'Brave' changes will boost investment into CICs

Community interest companies (CICs) will become much more attractive to investors this spring with the government set to simplify the rules governing how much profit can be paid out.

Under current rules returns have been linked to the Bank of England base rate. With historically low interest rates, this has made CIC investments both unattractive and complicated.

The changes unveiled by the CIC regulator Sara Burgess today will allow CICs to offer dividends of up to 20 per cent without reference to the Bank of England base rate. The changes will come into force on 6 April this year.

The move was widely welcomed by the sector. CIC Association co-founder John Mulkerrin said the changes would 'undoubtedly open up the tap to CIC investment'.

Head of policy at the Social Enterprise Coalition Ceri Jones said the breaking of the link between the dividend per share and the Bank of England base rate was a 'very positive move'.

'This will allow the return offered by CICs to be based on the performance of the individual company, rather than the market as a whole,' said Jones.

Daniel Brewer, director of the angel investor network Equity Plus, said the simplification of the interest caps would make CICs attractive to investors who until now had refused to look at them.

'I don't think equity returns have any relation to Bank of England returns or any other interest rate. Decisions on equity investment are completely independent of interest rates and are based on the risk of investment in that company and the likely return, so this change is sensible.'

The changes come after Burgess carried out a consultation in the middle of last year on the possible effect these caps have on deterring investors.

In her response to the consultation, Burgess said many of the original tensions that existed when the CIC was first created in 2005 still exist.

She wrote that the tensions were 'the need to strike a balance between maximising potential access to finance and maintaining the integrity of the asset lock and a fair reward for the risk involved [in investing] and the principle that no individual or group of individuals should receive disproportionate income for their investment'.

The overall cap for the distribution of profit is unchanged at 35 per cent - this means that in any CIC at least 65 per cent of its profit will be reinvested in the company.

However, individuals or companies who invest in a CIC through shares will no longer be limited to returns of five per cent above the Bank of England base rate - this changes to a flat rate of 20 per cent of the paid up value of the share.

In the case of 'quasi-equity', in the form of loans where repayments and interest is linked to performance, the current cap is four per cent above the Bank of England base rate. But this will change to a flat rate cap of 10 per cent of the average amount of the CIC's debt.

Brewer described the changes as 'brave'. 'I think it's brave to go for a totally independent [of the Bank of England] cap. Some will think it's a fair rate of return, others won't. But it's transparent and simple which means everybody knows where they stand, so I think it's a good move.

'It's to Sara Burgess and her team's credit that they're sharing the entrepreneurial ethos of the sector in terms of taking a risk and seeing if it works. If you don't take good well-reasoned risks and be brave than nothing ever changes.'

The regulator said there would be a review of the caps again in two to three years' time.

To read the full consultation response click here

• The CIC Association is hosting an event of discussion and debate about CICs, the proposed changes and how to improve awareness on Monday 18 January. For more information click here.