Mr Brian Cotter (Shadow Minister (Trade & Industry), Trade & Industry; Weston-Super-Mare, Liberal Democrat)

I beg to move amendment No. 41, in

clause 24, page 28, line 16, at end add—

'(c) a charity may become a community interest company.'.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

With this it will be convenient to discuss the following:

Amendment No. 42, in

clause 24, page 28, line 17, leave out subsection 3.

Amendment No. 35, in

clause 24, page 28, leave out lines 17 to 18 and insert—

'(3) Notwithstanding the purposes for which a community interest company is established it—'.

Mr Brian Cotter (Shadow Minister (Trade & Industry), Trade & Industry; Weston-Super-Mare, Liberal Democrat)

I am pleased to move the amendment on behalf of my hon. Friend the Member for Tweeddale, Ettrick and Lauderdale (Mr. Moore) and myself. We are talking about an important subject, to which we have already referred: community interest companies. My colleagues and I are engaged on the issue, and are supportive of community interest companies, but I wanted to raise a particular point. The amendments would remove the provision that states that charities cannot become community interest companies and would instead allow them to choose that legal form if they so wished.

As my noble Friend Lord Phillips of Sudbury noted in the House of Lords, clause 24 states:

''A community interest company established for charitable purposes is to be treated as not being . . . a charity''.

As Lord Phillips pointed out, that is something of a paradox, because a body established for exclusively charitable purposes and operating exclusively as a charity is prevented from registering as a community interest company.

The concept of a charity has always been defined by an organisation's activity and purpose rather than its form. That fundamental point is enshrined in charity law and has in the past given charities the necessary flexibility to adopt the most appropriate form to perform their work. Preventing a charity from choosing to become a community interest company will only create confusion in the public mind about the differences between each structure.

The Government claimed in the other place that they would not accept such an amendment, on the grounds that it would be of little use to charities, which would not wish to use the new form as it would require them to comply with additional regulatory requirements. None the less, it should be for a charity to choose which legal form is most appropriate for the execution of its work. It should not be for the Government to limit the decisions of individual charities, which each have different needs and aspirations. As Lord Phillips said in the other place, he consulted two Law Lords, Lord Browne-Wilkinson and Lord Hoffman, on the issue. Both have extensive experience in dealing with charities, and both shared his concerns.

The Government have said that a new legal form for charities will be created: the charitable incorporated company. Under the draft Charities Bill, the Home Office believe that that will

''avoid dual regulation between charity and company law and provide an alternative to the company limited by guarantee model currently used by many charities.''

None the less, the proposal is likely to be utilised by smaller charities that want to operate within the simple legal framework that the charitable incorporated company will provide. Concern has therefore been expressed that the new type of legal form will be of little use to larger, high-profile charities, which may want to use the community interest company form.

It has also been said that grant-giving charities will find it easier if community interest companies can register as charities, as they will find it easier to make

grants to them—a point that I believe has been raised with Ministers by the Community Development Finance Association.

The Government have claimed that the community interest company form is not designed to be used by charities, but, as was pointed out in the other place, virtually no other legal form is specifically designed for charities. The company limited by guarantee and the company limited by share are both forms utilised by charities, but there is no confusion. For example, a company limited by guarantee that is a charity is still a company limited by guarantee. Why should the same not apply to charities that wish to use the community interest company form?

Allowing charities to become CICs will allow them the maximum flexibility to choose whichever form is most suitable for their work, and will thus help to enhance the value of the new community interest company structure. That will in turn boost the social enterprise sector, as there is a lot of commonality between CICs and charitable work. I commend the amendment to the Committee.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Before I call the next speaker, I should say that I intend to let the debate on the amendments range widely to cover the clause, on the basis that we will not then have a clause stand part debate. If that does not inconvenience the Minister, it might help to facilitate proceedings.

Mr John Battle (Leeds West, Labour)

Thank you, Mr. Conway, for giving me the opportunity to say a few brief words, because I am enthusiastic about the idea of the new instrument of community interest companies reaching the statute book. That sentiment is shared on both sides of the Committee, so I am keen to ensure that we do not make obstacles, which may not really exist, so insuperable that we cannot move forwards.

