Friday, 22 April 2016

Why CIOs Seem Like a Bad Idea



I'm posting this on here as a discussion on LinkedIn because it's too long for their word count.

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I recently received an e-mail about a consultation the Charity Commission of England & Wales are holding into whether to allow existing charitable companies (registered with Companies House), to become Charitable Incorporated Organisations (CIOs) with the Charity Commission.

I run a charity start-up service, assisting small organisations and international NGOs in navigating the paperwork involved in charitable status in the UK.

The traditional route to registration has always been to limit your liability by incorporating as a Charitable Company Limited by Guarantee through Companies House. This is why most charities display both a charity number and a company number.

A couple of years ago, a new method of incorporation was introduced – the Charitable Incorporated Organisation (CIO). Instead of registering with Companies House, you register directly with the Charity Commission.

Up to now, I have always advocated the traditional Companies House registration route.

I wanted to share my main reasons for this – my concerns over CIOs – in order to gain insight from others. Is my reasoning correct? What do others recommend?

So, my three main objections to CIOs:

1. CLOSURE

If for any reason the Charity Commission revoked charitable status, the organisation would cease to exist – what happens to the assets? If a Charitable Company loses its status or is refused registration, it still retains its assets and usually HMRC status. 

This is largely what CIOs were designed to address – the Charity Commission’s lack of control over charities. Charitable status in a meaningful sense (tax status) is granted by HMRC, not the Charity Commission. Charitable Companies exist with tax exemption and without Commission registration.

Although I sympathise with the desire of the Charity Commission to exercise more control, from a client perspective, I couldn’t in good conscience tell them to choose a CIO knowing there would be a risk of full closure, whereas a charitable company could continue to operate.

2. LENDING

A fellow consultant pointed out the conundrum: If a CIO isn’t registered with Companies House, what does a credit agency look at when deciding whether to offer a loan? If a CIO needs a loan for land or buildings in the future, will this cause problems?

3. COMMUNICATIONS

Finally, my largest objection is simply the way the CCE&W currently communicates. I must exempt OSCR (Scottish Charity Commission) from this, as I’ve always found them very helpful and responsive.

It takes four separate clicks to get to the general enquiry form (two of them ‘make a general enquiry’). Once you get there, you’re curtly told the CC won’t bother responding if the answer is in published guidance: “The commission doesn’t respond to requests for advice or queries which could be dealt with by the guidance above.”

In practise, this is a real pain. I contacted them to ask whether a Debt Management Program precludes someone from being a trustee. They sent me guidance on Individual Voluntary Agreements, telling me to read it. A DMP and an IVA are different things. The e-mail had a DO NOT REPLY catch on it, so the only way to ask them to answer my original question was to go back through the entire query process again. It just seemed utterly facetious. 

It also seems to suggest that the CC have neither the time nor the staffing resources to run a friendly customer-based operation.

In their guidance on CIOs, the Commission states: “There are over 160,000 registered charities in England and Wales.”

When you do an advanced search on the Commission website, it says there are currently 6,857 CIOs registered. That’s around 4% of all registered charities. 

Whereas the Charity Commission may be coping at present, it isn’t making any money from CIO registration, so the workload is going to increase but staffing is unlikely to. I worry how they are going to cope with administering such a system in the future, when they are already uncivil towards querents.

Companies House are tried, tested, and usually fairly quick to respond with helpful advice via telephone and e-mail.

The final flashing red light for me is that the Commission waive the £5,000 minimum threshold for CIOs, which companies are obliged to have in the bank before applying for full charity registration.

I am innately suspicious of a regulatory system which needs to incentivise charities to be regulated. Either, as a regulating body, you can cope with regulating all the charities in England & Wales, and therefore you do so – requiring nobody to have a £5,000 minimum threshold (this works in Scotland), or you can’t, so you exempt charities under £5,000 to cut back on the workload. Bribing people into becoming a CIO by dishing out a registration number seems highly questionable on both ethical and practical grounds.

That’s currently my line of thinking.

I’d welcome a discussion on it.

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