Community Interest Companies (CICs) Set To Benefit from New Government Tax Legislation

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The use of Community Interest Companies (CICs) is set to grow in light of various changes relating to their tax treatment in particular.

A CIC is a private limited company with special additional features and which is created for the use of people who want to conduct a business or other activity for community benefit and not purely for private advantage. A total of 222 CICs were formed during May 2014 and there have been 9,425 in total formed to date. CICs are separate from charities in that they are not regulated by the Charity Commission, but rather the CIC Regulator which has a continuing monitoring and enforcement role.

A feature of CICs to ensure that they continue operate for the community purpose for which they were established is that they must pass a “community interest test” and that the assets within the company are protected by an “asset lock”. This asset lock ensures that the assets and profits of the CIC are dedicated to the purpose.

In the Budget the Government announced that it would consult on the introduction of a new tax relief to encourage investment into social enterprises due to the fact that many social enterprises currently have difficulty raising capital from investors and commercial lenders.

New legislation is currently being drafted following responses to a Government consultation document. The legislation in respect of CICs is due to change on 1 October 2014 (through the Finance Bill), which shall see the insertion of a new part in the Income and Corporation Tax 2007.

The new legislation will:

  • Provide for an income tax relief to be available to qualifying individuals making qualifying investments in qualifying social enterprises;
  • Apply in respect of subscriptions for shares in the enterprises or certain types of loans to the enterprises;
  • Apply to a limited annual amount of investment per investor, but with investment able to be carried back to the previous year; and
  • Allow enterprises to raise a maximum amount of investment over a period of three years.

Currently there is a cap on the dividend payable per share. Under the new legislation the cap will be removed. It was agreed however, following the consultation that the aggregate dividend cap of 35% should be retained. Furthermore, performance-related interest will rise from 10% to 20% and income and capital gains tax reliefs will also be available.

The expectation is that these changes will increase interest in the use of CICs as ‘company limited by share’ vehicle.  For advice and assistance with setting up a CIC and how this could be a beneficial vehicle through which to run your business contact the Forbes Solicitors Business Law team on 0800 321 3258 or via our Enquiry Form.

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