Considered in Grand Committee
My Lords, the community interest company form was introduced by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005. The legislation created a new type of company tailored for social enterprise that wanted to use the familiar company form but with the assurance that assets would be used primarily for the benefit of the community. The new form was intended to complement existing and well established forms such as charities and industrial and provident societies which are also commonly used in the social enterprise sector.
Since July 2005, when the legislation came into force, over 6,700 social entrepreneurs or social enterprises have chosen to register as community interest companies. CICs—I shall resist the temptation to call them “kicks”, although I think it is a fairly widely used expression—carry out a wide range of activities taking in sectors such as health and social care, retail, manufacture, the environment, business support, working with young people not in employment, education or training, older people, addressing cultural needs and running community cafés and centres. The Regulator of Community Interest Companies, Sara Burgess, is an independent regulator for this legal structure.
The regulator discharges its responsibilities by ensuring CICs comply with a community interest test on registration. They are then monitored and supported to ensure that they continue to operate in the interest of community benefit and are transparent in the way they do this. A statutory asset lock ensures that there is limited or no private gain. The community interest company report is a key feature of the model. The directors of a community interest company must produce a report annually to show to the public and the regulator that the community interest company is continuing to meet the community interest test and engaging appropriately with stakeholders.
When the relevant aspects of the Companies Act 2006 were implemented, they made a number of changes. Unfortunately a gap was created, so that although all CICs have to prepare an annual report, not all of them have to file it. Filing the report is optional for small companies that benefit from certain accounts and reporting exemptions, when it was always intended that it should be compulsory for all community interest companies. The vast majority of community interest companies are small. I am delighted to say that I can reassure your Lordships that in practice CICs have filed reports. However, it is important to put the point beyond doubt, and indeed Parliament imposed a duty on Ministers to do this.
The regulations will make provision requiring the directors of all community interest companies to submit a copy of the annual community interest company report to the Registrar of Companies together with the community interest company’s annual accounts as a package. Placing the report on the companies register should be compulsory for all community interest companies, even for those that are small. CICs are subject to a light-touch regulatory regime to minimise burdens for them, and the report is therefore one of a very limited number of means by which stakeholders and the regulator can check that a community interest company is complying with relevant rules. The report contains important information on the impact of the community interest company’s activities, directors’ remuneration, the payment of dividends to shareholders and the consultation of stakeholders.
The regulations will, as always intended, apply late filing penalties if the package is received after the filing deadline, address the gap created in the implementation of the Companies Act 2006 and ensure that the transparency offered by the submission and publication of the CIC reports continues as it was intended. I therefore commend the regulations.
My Lords, I will make a comment or two. The CIC is a very valuable corporate form and has enabled the development of the social enterprise sector. The asset lock has proved valuable and a good way of developing an alternative to the purely charitable structure. I therefore fully agree with my noble friend that we need to close this loophole. However, when I read in the Explanatory Memorandum a government department using the words, “to minimise the burden” it is like the letter I get from my power supplier or my mobile phone company saying, “We are going to introduce some changes, which are going to improve the service we are providing you”. You know immediately that the service is going to deteriorate considerably.
What the Explanatory Memorandum is trying to parade here is the idea that this is somehow helping CICs. In fact, this measure is helping the CIC register and Companies House, because the memorandum states that,
“it has been decided that the directors of a CIC should be required to deliver the annual community interest company report to the Registrar of Companies together with CIC’s accounts and reports”.
It might be that a CIC would find it more comfortable not to do this—it might want to send it a different time of year. However, this is designed to help the regulator by making the CIC send the two reports at once. All I am saying to my noble friend is that it is sophistry to pretend that this is minimising burdens. If his department would like to minimise the burdens, it could quite quickly arrange for Companies House and the CIC registrar to agree one form that combined the two. You could have a CIC company reporting form that included both parts of what a normal limited company would provide as well as the particular assurances for the CIC.
I say to him—this is in no way a criticism—that in these circumstances, Companies House is obdurate, which is not too strong a word, in not being prepared to move forward the regulatory structure in a way that reduces the burden. Eighteen months ago, I was asked by the Minister for Civil Society, Nick Hurd, to undertake a review of the burdens that were affecting the development of the charitable sector. My report was called Unshackling Good Neighbours. One thing suggested in that was that Companies House and the Charity Commission should get together and provide a common report for charitable companies, of which there are 30,000. Fifteen months on from that report, there is absolutely no progress at all. The Government’s response, which my committee is going to discuss for the next couple of weeks, states,
“Companies House and the Charity Commission are working together to address this issue and are considering both the joint submission of accounts and common annual returns… There is willingness and commitment from both organisations to address this recommendation, although there are technical challenges to be overcome… These differences do not necessarily prevent a single portal being developed, but they do add complexity and a business case is under development to ensure that any changes are made following a full appraisal of the benefits”.
If ever I heard the long grass whispering, this was it. A bit of business case development 15 months in is not good enough. I am not asking my noble friend to take responsibility for this. I am saying that we really can do something to improve the way in which Companies House, the CIC regulator and—parenthetically, it is nothing to do with our discussion this afternoon—the Charity Commission work together to reduce the regulatory burden. As my noble friend has told us, there are 6,700 CICs, but there are more than 30,000 charitable companies. We are talking about being able to get rid of 30,000 to 50,000 forms if Companies House can be persuaded actually to walk the walk as opposed to talking the talk about minimising burdens when, in fact, it is doing no such thing. It is just reorganising the regulations—quite rightly, because I accept that it is closing a loophole—in a way that benefits them and has no benefit to the CICs whatsoever. I urge my noble friend, let us find a way to get Companies House to collaborate with the CIC regulator on the one hand, the Charity Commission on the other and, in so doing, take a small step in reducing regulatory burdens for this charitable and social enterprise sector.
My Lords, I confess that I was in complete ignorance of community interest companies until I saw this, and I learnt quite a bit looking at it. They are one of our more interesting innovations, given that a significant number have been created and continue to be created. I have looked on the website at the latest grouping. I admit that until I listened to the noble Lord, Lord Hodgson, I saw this order as correcting an error.
I have some sympathy for the view of the noble Lord, Lord Hodgson, that we should try to make things as easy as we can. I was impressed when I read the impact assessment that all of them have submitted their reports. I hope that I have got that right. If only we could ensure that all companies managed to do that, it would be a major step forward. Nevertheless, I will be interested to hear the Minister’s response to the view of the noble Lord, Lord Hodgson. I have no further comments.
My Lords, I thank my noble friend Lord Hodgson and the noble Lord, Lord Young, for their consideration of the draft regulations. To address my noble friend’s point about the claim in the documentation to reduce the regulatory burden, I can first establish that it is at least not increasing it, because all CICs were already filing. I think that the contention is that it is more straightforward to have one account filing date and one set of penalties, and also that e-enablement will allow easier submission. I throw myself on his mercy, but those are the suggestions that I put to him.
His greater point about the co-ordination between the registrar of companies and the Charity Commission —I think that was the nub of it—I will take back to the appropriate departments. I think that it will be more than one department, but it is a valid point.
Consistency is essential in the regulatory environment, where light-touch regulation means that there are limited measures to ensure that CICs are meeting the obligations laid out in the legislation. I commend these regulations.