or is it audited by somebody else? How do we know that assurances given in the report that the company is continuing to serve community purposes are valid and have been assessed and audited?
Secondly, what kind of bodies does this measure apply to? A number of big companies have been specially created to leech on the state by taking over functions previously exercised by the state. The classic example is A4e—is that a community interest company? The Minister said that there was limited or no private gain involved for these companies, but there has been very substantial private gain for the head of A4e. From the discussions at the Public Accounts Committee, there seems to me to have been a very inadequate system of internal audit to see what that company was doing, where mistakes were being made and where it was overclaiming for returning people to work.
Those are my two simple questions. I hope that the Minister can answer them before we conclude these proceedings.
10.40 am
Jim Shannon (Strangford) (DUP) rose—
The Chair: Mr Shannon. Sorry, my brains have gone. I forgot to call you.
Jim Shannon: I want to ask the Minister a couple of quick questions. In Northern Ireland we have a legion of small companies, so any legislative change will impact
upon a greater number of companies and a greater number of people. I understand that, in 2007, the Northern Ireland Assembly brought in some legislative change. Can I confirm that the regulations will mean further legislative change for Northern Ireland, as I think is probably the case? Can the Minister tell me whether there has been contact with the Assembly and in particular with Arlene Foster, the Minister of Enterprise, Trade and Industry? If that is the case, is this the first time that England is following Northern Ireland when it comes to legislative change, or is it the other way around?10.42 am
Norman Lamb: With regard to the question from the hon. Member for Strangford, I understand that there has been contact with the Administration in Northern Ireland on this matter. In response both to the hon. Gentleman and to the shadow Minister, I would stress that, although the regulations theoretically impose a burden, it is a burden that community interest companies are already meeting, because they all assume that they have to. When this model was first introduced they were required to prepare the report and then to file it, and they have continued to do so all the way through. They were blissfully unaware that, inadvertently, a change had removed the requirement for small companies to file the report, and so they have carried on doing so. Correcting the error, to reintroduce the requirement to file, makes no difference in terms of the burden on companies, because they are doing it anyway.
One of the important aspects of community interest companies is their accountability. The very light-touch obligation upon those companies—simply to set out in a report what they are doing as a company and to file that report once a year—is accepted and indeed welcomed by the sector, because it wants that accountability. The obligation puts that information into the public domain.
To answer the question from the hon. Member for Great Grimsby, the report would normally be prepared by the directors of the company. However, it is put into the public domain so that if people locally have concerns about the operation of the company—they feel that it may be straying from its original purpose or not doing what it says it is in its report—it can be held to account.
The shadow Minister raised the question of penalties. If company directors fail to file their accounts and reports on time, including the CIC report, the company will be liable for a late-filing penalty when the directors eventually do file. The level of the penalty depends on how late the accounts and reports reach Companies House; there is a schedule that sets out the relevant penalties. The directors may also be personally liable: failure to deliver accounts and reports on time, including the CIC report, is a criminal offence punishable with a fine of up to £5,000 and a daily default fine of £500. There are also powers in the Companies Act 2006 to order directors to comply with their filing duties.
As the Minister, I want to do all I can to proselytise for the use of this model. I am a great advocate of social enterprise, and this model provides an excellent vehicle for it. The regulator promotes the activities of CICs and has detailed information on its website.
On representations received, CICs are filing their accounts anyway, so we have not gone through the usual consultation process because, in effect, we are not
introducing a new burden on them. In terms of any grand process for making people aware of this change, it is important that the regulator provides as much information as possible to those in the sector to ensure that they understand their obligations, but they all assume that they are under this obligation already.No late-filing penalties will be applied unless CIC directors miss the deadline to file their company’s annual accounts and reports in relation to financial years ending
on or after 1 October 2012. In the interim, Companies House will send a reminder to companies to submit their CIC report if it is not filed on time. However, the level of compliance is very high; the sector recognises its obligation and seeks to meet it. I hope that I have answered hon. Members’ questions.