Community Interest Companies [CICs]

What is a Community Interest Company (CIC)?

1. A Community Interest Company (CIC) is a type of limited company designed to benefit the community rather than make a profit for private individuals. CICs can carry out activities such as providing services to vulnerable people or running businesses where profits support community projects.

2. A CIC operates like any other limited company. It has its own legal identity, meaning it can enter contracts, own assets, and borrow money. It continues to exist even if its management or ownership changes. Directors of a CIC can be paid or unpaid, but they have the same responsibilities as directors of any company.

The Community Interest Test

3. To be a CIC, a company must show that its activities benefit the community. The Regulator of CICs must be satisfied that a reasonable person would agree that the CIC’s activities serve a wider community interest.

4. A CIC cannot:

1. Be used mainly to benefit its own members or employees.
2. Engage in political activities or support political parties.

5. A community can be broadly defined and may include a specific group of people, such as residents of a particular area or those facing a shared disadvantage.

Asset Lock

6. CICs must follow strict rules about their assets and profits, known as the ‘Asset Lock.’

7. This means:

1. Assets and profits must be used for the community’s benefit.
2. They cannot be transferred to private individuals.
3. If the CIC closes, remaining assets must go to another CIC, a charity, or another approved ‘asset-locked body.’

Annual Reporting Requirements

8. Every year, a CIC must submit an Annual Community Interest Report (CIC34) along with its accounts. This report must explain:

1. How the CIC has benefited the community.
2. How it has consulted with stakeholders.
3. Details of any directors’ salaries.
4. Whether any assets have been transferred at below market value.

Setting Up a CIC

9. Once a company becomes a CIC, it cannot revert to a standard company. The only options to exit CIC status are:

1. Dissolving the company.
2. Converting it into a charity or a Charitable Incorporated Organisation (CIO).

CIC Structures: Limited by Shares or Guarantee

10. A CIC can be either:

1. Limited by Guarantee: Members agree to pay a small amount if the company fails. This structure is common for non-profit organisations.
2. Limited by Shares: The company can issue shares and pay dividends, but dividends are capped to ensure profits mainly benefit the community.

11. If paying dividends, a CIC must:

1. Follow a dividend cap, which limits payments to no more than 35% of profits.
2. Ensure that at least 65% of profits are reinvested for the community’s benefit.

Directors and Salaries

12. CIC directors can be paid, but their pay must be reasonable and not reduce the company’s ability to serve the community. If salaries are too high, the Regulator can take action.

Restrictions on Political Activities

13. A CIC cannot:

1. Be a political party or campaign group.
2. Engage in political activities that do not benefit the community.
3. Be controlled by a political organisation.

Fundraising and Borrowing

14. CICs can raise money through loans, grants, and issuing shares (if structured as a company limited by shares). Some forms of borrowing, such as performance-related loans, are subject to legal restrictions.

Regulation and Compliance

15. The CIC Regulator oversees CICs to ensure they comply with the law. The Regulator:

1. Reviews new applications for CIC status.
2. Examines annual CIC reports.
3. Investigates complaints and can take enforcement action if necessary.
4. Reports to Parliament each year.

16. The Regulator does not provide legal advice but can give general guidance on CIC requirements.

Closing or Changing a CIC

17. If a CIC closes, its assets must be passed to another CIC, a charity, or another asset-locked body. If a CIC has named a specific recipient in its Articles of Association, it can transfer assets without additional approval. If not, the Regulator must approve any transfer.

Filing and Compliance with Companies House

18. CICs must:

1. Submit annual accounts and a confirmation statement to Companies House.
2. Provide details of dividends (if applicable).
3. Declare any performance-related interest payments.
4. Ensure compliance with all company law requirements.

Conclusion

19. A CIC is a company designed to benefit the community, not private individuals. Before setting up a CIC, it is essential to understand:

1. The permanent Asset Lock restrictions.
2. The requirement to benefit a genuine community.
3. The annual reporting obligations.
4. The restrictions on political activities.

20. If in doubt, seek professional advice before registering as a CIC.

21. The key legislation and official guidance governing CICs in the UK:

Primary Legislation

1. Companies (Audit, Investigations and Community Enterprise) Act 2004 (CAICE Act 2004)
   1. Establishes the legal framework for CICs.
   2. Defines the Community Interest Test and the Asset Lock.
   3. Grants powers to the CIC Regulator.
2. Companies Act 2006
   1. General company law that applies to all UK companies, including CICs.
   2. Covers incorporation, directorship duties, financial reporting, and governance.

Secondary Legislation (Regulations)

1. The Community Interest Company Regulations 2005 (SI 2005/1788)
   1. Sets out detailed rules on the formation, operation, and regulation of CICs.
   2. Establishes the dividend cap and rules for share capital CICs.
   3. Covers the CIC Regulator’s powers and reporting requirements.
2. The Community Interest Company (Amendment) Regulations 2009 (SI 2009/1949)
   1. Amends the 2005 Regulations, particularly in relation to the dividend cap.
3. The Community Interest Company (Amendment) Regulations 2014 (SI 2014/2483)
   1. Increases the dividend cap to 35% of distributable profits.
   2. Raises the performance-related interest cap to 20%.

Official Guidance and Regulatory Documents

1. CIC Regulator’s Guidance (Published on GOV.UK)
   1. Explains how to set up and run a CIC.
   2. Covers compliance, reporting obligations, and regulatory processes.
2. Companies House Guidance
   1. Provides general filing and company administration requirements.
   2. Covers annual returns, accounts, and statutory filings.
   3. Available at: www.gov.uk/government/organisations/companies-house
3. Financial Conduct Authority (FCA) Guidance (if CICs issue shares or raise finance)
   1. Covers regulations on share offerings and fundraising.

© Martin Ward | Philip Parnham 2025