I notice that we are already slipping into using acronyms—I am suspicious of our language being reduced to text language—and referring to CICs as ''kicks''. To use a most appalling pun, I believe that the instrument could ''kick-start'' local economic development. More seriously, we should get away from the acronym and focus on the purpose of the instrument. The purpose is to allow ordinary people to invest a modest amount of money in a company that can provide goods and services locally, so that the benefits will be felt locally. My neighbourhood of west Leeds loses £18 million a year through goods and services being bought elsewhere. We could reinvest that money in our neighbourhood to take the boards off of boarded-up shops and reopen them. We could use the provisions of the Bill to help with the care of the elderly, the sick and youngsters. I want the provisions to have a real practical input, and not be just a financial instrument or just another piece of law.

I shall briefly comment on the remarks by the hon. Member for Weston-super-Mare (Brian Cotter), because I know that he appreciates the purpose of the new instrument. Having read the Hansard record of the debate in another place, I believe that there is a

danger that the Law Lords can become so obsessed with reconciling law that they miss the point. I share the concerns raised on the Floor of the House about the interface with charity law. I worked for 10 years in charity law trying to separate out which activities counted as charity and which counted as educational. However, I cannot support the hon. Gentleman's amendment and I think that we are making a mountain out of a molehill.

More reform of charity law will come. However, the charity commissioners wrote in support of the Government and I read out the letter on the Floor of the House. They say, ''Don't turn charities into community interest companies, but there is nothing to stop a charity setting up, with others, a subsidiary that is a CIC.'' The current remit of the Bill does not dilute the practical effects that the hon. Gentleman highlighted. We should not hold up the Bill by arguing whether we should wait for charity law to be reformed later—when that comes, it will be helpful. There will always rightly be a complex interface between charity law and business activity, because both areas are dynamic and growing, but there should not be a problem.

I shall make three quick points to the Minister on my own behalf. First, I welcome the fact that in setting up the regulations, and in the conversations that the Government had with the sector, the interested voluntary bodies that have campaigned for new social enterprise instruments will be included in the ambit of regulation to work with the regulator. I hope that she can confirm that, because that is most welcome. Secondly, I know that most of the detail will be included in detailed regulations. When will they be published? I look forward to that, so that we can work with the practical instrument as soon as possible.

Finally, can I be assured that when CICs are set up, they will get a fair wind when it comes to competing for contracts and tendering? Only 20 years ago—it is now history—I was involved with setting up co-operative businesses. It may surprise hon. Members, even Labour Members, to know that the most difficult thing was to convince the Co-operative bank, of all people, to accept a workers' co-operative as a viable business. That was not because the co-operative did not have a good business plan; they had a damn good business plan. However, the bank could not understand the complex nature of a co-operative company's structure, or the fact that, rather than one person being involved, all members shared in it.

We are well beyond that stage now, I am glad to say. However, I hope that lack of awareness of the slightly more complex community structure of community interest companies does not deter other businesses, local authorities and public bodies from recognising them, respecting them and treating them fairly. The new companies will need to be treated as good real businesses that can bid for contracts and tender on a level playing field with other private businesses. If we reach the point at which that is the case, we will have an instrument that allows local communities to invest

in their communities, and when they do, that investment will remain in the communities. Even if a scheme goes belly up after a few years—and of course, some businesses do—all the assets will remain in the community.

We are in a win-win situation with this proposal. I hope not only that it will become law, but that the Government will give it publicity and advertise it as a good thing for local communities. We should promote this instrument of community economic development and ensure that it is used.

Mr Andrew Mitchell (Shadow Minister, Economic Affairs; Sutton Coldfield, Conservative)

I am pleased to be able to speak to amendment No. 35, which is designed to be helpful to the Minister. Its purpose is to make it clear that a company established as a CIC cannot be a charity. That is, as I understand it, the current position in law, but the objective is achieved in the Bill by drafting that is so convoluted as to obscure the point. Anyone reading the Bill to the effect that a company established for a specified purpose

''is to be treated as not being so established''

would surely despair of the drafting. The amendment would make the point of principle more simply and clearly, and I offer it to the Government in that spirit only. If the Minister feels that it is not helpful, I will not press it.

