Small Business, Enterprise and Employment Bill

Written evidence submitted by Bates Wells Braithwaite (SB 79)

Dear Sir/Madam

Small Business, Enterprise and Employment Bill ("the Bill") – the impact on charitable and community interest companies

1. This firm specialises in providing legal advice to charities and voluntary sector organisations. We act for a large number of clients in the voluntary and community sector, ranging from household name charities to very small community organisations. We have been specialising in this work for several decades, and are regarded as one of the leading firms in this area.


2. Many of our clients are structured as companies – particularly companies limited by guarantee – and therefore stand to be affected by the changes to company reporting in the Bill.


3. One of the challenges for charities and community organisations, particularly those at the smaller end of the scale, is keeping up to date with regulation. We welcome the proposals to simplify the filing of annual returns, and the simplified procedures for notifying Companies House of the appointment of new directors and secretaries. However, we have serious concerns about the potential impact which the proposed new rules on "people with significant control" ("PSCs") may have on companies in the voluntary and community sector.


4. The rules, which are complicated, and therefore difficult to understand easily, may, as drafted, affect voluntary and community organisations structured as companies, including charitable companies and community interest companies.


Charitable companies

5. Charitable companies are usually structured as companies limited by guarantee, although in exceptional circumstances they may be limited by shares. While it would be unusual for a small number of individuals to be in control of a charitable company in the way envisaged by the Bill, there may well be circumstances where the proposed new rules would apply. These might include the following:


- Situations where the only members of a charitable company are its directors (called charity trustees), and there are less than four directors.

- Other situations where a charitable company has less than four members.

- Cases where a third party has a right to appoint members of the board.

- More complicated structures, involving a group of charities, where one or more charities have membership rights in another.

- A situation where a charity chief executive has "significant influence or control", depending on the definition of that term in the guidance accompanying the legislation.

6. If the proposed new rules are applied to charitable companies, these companies will first need to establish whether they are, in fact, caught by the PSC regime: this may well entail seeking legal advice. They will then, if appropriate, need to spend time compiling and maintaining their PSC register, and making appropriate returns to Companies House. The bureaucratic burden is exacerbated by the fact that, at present, companies limited by guarantee are not required to submit details of their membership to Companies House.


7. We are not convinced that this is a good use of charity resources. It is at odds with other moves to cut red tape for charitable and community organisations. Given that charities are already subject to considerable regulatory scrutiny and significant disclosure requirements, we find it difficult to believe that this additional bureaucratic burden is warranted in the circumstances.


8. We endorse the suggestion of the Charity Law Association Working Party on the Department for Business Innovation & Skills 2013 Discussion Paper: Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business to the effect that it should be sufficient for charitable companies to meet the disclosure obligations under the legislation by simply stating that they exist for charitable purposes and the public benefit.


Community interest companies limited by guarantee

9. It is our view that similar considerations apply to community interest companies limited by guarantee.


10. Community interest companies are legally obliged to pursue a stated community interest and report annually to the CIC regulator on how they do this. There are statutory restrictions on the distribution of assets to members, except where this achieves the company’s purposes. While shareholders of community interest companies limited by shares have some rights to dividends, community interest companies limited by guarantee may not distribute profits to their members.


11. We would, again, suggest that a statement that a community interest company limited by guarantee is set up for the community interest and maintains a non-profit distribution provision in its constitution should suffice to fulfil the PSC disclosure requirements.


Trading subsidiaries

12. A number of charities carry out trading activities or initiatives connected to their charitable purposes through wholly owned trading subsidiaries, usually structured as private companies limited by shares. An indirect effect of the disclosure obligations on these subsidiary companies will be the burden on the parent charities.


13. In line with proposals made by the Charity Law Association Working Party, we suggest that the PSC disclosure obligations of non-charitable companies that are wholly owned subsidiaries of charities should be limited to a requirement to state the name and registration details of the parent charity.



14. In our view, it would be appropriate for exemptions to be included in the legislation for all charitable companies (whether limited by guarantee or by shares) and all community interest companies limited by guarantee. Such companies would simply be required to state that they are established for charitable or community benefit, perhaps in the same way that companies which are exempt from including the word "limited" in their name may confirm that the company meets the conditions for the exemption.


15. Non-charitable companies which are wholly owned by charities should be subject to limited disclosure requirements.


We would be happy to discuss this further if the Committee would find that helpful.

November 2014

Prepared 13th November 2014