CIO’s and the incorporation of Charities associated with Congregations2013 sees the long awaited introduction of the Charitable Incorporated Organisation or CIOs, which provides a new method by which a charity can be set up as an incorporated organisation with all the benefits that such a structure provides whilst keeping the extent of corporate regulation to an appropriate minimum.

Charitable TrustsIn accordance with the provisions of Canon Law, most Congregations have established a civil law entity that is used to protect the assets of the Congregation and to carry out charitable activities. This entity is normally established as an unincorporated charitable trust and registered with the Charity Commission as a charity. A trust is essentially an agreement between two or more people where they (the “Trustees”) declare that they will hold certain property on trust to be used for specific charitable purposes that are set out in the trust. There is normally a written document that sets out the particular trusts (ie the charitable purposes) for which the property is being held, and these are normally described as a Deed of Trust.

In the case of the charities associated with Congregations, the charitable purposes are normally to further the work carried out by the Congregation. An unincorporated charitable trust is a very simple arrangement which is normally fairly easy to manage.

DrawbacksThere are, however, three main drawbacks of operating through a charitable trust:

1. the charitable trust does not have its own legal identity, it is not a recognisable object or person in its own right. As a result, the Trustees of the charitable trust are personally liable for any debts incurred by the charity which the charity is unable to meet from its own resources. This is potentially not an issue for individuals who have taken a vow of poverty, but, if a Congregation

is considering introducing lay trustees into the charity, such individuals are unlikely to be keen to put their own personal assets at risk.

2. the charitable trust cannot hold property such as land or investments in its own name. All property therefore has to be registered in the name of the Trustees and, when Trustees change, the registrations have to be updated which can be an onerous task. This is not always done and, as a result, it is often the case that properties remain registered in the name of former Trustees. This can be rectified easily whilst such Trustees remain alive and mentally competent, but as time passes on, the charity may find that the individuals have either died or are no longer mentally competent to manage their own affairs, in which case it can be time consuming and costly to rectify the position. (Some charitable trusts have taken the step of incorporating their Trustee body or vesting their property in a custodian trustee to overcome this drawback).

3. the charitable trust’s deemed residency can depend upon where its Trustees live. In some cases worldwide Congregations may wish to involve younger members of the Congregation, who live overseas, as Trustees and, if a majority of the Trustees live overseas, this may have the unintended consequence of changing the residency of the charitable trust and making it subject to overseas jurisdictions or ineligible for tax reliefs, for example, gift aid.

Incorporation of the charityUntil recently, the only way to overcome the drawbacks referred to above was for the charity to take steps to become incorporated as a company limited by guarantee. A company is a distinct legal personality in its own right and is separate from its Directors (normally called the Trustees) and its members. A charitable company is normally formed as a company limited by guarantee, where the members of the company

IBB Solicitors charities team Briefing noteJanuary 2013

agree to contribute a fixed amount to the debts of the company, should it go into liquidation, but do not share in the profits of the company.

The advantages of a charitable company over a charitable trust are:

1. the Directors / Trustees and the Members have the protection of limited liability and will therefore only be liable for a nominal amount (normally £10) should any claim exceed the assets of the charity.

2. the property can be registered in the name of the company, so no changes need to be made when Trustees change.

3. the company will be resident in England or Wales so that trustees can be from anywhere in the world.

The main disadvantage, however, of a company is that in addition to being regulated by the Charity Commission and having to comply with the various filing requirements the company will also be regulated by Companies House and have to comply with its filing requirements and regulations as well as complying with company law. This often leads to duplications, for example when a new Trustee is appointed both the Charity Commission and Companies House have to be updated.

Charitable Incorporated Organisations (CIOs)After an extended period of lobbying for an incorporated form that was specifically designed for charities, the Charities Act 2006 created the concept of a Charitable Incorporated Organisation (CIO). This is a new corporate structure designed specifically and exclusively for charities that seeks to establish the benefits of incorporation without the drawbacks of additional expense and regulation. It is, however, only now in 2013 that the necessary statutory framework has been established for CIOs to be set up.

The key characteristics of a CIO are:

• The CIO only has to be registered with the Charity Commission and not Companies House.

• CIOs have a separate legal personality and can contract and hold property in their own name, as opposed to doing so in the name of its Trustees.

• The liability of the charity trustees (and its Members) is limited. Under the applicable regulations the liability can either be limited to a fixed amount, or excluded entirely.

• CIOs have much less onerous reporting and accounting requirements than companies (for example they do not need to prepare a Directors’ Report to comply with the Companies Act 2006).