Mr. Conway, you kindly said that we could have a slightly wider debate on the amendments in order to avoid the need for a clause stand part debate, and I am most grateful for your ruling. In the interests of the timing this morning, and of getting through the amendment paper, I do not intend to suggest a general debate on CICs, although I very much hope that we will be able to have one on Report, because, as the right hon. Member for Leeds, West (Mr. Battle) said, this is a matter of wider interest to a number of hon. Members.

The hon. Member for Weston-super-Mare asked whether a CIC could be a charity. I am agnostic on that point, although I think that the Bill should make the position clear. As I understand it, a CIC can have a relationship with a charity or, possibly, a charitable incorporated organisation. That means that if the Government intend us to be clear that a CIC cannot be a charity, they will have to look quite carefully at this legislation to ensure that it is enforceable, because of the arrangements that I have described.

I want to make three further points. I agree with the right hon. Member for Leeds, West about the use of acronyms. He will have noted that throughout these proceedings I have never referred to a ''kick''; I have always referred to either a C-I-C or a community interest company. It is quite important to distinguish this organisation, because in a moment I shall say a few words about another organisation that the Government are seeking to establish—the charitable incorporated organisation, which will arise under charity law. If there is a Charities Bill in the next Session, that form of organisation, too, will be established, and although the Minister made a good attempt on Second Reading to describe the difference between the two types of organisation, it will defy most

of our constituents. The organisations are closely related in intent in so many ways that great confusion will be caused.

My submission to the Committee is that the Government would have been wiser to wait until the House could see the shape of the charity legislation—draft legislation is being considered by the Joint Committee—before proceeding with CICs. That is the same point as was made about part 1 of the Bill: Opposition Members regret that the Government have produced a minnow when they should have produced the company law review and the major company law changes that we have been awaiting. Similarly with CICs, it would have been better to wait until the House could see the new Charities Bill and consider CICs in that connection.

I also think that the Minister will need to demonstrate that the raft of new legislation proposed is necessary. On Second Reading I drew the attention of the House to the Industrial and Provident Societies Act 1965. It is clear that the distinguishing characteristics of a community interest company, which are outlined in paragraph 161 of the explanatory notes, are very similar to those of an industrial and provident society set up under the 1965 Act.

For example, an industrial and provident society for carrying on any industry, business or trade can be registered if its business is conducted for the benefit of the community. Clause 33 says that a CIC

''satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community.''

Similarly, the Industrial and Provident Societies Act says that a community benefit society must state in its rules how profits are to be applied, and state factors relevant to the decision whether a society qualifies as a community benefit society; it must include whether it is non-profit-making and whether its rules prohibit distribution of assets among its members.

Clauses 28 and 29 allow regulations to prohibit or limit the distribution of assets by CICs and deal with the distribution on winding-up of a CIC. The Industrial and Provident Societies Act says that rules must prevent surplus assets from going to members, and the Bill promises, with regard to CICs, regulations that limit the amounts that can be paid to members in a winding-up.

Not only is the Bill premature, as this proposal should have been examined in the context of the draft Charities Bill, but much of it may be unnecessary. Its aims could have been accomplished in a far simpler legislative way.

I must point out to the right hon. Member for Leeds, West that the difference between the CIC and the CIO, which he understands—as you will, Mr. Conway, because of your expertise in the charitable sector—will not be understood by many others. The Government will have to return with a clearer exposition of the aim of both those two instruments.

The right hon. Gentleman was right to point out that we have not seen the secondary legislation regarding the CIC. As for the CIO, those considering

the draft Charities Bill have seen nothing, because there are no regulations for us to see. We are stabbing in the dark. I hope that the Minister will hear the words of the right hon. Gentleman and ensure that we are given sight of the secondary legislation, which, so far, we have been unable to review.

Ms Jacqui Smith (Minister of State (Industry and the Regions and Deputy Minister for Women), Department of Trade and Industry; Redditch, Labour)

As we have heard, clause 24 introduces the concept of the community interest company—the CIC, or ''kick''. I shall try to refer to it in full. The community interest company will be a company with additional features to ensure that it will work for the benefit of the community. The proposal has been developed in the light of two consultations, both of which have clearly demonstrated the demand for the specific and separate features of a community interest company. For instance, in response to the consultation, the Social Enterprise Coalition said that it would be a valuable addition to the legal forms available. The National Council for Voluntary Organisations described it as a useful tool for many organisations.

