Payment cap lifted for community interest companies

By David Ainsworth, Third Sector Online, 6 January 2010

CIC regulator responds to consultation by lifting limits on  amounts that can be distributed to investors

The Regulator of Community Interest  Companies has decided to raise the limits on payments they can make to  investors.

CIC regulator Sara Burgess announced today that she would raise the dividend  cap to 20 per cent of each share and the loan interest cap to 10 per cent of the  value of the loan.

The dividend cap was previously five percentage points above the Bank of  England base rate, while the interest cap was four percentage points above the  base rate.

A consultation last year showed that most social investors thought the caps  were too low.

The total proportion of profits a CIC can distribute will remain unchanged at  35 per cent.

The regulator's response said:"In broad terms, the responses to the  regulator's consultation indicated that the maximum dividend rate per share was  too low given the level of risk.

"The 1 per cent differential between debt and equity finance may not give  adequate incentive to investors to make an equity investment; and the interest  and dividend-per-share caps were too complex."

Burgess said she would review the changes in two or three years to find out  how effective they were.

John Mulkerrin, co-founder of the CIC Association, a membership group  for CICs, said the initial response to the news was positive.

"There's not a lot of money going into CICs in share capital at the moment,"  he said. "The new, higher dividend could open up new opportunities to attract  investors - something the negativity of the cap prevented before.

"This has been a good piece of work by the regulator."

Equity Plus, which specialises in finding investment for social enterprises,  said it would now be much easier for CICs to attract outside investment.

"The new caps are not only more generous but are significantly simplified -  so far these have been the two big barriers to investors engaging with CICs," a  spokesman for the organisation said. "Equity Plus welcomes these changes and  believes that CICs will now become a structure of choice for social  enterprises."

9. What are the legal structures for social enterprises?  

 

 Social enterprises use a wide variety of legal forms including:   

 
 
• Community interest company (CIC) A CIC is a legal form created specifically for social enterprises. It has a social objective that is "regulated" ensuring that the organisation cannot deviate from its social mission and that its assets are protected. For more information on CICs, contact the CIC regulator - http://www.cicregulator.gov.uk/
 
 
 
• Industrial and provident society (IPS) This is the usual form for co-operatives and community benefit societies, and is democratically controlled by their members in order to ensure their involvement in the decisions of the business.
 
• Companies limited by guarantee or shares are the most common legal structure for businesses and often considered to be the most flexible, particularly companies limited by shares. While they can ensure they have a social mission written into their Memorandum and Articles of Association, this is not regulated.
 
• Group structures and charitable status Tax is an important consideration for some organisations where the retention of surpluses is essential, particularly if they can't take on equity.  In these cases the tax breaks associated with charitable status can be an important factor.