What Are the Advantages and Disadvantages of the CIC Model for PCN Companies?
This article explores why a PCN company may want to incorporate as a CIC, or convert to being one. It briefly outlines the main legal restrictions to be aware of when operating as a CIC.
What is a Community Interest Company (CIC)?
A Community Interest Company or ‘CIC’ is a type of company that is primarily designed for social enterprises that are being carried out for the benefit of a community. Whilst CICs may generate a profit, the purpose of a CIC is one of community benefit, rather than to maximise a profit for shareholders. CICs are primarily, therefore, not-for-profit entities.
Some basic features of a CIC are that:
- CICs must be a limited company whether by shares or by guarantee
- a company may be incorporated as a CIC, or an existing limited company can convert to a CIC
- whilst a charitable company can convert to being a CIC, it cannot be both at the same time
A company limited by guarantee is not eligible to hold GMS contracts or PMS agreements, and is therefore a less common structure adopted in primary care. This also impacts its ability to offer the ‘classic’ NHS pension scheme to any staff it employs, meaning that if this is desired, either an application for Independent Provider or a Direction/Determination would be needed. Please note that the NHS BSA have confirmed in their October 2019 guidance that a PCN Company can offer NHS pension scheme access to employees provided they are involved in directly assisting in the performance of GMS/PMS/APMS/PCN/ARRS.
Why Become a CIC?
- Many PCN companies are established to support their relevant PCN and therefore the health needs of the local community and patient base in their area. A PCN company structured as a CIC will have a legal structure that allows it to support these aims.
- Adopting a CIC structure can show a clear commitment to supporting the community and social goals.
- The structure of a CIC will be familiar to those who have previously operated limited companies. Many of the benefits that exist with limited companies (for example limited liability) exist with CICs.
- A ‘not-for-profit’ CIC can be seen, in some cases, as a more appropriate legal structure when providing publicly funded services in the Healthcare sector - particularly if there are concerns about any perception of ‘privatising the NHS’.
- Additional grants and funding may be available to CICs (however this may be less relevant when funding is primarily obtained from NHS England or a CCG).
What Is the Legal Position?
CICs must satisfy the ‘community interest test’ at formation or conversion and continue to do so for as long as they remain a CIC (ie a reasonable person might consider that its activities are being carried on for the benefit of the community).
Not all of the activities carried out by a CIC need to have a direct benefit to the community to which it serves but everything a CIC does should somehow benefit the community it is built to serve.
The CIC Regulator decides whether a company is eligible to be a CIC and they must approve the registration of a CIC.
The main features that distinguish a CIC from other private companies are:
- An Asset Lock - this means that the CICs assets may not be sold at an undervalue and must be used for the benefit of the community, subject to limited exceptions; on winding up of the CIC any surplus assets (less any allowable returns to shareholders) must be transferred to ensure they are retained for community interest or charitable purposes.
- A Dividend Cap - this means that the CIC can only pay dividends out of distributable profits and with consent of the members up to a capped amount.
- A Performance Interest Cap - this means that where interest payable on debts or debentures is linked to the performance of the CIC,uch debt is regarded as similar to equity and therefore subject to a cap on interest payable.
The purpose of this is to ensure that such payments of dividends or interest are not used as a means to circumvent the asset lock.
In addition to the company accounts (which all limited companies must file with Companies House), CICs must prepare an annual community interest company report. This must show that the CIC continues to satisfy the community interest test that it passed on formation or conversion, and that its activities continue to benefit the community. CICs are to that extent more heavily regulated than limited companies.
Dividends can be an important or useful income stream for shareholder practices within a PCN company, and can allow for the extraction of excess funds. The checks and balances required around the use of the profits and the asset lock introduce a degree of inflexibility which may not be appropriate, depending on how the arrangement is to be structured. Secondly, due to the asset lock, on winding up of the CIC any surplus assets (less any allowable returns to shareholders) must be transferred to ensure they are retained for community interest or charitable purposes.
Before adopting a CIC structure, it is important that a PCN and its members are clear on the aims and goals of the PCN company and consider these against other possible legal structures, bearing in mind that it is not possible to simply revert a CIC back to a for-profit company (at least not directly and without difficulty).
It may be possible to introduce 'not for profit' elements into a company, without formally becoming a CIC (for example within a company's articles or shareholders' agreement), however do bear in mind that the company will still technically be a 'for profit' entity, albeit it may be run with a 'not for profit ethos'. It is important to be careful about how you describe such a company, and in particular not to claim to be formed as 'not for profit', if the company is not a CIC or an equivalent entity.
How Can We Help You?
Our specialist healthcare and not-for-profit teams can help with either the formation of a CIC or advise you if you are looking at converting an existing PCN company into a CIC.
We are a full service law firm and can continue to work in partnership with your PCN, its members or PCN company, offering support across a full range of practice areas as your company continues to grow and the NHS landscape evolves.