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Lord Glentoran: I support Amendment No. 101 in the name of the noble Lord, Lord Phillips. I wish to speak also to Amendment No. 102, which stands in my name, and to discuss the inclusion of Clauses 36, 37, 51 and 52.
I shall not embark at the moment on a general debate concerning our thoughts on CICs, as that will form the basis of my comments when speaking to the Question whether Clause 23 shall stand part of the Bill. For now, I wish to focus on one particular aspect of Clause 23 and the proposals for CICs; namely, that they should be prohibited from having charitable status. These amendments are put forward to probe what I see as a fundamental element of the new CICs.
As the noble Lord, Lord Phillips, has already pointed out, it is something of an anomaly for CICs to be denied charitable status. That is particularly so when subsection (3) of Clause 23 reads:
- "A community interest company established for charitable purposes—
- (a) is to be treated as not being a charity".
[The Sitting was suspended for a Division in the House from 3.31 p.m. to 3.40 p.m.]
Lord Glentoran: My Lords, I was referring to subsection (3), which says:
- "A community interest company established for charitable purposes . . . is to be treated as not being a charity".
- "for the benefit of the community".
In paragraph 15.14 of the report on the public consultation, the Government conclude:
- "It has been agreed with the Charity Commission and the Attorney General that where a CIC's objects are entirely charitable, it should nonetheless be deemed not to be a charity for legal purposes".
- "This is the first time in English history that a body established for exclusively charitable purposes, with a constitution entirely in accordance with the requirements of charity law and which operates exclusively as a charity, is to be prohibited from registering as such".—[Official Report, 8/1/04; col. 276.]
I turn to another point. I am concerned that, if the two are to be kept as separate entities and a company can be either a charity or a CIC, there will not be sufficient demands for a company to disregard the obvious benefits in tax breaks that come with charitable status in favour of forming a CIC. On page 12 of the government consultation document proposing CICs, it is made clear that,
- "Whatever their legal form—company, IPS or unincorporated—social enterprises with exclusively charitable objects and which cannot distribute their assets to their members will have charitable status".
The Government make an attempt to answer those questions in their consultation document. Paragraph 11, on page 13, states:
- "The CIC is an alternative to charitable status. If an enterprise has charitable objects but wishes to become a CIC, it will forego the benefits and obligations of charitable status. Both options will provide a lock on purposes, assets and profits, with regulatory supervision, but CICs will not be eligible for the tax relief available to charities. In choosing between charitable status and becoming a CIC, enterprises will weigh the relative benefits of charitable tax status and regulation on the one hand, and the flexibility of the CIC on the other".
I am not sure how, in the case of a company limited by guarantee which does not intend to trade shares, the CIC would seem a more beneficial model than the charitable status. What added flexibilities would induce a company to choose CIC status?
In the Explanatory Notes to the draft regulations under Regulation 9, it states:
- "A CIC may wish to take advantage of the provision [to amend the provision in its memorandum and articles] if it wishes to establish itself with wholly charitable purposes, since the ability to transfer assets to another CIC would not necessarily be consistent with charitable purposes".
I have one further point, which deals with changing status between charity and CIC. When a company is setting up, it is faced with a range of models. We are aware that we are expecting an overhaul of charity law, including the setting up of a new form of incorporation for charities—the charitable incorporated organisation. There has also been talk of the reform of industrial and provident societies. With little to differentiate between these various models, companies or enterprises may well want to change status. I am not convinced that the
current proposals in the Bill make such a change in status easy—I think it will make it difficult. I fear that the process will be costly, administratively time-consuming and overly bureaucratic.I fail to see where the Government are coming from in denying charitable status to CICs. I beg to move.
3.45 p.m.
Lord Sainsbury of Turville: Both these amendments oppose the policy that CICs which have charitable purposes should not be treated as charities. The various clause stand part debates relate to clauses which enable conversion from CIC to charity and vice versa. Clauses 36 and 37 would be redundant if either of the amendments were to succeed, but a modified version of Clauses 51 and 52 would still be necessary if a charitable CIC wanted to drop its CIC status.
The noble Lord, Lord Phillips of Sudbury, raised the issue of CICs and charitable status on Second Reading. Since then, he and I have corresponded and met to discuss the matter. I and my colleagues have considered very carefully the arguments that he has raised, but we have concluded that the policy expressed in the Bill is the right one. This is a very important issue and I will address the main arguments that the noble Lord, Lord Phillips, has raised in a moment. First, however, I should restate the reasons why we have adopted this policy and why we think, on reflection, that it is right to stick to it.
In a nutshell, the provision on CICs and charitable status in Clause 23 is intended to ensure that there will be a clear distinction between this new type of company on the one hand, and charities on the other. I should emphasise that the CIC is not designed for use by charities, and it is not a part of the revision of the charity law which our colleagues in the Home Office are preparing. However, it is part of the same overall process of modernising the legal environment for the voluntary and social enterprise sectors. It will certainly not remove any of the existing options for charities, which will of course be updated and improved in the forthcoming draft charities Bill.
The key point here is that the CIC has been designed as an alternative to charitable status. We expect that CICs will wish to use the freedom of company law to pursue a wide variety of purposes, some of which may be charitable, while others will not. CICs will certainly wish to trade and to behave as enterprises, in a way that is difficult for charities. They will have the freedom to pay their directors and to change the nature of their activities, subject to the requirements of this part of the Bill.