• CIOs only have to prepare one annual return for the Charity Commission (whereas a company also has to file an annual return with Companies House).

• The Charity Commission has prescribed model constitutions (which can only be tailored to a limited extent) making it easier to establish a CIO.

• The CIO must be located in England or Wales.• The Charity Commission will provide limited

registration details on the register, but will not, unlike Companies House, be maintaining a register of charges.

Converting an existing charitable trustConverting an existing charitable trust is not a case of simply asking the Charity Commission to change your status. Technically, as the CIO is a new corporate entity (with a new charity registration number), it is necessary to:

1. establish the new CIO – which will involve preparing the new constitutional document (based on the Charity Commission model) and registering this with the Charity Commission;

2. the Trustees of the charitable trust taking the necessary steps to “transfer” the assets and liabilities of the charitable trust across to the new CIO. This involves a careful consideration of the Deed of Trust to ensure that the Trustees

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have the appropriate power. It may also be necessary to enter into formal novation agreements with third parties in order to transfer across the contractual liabilities. One advantage of the CIO over an ordinary company, is that the regulations make specific provision for the transfer of permanent endowment.

3. final accounts are prepared for the charitable trust and it is then dissolved and removed from the Charity Commission register.

As the CIO will be a new entity, it will be necessary to change your bank accounts, update your investment advisors to change the ownership details of any investments, advise donors, transfer the contracts of employees, update details on websites, notify insurers and the appropriate statutory authorities (eg DVLA, Television Licensing Authority, the appropriate utility companies) and so on.

In addition, it will be necessary for all members of the Congregation to update their Wills (to make reference to the new CIO) and to update their Deeds of Covenant or Gift Aid Declarations (to benefit the new CIO instead of the old charitable trust).

For charitable trusts that operate in Scotland, it will also be necessary to register the CIO in Scotland.One point to bear in mind is that because the Charity Commission is not intending to operate a register of charges (eg mortgages, debentures, etc) third party funders such as banks may be less keen to lend to CIOs as they will not have the same statutory protection that comes from registering such a charge over the assets of a company. If your Congregation makes use of significant borrowing facilities then a CIO may not be appropriate, but incorporation as a company is still likely to be a sensible option.

The TimetableThe Charity Commission is expecting that there will be a significant demand for the new CIO structure and is therefore planning to phase the timetable for existing charitable trusts to convert. Whilst “new”

CIOs can be established as from 2 January 2013, at present the indicative timetable for “conversion” is as follows:

March 2013: existing unincorporated charities with an annual income of over £250,000May 2013: existing unincorporated charities with income between £100,000 & £250,000July 2013: existing unincorporated charities with income between £25,000 & £100,000October 2013: existing unincorporated charities with income between £5,000 and £25,000

Conversion – is it really worth it?Although the process may be time consuming to transfer from an unincorporated charitable trust to a CIO, it may be a worthwhile exercise for Congregations to consider because:

1. it is an opportunity to revisit the constitutional governance of the charity and implement a new modern constitution;

2. it provides the framework for the charity to take on lay trustees, should the Congregation decide to follow this path, due to the benefit of limited liability;

3. it enables the charity to be sued in its own right as opposed to claims being made against individual trustees;

4. it provides for continuity of ownership of the charity’s assets so as to avoid difficulties associated with aged members of the Congregation losing capacity whilst in post as Trustees;

5. it enables the charity to be permanently based in England or Wales notwithstanding the introduction of overseas Trustees; and

6. it establishes the charity as an enduring entity in its own right that can continue in perpetuity after the Congregation ceases to have any members (similar to the Congregation’s status under Canon Law as a public juridical body).

It is, however, a new type of structure and it is therefore possible that until the CIOs have

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firmly bedded down, teething problems may be experienced and as yet there is no established case law or guidance from the Charity Commission on issues that have yet to be uncovered. It is also the case that, as with any new structure, third parties (eg banks, accountants, investment managers, donors, overseas authorities) may need to be educated in the framework of the structure in order for it to be properly recognised. Trustees should therefore consider whether this is the appropriate structure for the future, taking into account the changing needs of the Congregation.If you or your Trustees would like to talk to us in more detail about the issues raised by this note and the potential options for your Congregation, please contact:

Tim Rutherford, Partner

01895 207828

IBB Solicitors, Capital Court, 30 Windsor Street, Uxbridge UB8 1AB

This briefing note is only intended to provide general guidance and is not intended to constitute legal advice. © IBB Solicitors 2013

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IBB Solicitors charities team Briefing noteJanuary 2013