These two sections have been taken from: http://www.cicregulator.gov.uk/guidanceindex.shtml

 

Contents:

DEFINING “COMMUNITY” IN COMMUNITY INTEREST COMPANY THE COMMUNITY INTEREST TEST

 

CHAPTER 2

UPDATED MARCH 2007

CHAPTER 2.3

DEFINING “COMMUNITY” IN COMMUNITY INTEREST COMPANY

The essential feature of a CIC is that its activities are carried on for the benefit of the

community and it is therefore important that before creating a CIC you have a clear

picture of the community you intend to serve.

A community for CIC purposes can embrace either the community or population as a

whole or a definable sector or group of people either in the UK or elsewhere. The Act

provides that for the purposes of the community interest test, “community” includes a

section of the community. The Regulations state that any group of individuals may

constitute a community if they share a readily identifiable characteristic which is not

shared by other members of the community of which that group forms part [Regulation

5].

However, a company which benefits a group which may be clearly defined, but which a

reasonable person might not consider to be a genuine section of the community (e.g.

“my family”, “my friends”, or “regular drinkers of ABC beer”), is unlikely to be eligible to

be a CIC. In other words, in the Regulator’s view, regulation 5 has to be against the

overall background of the view which a reasonable person would take of what

constituted a section of the community for the purposes of the community interest test.

It is therefore expected that the community will usually be wider than just the members

of the CIC. For example, the community of a CIC formed to run a community bus

service would include the whole of the population of the area served not just those

residents who had invested in the company.

In most cases the community should be easy to define such as:

The residents of Oldtown

People with learning difficulties

The elderly

The young unemployed

Small scale produce growers in Africa

The XYZ charity

Sufferers from ABC disease

People wishing to learn to…

Youth of Oldtown needing sports facilities

Redundant car workers

In other cases the purpose of the CIC will in itself suggest a benefit to the whole

community such as:

Research into environmental pollution

Preservation of wetlands

Provision of advice services

Preservation of language/culture

Encouragement of sport

Establishing a museum

Hire of equipment for short term needs

Support for community projects

In further examples the community may be the beneficiary of surpluses or profits of

trading activities which may not themselves be specifically community benefit activities.

Such CICs could have purposes described in terms such as:

Trading to create a surplus to assist…

Contracting to provide services and using surpluses from this for the benefit of…

This type of activity where the community benefit may be either from the activity itself or

the profits of the activity (or both) are areas where the CIC format could be particularly

suitable. CICs could for example act as the procurement arm for a group of schools or

care centres who in turn could benefit by participation in dividends as shareholders or

donations from profits if they were themselves asset locked bodies.

A CIC must not be too deeply involved in any form of political activity. [See Chapter 2]

You should note that a company can only be eligible to become a CIC if it satisfies the

community interest test. A company will not be eligible if any of its activities benefit only

the members of a particular body or the employees of a particular employer, without

bringing any benefits (directly or indirectly) to a wider community.

If the community which your proposed CIC is primarily intended to serve is made up of

members of a particular body or employees of a particular employer, you will need to

think carefully about this and consider what wider community benefits the proposed CIC

can be said to deliver. [See Chapter 4]

 

CHAPTER 4

UPDATED AUGUST 2008

CHAPTER 4.7

THE COMMUNITY INTEREST TEST

Most ordinary companies, even those that provide benefits to the community, are set up and run mainly for the benefit of their own members and employees. CICs are different. Their primary purpose is to provide benefits to the community, rather than to the individuals, who own, run or work in them.

In the legislation, this core principle is set out in terms of the “community interest test”. A

company satisfies the community interest test if a reasonable person might consider that its activities (or proposed activities) are carried on for the benefit of the community. [See

Companies (Audit and Investigations and Community Enterprise Act) 2004 section 35]

All companies applying to be registered as CICs must provide the Regulator with evidence that they will satisfy the community interest test. To enable the Regulator to decide whether they will satisfy the test, applicants are required to deliver a community interest statement to the Registrar. [See Chapter 4.1 and 4.2 of this guidance, and Community Interest Companies Regulations 2005 Parts 2 & 4.]