As we made clear in the consultation paper published last year, the Government intend organisations with charitable objects, which want to operate for the benefit of the community and with an asset lock, to have a new choice. They may adopt charitable status, which brings with it significant benefits, including favourable tax treatment, or they may opt to be a CIC, and so forego the benefits but also the obligations of charitable status. In practice, we believe that the large majority will opt to
be charities, not least because of the financial benefits. But some may well find CIC status more appropriate to the way in which they want to operate—for instance, if they want to trade freely, or want to be able to change the way in which they benefit the community in future.The consultation indicated that a clear distinction between CICs and charities was important. Indeed, there were some comments that the distinction between the two needed to be as firm as possible, to avoid any risk of inadvertently confusing the public understanding of what "charity" means. In that context, it is I hope clear why Clauses 36 and 37, and also Clauses 51 and 52, are needed. The last two permit the conversion of a CIC into a charity, under controlled conditions. We think it is quite possible that some organisations that begin life as CICs may, in time, find it desirable to become a charity instead. For instance, they may find that their activities fit entirely within the sphere of charity, and that the restrictions which charitable status imposes on their freedom to act commercially—to trade, or to pay their directors—are not a problem for them. In such cases, they will probably find it financially beneficial to become a charity.
It may be that far fewer organisations will consider a conversion the other way, from charity to CIC. The benefits of a move to a more lightly regulated form are likely to be outweighed by the requirement that their assets, at the time of conversion, will remain subject to charity regulation. Nonetheless, Clause 36 makes conversion possible should it be desired. Scottish charities are in any case presently unable to lose their charitable status, hence the need for special provision in Clause 37.
Let me return to the main issue. As I said just now, we have thought carefully about the arguments made by the noble Lord, Lord Phillips, and about their practical implications. We fully understand the view that charity should be judged by objects and activities, rather than legal form. But we believe that CICs will have only a limited impact on that principle and that there are good practical arguments for modifying the principle in this case. We have concluded that a change of policy, to allow CICs to have charitable status, would not be of benefit to the charitable sector. Nor would it carry any benefit for social enterprises which are not charitable, who are the intended users of the CIC. However, it could adversely affect the value of the CIC to that latter group. It would also be likely to raise increased concerns about confusion between CICs and charities.
That seems to me the nub of the argument—that in practice it is very difficult to see what the advantages of the amendment would be to charities. They have perfectly good forms in which to do what is needed, and it would require quite a distortion to the CIC form to make it charitable. Against that, one has to weigh the unpredictable, which is where confusion might come in. For those charities that wish to use the company form to incorporate—and the noble Lord, Lord Phillips, has said that there are many charities which welcome the certainty of company law—the CIC will offer no practical advantage over existing
forms of company. The fact that it offers a statutory asset lock backed up by regulation will be of no value to charities, because charitable status already provides that.The only practical difference that being a CIC would make is the new "badge" or "brand" of having the name CIC. But at the outset, that badge will of course be less established than, and in some important respects quite different from, the charity brand. I understand that there may be some charities, working in fields such as the arts or education, that do not feel that being a charity is their defining characteristic. Such organisations may in principle find some attraction in using the CIC name. However, we and the Home Office believe strongly that any change in the way in which such charities incorporate and describe themselves needs to be considered in the wider context of the forthcoming revisions to charity law.
The point was made that larger charities would want to be companies, so would not use the forthcoming charitable incorporated organisation, and that CIC was a better option for charities than normal companies. Developments in the legal form of charities are a matter for the forthcoming charities Bill, but I understand that the Home Office intends the new charitable incorporate organisation to be a suitable vehicle for all types of charity, not only small organisations with limited resources.
In practice, of course, a charity that wanted to use CIC status would face the prospect of meeting three new sets of requirements: first, the reporting and accounting requirements of being a company; secondly, the requirements of CIC status; and, finally, the charity regulation regime.
The CIC proposals are designed to avoid unnecessary or overlapping regulation. But surely all these requirements, coupled with a lack of practical benefit to a charity from being a CIC, will deter any charity that might find the CIC brand of interest.
The question was raised of local authorities which have set up charities to look after their leisure facilities. It is difficult to see what value such an organisation would get by the additional requirements that CIC status would bring. So, if we are talking about this from a pragmatic point of view, it is very difficult to see what benefit would come.
Set against the very limited benefits of a change of policy, we think there are clear risks. In particular, allowing CICs to be charitable would inevitably reduce the distinctiveness of this new vehicle as a clear new alternative for those who wish to operate in a commercial and enterprising way in order to benefit the community.
Finally, the noble Lord, Lord Phillips, raised the question of the fundamental principle that charitable status is determined by the purpose not the legal form, and said that to change that was unacceptable. While it may be unusual for legislation to prevent an organisation with charitable purposes being a charity, it is not unique. For example, Section 23 of the School Standards and Framework Act 1998 provides that the governing body of a community or community special
school shall not be a charity. It also provides that the governing bodies of certain other types of school shall be charities even if they would not otherwise have been charitable.
So one again has the situation of very limited benefits for a change of policy and we think that there are clear risks. For all those reasons we cannot accept the amendment and would therefore ask the noble Lord to withdraw it.
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