Contracts via Community Interest Company (CIC)

[TheBakingSysAdmin]

On the bench at the moment - done a few contracts in the past via brolly companies, and now I'm interested in moving to a different model. In particular, I'm looking to form a Community Interest Company (CIC). I would expect that a significant portion (50 - 80%) of this company's turnover could be derived from contracts via agencies - the remainder coming from self-found services to local businesses.

The Department for Business Innovation & Skills' (BIS) own documentation seems to suggest that the CIC format is perfectly valid.

Source: http://www.bis.gov.uk/assets/cicregu...ation-pack.pdf ; Highlighting my own

"In further examples the community may be the beneficiary of surpluses or profits of trading activities which may not themselves be specifically community benefit activities. Such CICs could have purposes described in terms such as:

Trading to create a surplus to assist...
Contracting to provide services and using surpluses from this for the benefit of...

This type of activity where the community benefit may be either from the activity itself or the profits of the activity (or both) are areas where the CIC format could be particularly suitable."

I have three main questions about this setup:

What are the reactions of agencies likely to be to this setup? More specifically, what reassurances are they likely to be looking for that a contractor acting through a CIC is (to them) no different to one acting through a (normal) Ltd?

Are any of the well regarded contractor accountancy firms likely to be able to be happy with such an arrangement? Or put another way, would I better trying to get a contractor accountancy firm to understand CICs, or an accountancy firm used to Social Enterprise / CICs to understand the nuances of contracting?

Any thoughts on whether would a CIC would be eligible for the FRS? I can't see why it would be any different to a normal Ltd, but Hector's terminology at HM Revenue & Customs is sufficiently wooly that some doubt has crept in. The one barrier I can see would be if the CIC's articles tied profits paid to one entity (say a specific chairty) under the 'associated' businesses rule, but that's not what I would be looking to do anyway.

First post on ContractorUK, so go easy please. Also, couldn't decide whether this should go in Business / Contracts or Accounting / Legal - whichever I'd chosen, somebody likely would have said it was in the wrong place. Apologies in advance if you find yourself reaching for the beta-blockers at my cavalier attitude to posting locations.

Much obliged for any help anybody can give,
TBSA

[northernladuk]

Can I ask why you want to do this?

From the website it says

Community Interest Companies (CICs)
Community interest companies (CIC) are a type of limited company designed specifically for those wishing to operate for the benefit of the community rather than for the benefit of the owners of the company. This means that a CIC cannot be formed or used solely for the personal gain of a particular person, or group of people.

What reason are you starting one up?

[eek]

From what I've read a CIC is a charitable type business from which the founder wishes to be paid so:

1) A CIC is supposed to have a defined public purpose. This may be a local arts group, football club or broader function but it needs to have a charitable purpose.
2) Bacause the company cannot pay dividends you have to pay yourself via PAYE. As such its not a tax efficient model.

One of the projects I'm working out may end up inside a CIC but that will be because:-

1) I can separate out day to day support from development (which would remain within a private making company).
and 2) The CIC itself and the purpose of it would by its self be a BIG selling point (while the development company will allow me to pay myself efficiently).

But for day to day contracting its not a great model.

[TheBakingSysAdmin]

Can I ask why you want to do this?

From the website it says



What reason are you starting one up?

Of course you can ask...

The flippant answer is because I can.

The real reasons are two-fold. Firstly, for exactly the reason mentioned in your quote - because I primarily wish to run a company operating for the benefit of the community, not myself. Certainly, I could run a limited company, be hugely tax-efficient, and then give most of my money to charity, but that's not the way I'd like to run. A CIC gives me a recognised way to contribute to the community, while also drawing a fair salary.

The second reason could be seen as going against the grain of "rather than for the benefit of the owners" ,but it's not. My Plan B would also involve a CIC, much larger in scale than my Plan A. It would need external investment / grants. Having one successful CIC under my belt would be a plus point when looking for the investment.

It's a fair question though, thanks NLUK.

[TheBakingSysAdmin]

From what I've read a CIC is a charitable type business from which the founder wishes to be paid so:

1) A CIC is supposed to have a defined public purpose. This may be a local arts group, football club or broader function but it needs to have a charitable purpose.
2) Bacause the company cannot pay dividends you have to pay yourself via PAYE. As such its not a tax efficient model.

Actually, the CIC can pay dividends, but they are capped. Firstly at 20% of paid-up value of shares. Secondly, at 35% of distributable profits. The rules are fairly complicated.

You're right, it's not a tax efficient model. However, that doesn't concern me, as I'm not looking for tax efficiency. I'm looking for community benefit efficiency.

But for keeping money out of Hector's hands its not a great model.

FTFY

[northernladuk]

Of course you can ask...

The flippant answer is because I can.

The real reasons are two-fold. Firstly, for exactly the reason mentioned in your quote - because I primarily wish to run a company operating for the benefit of the community, not myself. Certainly, I could run a limited company, be hugely tax-efficient, and then give most of my money to charity, but that's not the way I'd like to run. A CIC gives me a recognised way to contribute to the community, while also drawing a fair salary.

The second reason could be see as going against the grain of "rather than for the benefit of the owners" ,but it's not. My Plan B would also involve a CIC, much larger in scale than my Plan A. It would need external investment / grants. Having one successful CIC under my belt would be a plus point when looking for the investment.

It's a fair question though, thanks NLUK.

Fair dinkum, wouldn't be the first person that then asked if he can make himself a charity of something of that ilk lol.. Might want to drop Andy Hallett from S3 a PM on here and see if he will come and answer from an agents perspective. S3 don't seem to be everyones cup of tea but he has given some good advice on here.

EDIT: SAying that I don't think you have PM rights yet. Have dropped him a mail to see if he has anything to say on this thread

[Andy Hallett]

Thanks for flagging it NLUK, it is not something i have personally come across yet but I will take a look at this tomorrow.

[TheBakingSysAdmin]

Thanks for flagging it NLUK, it is not something i have personally come across yet but I will take a look at this tomorrow.

Thanks Andy, if you get a chance I'd appreciate it.

And if anybody from the accountancy firms feels like chipping in, I'd love to hear it.

[Jessica@WhiteFieldTax]

And if anybody from the accountancy firms feels like chipping in, I'd love to hear it.

CICs are still very new in accounting terms, and most high street accountants aren't using them, let alone contractor specialists (I sit in both camps).

The regulatory rules for a CIC are as for a normal limited company plus CIC regulations on top. Main CIC regulations are:

~ cap on dividends
~ annual CIC report with accounts
~ report to CIC regulator
~ asset lock (transfer assets to another CIC / charity if yours closes)
~ community benefit

There are no specific tax or vat relief's or regime.

In particular CICs don't get charitable status automatically - or indeed at all as Charities Commission would be unlikely to register an entity which could distribute dividends.

In shouldn't impact agencies greatly, but maybe fear of unknown. They are still protected in dealing with a limited company.

For accounting, the accountant will need to help with CIC report, make some tweaks to accounts, and make sure you don't breach the asset lock or dividend cap. It shouldn't be much extra work, but probably needs a bespoke accounting quote rather than off the shelf.

[Andy Hallett]

Having looked at briefly, I think we would probably be ok. We would treat these companies as a standard LTD company under a contract to supply professional services.

In most circumstances we expect companies to be PSC type operations, but as long as we had the relevant undertakings that this isn't an MSC etc I wouldn't see a massive issue here.

Andy