When the Regulator considers whether a company will satisfy the community test, she is taking a view about the likely course of its future activities, and what reasonable people might think of them. Once a company has been registered as a CIC, it must continue to satisfy the test for as long as it remains a CIC. The Regulator may take enforcement action against a CIC if she forms the view that it no longer satisfies the test [see Chapter 11 of this guidance].

In order to determine whether your company satisfies (or will satisfy) the test, you need to consider:

• the purposes for which it is set up;

• the range of activities in which it will engage; and

• who will be seen as benefiting from its activities.

The community interest test is a test of the motivation or underlying purpose of a company’s activities. In order to satisfy the test a company must show that a reasonable person might consider that the purpose towards which its activities are ultimately directed is the provision of benefits for the community, or a section of the community (on the meaning of “community” for these purposes, see Chapter 2 of this guidance).

 

It is not necessary that each activity carried on by the company must in itself be directly

beneficial to the community. But it is important that everything that a CIC does should in

some sense contribute towards achieving a purpose that is beneficial to the community.

For example, a company whose activities include manufacturing and selling a particular

product does not have to show that that product benefits the community – although that

might be one way in which it could satisfy the community interest test in relation to these

activities. It could equally well satisfy the test by virtue of the fact that the profits from its

sales of the product in question are to be devoted to charitable or other community benefit purposes.

In some cases, it will be necessary to take account of possible detriments to the community arising from a CIC’s activities. Clearly, an otherwise beneficial activity which a reasonable person might consider to have materially detrimental consequences for the community or a section of the community (which may or may not be the same community which the CIC aims to benefit) may not satisfy the community interest test.

However, the legislation provides that there are two kinds of activities, which in ordinary

circumstances might be considered “beneficial”, but which will prevent a company being

eligible to be a CIC. These are:

�� Political campaigning and activities intended to support political campaigning. This is

because the legislation is designed to ensure that the Regulator is not drawn into any

political debates by having to reach any sort of view on the merits of particular political

aims or programmes [see Chapter 2]; and

�� Activities which a reasonable person might consider to benefit only the members of a

particular body or the employees of a particular employer: this is a crucial distinction

between CICs and most “ordinary” companies.

Note that there is no prohibition on a CIC doing things that benefit members of a particular body (e.g. its own shareholders), or its own employees (or the employees of another employer). For example, some CICs would be unable to provide much in the way of benefits to the community if they did not also pay salaries to their employees and directors; and some CICs will be better able to realise their community benefit objectives if they can attract investors by paying dividends to their shareholders.

However, a company will be disqualified from satisfying the community interest test if it

engages in activities that a reasonable person might consider benefit, for example, its

members or employees without contributing towards any wider community benefit. A

company which is established primarily to benefit its members or employees rather than

external stakeholders will therefore have to show that it will deliver some wider benefit if it is to be eligible for CIC status. These wider benefits can arise in several ways as the following examples illustrate.

�� A company formed to provide its members with a service which meets a pressing social

need or to provide jobs to disadvantaged people who would otherwise be unlikely to find

employment could satisfy the test because its activities would benefit the wider community as well as its members or employees.

�� A sports club for employees of a business may only satisfy the test if it provides a wider community benefit, for example, by making its facilities available to the local community or providing training facilities not otherwise available in the area.

�� A company formed by the employees of a business solely for their own profit such as a

bulk purchasing discount scheme would not satisfy the test.

�� If, however, the sports club ran a purchasing scheme as an incidental activity which

contributed to the community objectives of the club this may not affect its eligibility to be a CIC.

This can be a difficult area. If you are concerned that the activities of your proposed CIC (or proposed new activities of an existing CIC) may be considered only to benefit the members or employees of a particular body, you are strongly recommended to seek advice from the Regulator’s office (or discuss the matter with your professional advisers) before submitting a formal application or taking any other decisive steps.