A charitable dilemma

The second wave of legislation governing the new Scottish Charitable Incorporated Organisation (SCIO) vehicle came into force on 1 January. Whilst the SCIO legal form has been available to start ups and unincorporated charities in Scotland since 1 April 2011, the new rules now enable existing charitable companies and charitable industrial and provident societies in Scotland to apply to the Office of the Scottish Charity Regulator in order to take on SCIO status. The general framework for the equivalent legal form in England and Wales, the Charitable Incorporated Organisation (CIO), was set out in the Charities Act 2006, although the secondary legislation making CIOs available to charities there (both incorporated and unincorporated) has not yet been approved by Parliament. It is hoped that this will occur in early 2012.

The CIO vehicle (both in Scotland and in England and Wales) shares some of the characteristics of a company limited by guarantee, including limited liability of its ‘directors’, and this is what has drawn the interest of many arts organisations that are currently exposed, because they are more informally constituted. Obtaining CIO status will provide a charity with many of the safeguards of incorporation but without the same level of administrative costs, with a CIO effectively being a halfway house between a charity run on basic procedures and one that is incorporated and structured like a conventional company.

Whilst in many cases it may be a great idea to ‘upgrade’ to CIO status, is there any point in it, when it comes to arts organisations who already enjoy the status of ‘company limited by guarantee’ with all the perks? Certainly, the benefits for an existing arts company applying for CIO status are less clear and it would be surprising if a significant number of incorporated charities submitted an application for CIO status.

I suppose that one advantage of converting to a CIO would be in the form of reduced administration – the new form of charity would be responsible to only one regulatory body – the Charity Commission in England and Wales and the Office of the Scottish Charity Regulator for charities registered in Scotland. Whilst this might make life tidier, simpler and could reduce annual administration costs since the charity would no longer need to be registered with Companies House, savings in administration costs would likely be marginal. For example, filing accounts to Companies House once a year costs £30 annually (£15 if the accounts are filed online). In addition, the Companies Act of 2006 greatly simplified business administration and, whilst the current act still has some 1,300 provisions, most of these do not apply to incorporated charities.

Another possible attraction for becoming a CIO is that this would rid a charity of the challenge of meeting the deadlines for filing accounts set by Companies House (which takes a very benign attitude to those who play by the rules but does start to bare its teeth with companies whose accounts are consistently filed late and/or in an unacceptable format). Arguably, though, being sufficiently disciplined to meet the deadline for filing properly audited accounts each year is good for a charity – and one more reason for retaining the status quo.

Looking at the picture in the round, will ‘clients’ and funders be less comfortable dealing with a charity that has changed to CIO status, even if the latter is seen as a generally positive innovation? Until we know whether CIOs will become universally recognised, there may still be an element of risk to image attached to adopting that legal form. There is also the spectre of the loss of gravitas (which in itself may have an adverse effect on income and funding).

Every situation is different and there may, of course, be some incorporated charities which see real benefits in becoming a CIO. Given the critical times for an arts sector which must now compete for dwindling third sector funding, the CIO may certainly help to address some of the governance dilemmas that artistic boards now face on a day-to-day basis.

So far, over 70 unincorporated organisations in Scotland have applied for SCIO status since it became available to them last April, including a handful set up to advance the arts and heritage in Scotland. On balance, however, there may be many more reasons for moving up to a CIO than moving down in the opposite direction.