Some of the discussion today has centred round the distinction between the possible alternatives. The hon. Member for Sutton Coldfield questioned, both on Second Reading and today, how the community interest company would fit together with other legal forms—particularly the proposed charitable incorporated organisation and the industrial and provident society. The answer lies in the analysis carried out in the strategy unit report on the matter. It recommended the creation of the community interest company and the charitable incorporated organisation and the updating of the industrial and provident society.

I shall briefly explain the distinctions between those. The industrial and provident society, as we have heard, is a well established legal vehicle for co-operative and mutual activity, for the benefit of members and the wider community. The IPS is particularly valued for its close links to co-operative and mutual principles, usually expressed in a one member, one vote governance structure. It is a very appropriate structure for many community enterprises, but it is not appropriate for everything.

Our consultation clearly showed that many social enterprises wanted to use the company form, because of its flexibility and familiarity, but they wanted the additional help of a tailor-made, robust asset lock. In other words, they would not need constantly to re-invent, sometimes with quite considerable expense and difficulty, an asset lock to tag onto a traditional company form. That is what the community interest company will provide.

The charitable incorporated organisation is an entirely different animal from the community interest company; indeed, its potential users are the very people who will not want to use community interest companies. The charitable incorporated organisation is for those organisations that wish to be charitable but want a simpler, better vehicle than the charitable company. The community interest company, on the other hand, is for those who want a distinct non-charitable company form. I shall come on to some of

the difficulties that would be caused by conflating the two in a moment when I address the amendments tabled by the hon. Member for Weston-super-Mare.

I hope that that explanation also helps the hon. Member for Sutton Coldfield to understand why we are legislating for community interest companies now, in advance of the Charities Bill. We are not placing the cart before the horse, as he suggested on Second Reading; rather, we have two different but equally valuable horses, one of which—the community interest company—is running a slightly earlier race. The community interest company is being introduced in this Bill because it is a company, formed by company law. The charitable incorporated organisation is not a company; it will be formed by charity law, so it is appropriate that be covered by the Charities Bill. As I suggested on Second Reading, there is nothing to be gained by forcing through legislation for both forms in the same Bill. There are considerable advantages, as my right hon. Friend the Member for Leeds, West said, in getting on with providing the alternative vehicle for social enterprise that received so much clear support during the consultations.

I accept that for some of those who want to set up new enterprises for the community, the choice of legal forms is quite complicated. That is one of the reasons why the Government intend to make a particular effort to promote both the community interest company and the other legal options available to help people to understand which is the right one for their enterprise. I agree with my right hon. Friend and the hon. Member for Sutton Coldfield that that is a priority, and I can assure the Committee that the Government will be working closely with the social enterprise sector to make that happen.

We strongly believe that amendments Nos. 41 and 42, which challenge the basis of the policy on which we consulted last year, would have harmful consequences both for community interest companies and for charities. As the hon. Member for Weston-super-Mare said, that was subject to considerable debate in another place. We have carefully considered the policy and are satisfied that it is the right one. The community interest company should not have charitable status: it is a new company form for social enterprises, is clearly non-charitable, and as I suggested, has the flexibility of a company limited by guarantee or shares, but it is run for the benefit of the community and has a regulated asset lock. It is a clear and separate option—a clear and separate brand for social enterprise.

Charities can choose a range of organisational forms and may incorporate in several ways, including as a company limited by guarantee. The difference between incorporating as a company limited by guarantee and as a community interest company is the access to the community interest company form's asset lock. That is a major benefit but, of course, charities already have an asset lock as part of their regulation by the Charity Commission.

Therefore, a charity that chose the community interest company form would gain nothing from the asset lock, but would be submitting itself to dual regulation by the community interest company regulator and the Charity Commission. A charity that was allowed to adopt a community interest company could act only within the boundaries of the more onerous Charity Commission regulations. It would not be able to trade or otherwise run itself with the freedom that would be enjoyed by the non-charitable community interest companies envisaged in the Bill.

Hon. Members rightly raised the issue of clarity with respect to different forms, and the other problem with the amendment is that it would undermine the clarity between the different forms. If we were to accept the amendment, there would be two regulators and no single answer to such questions as, ''Who are community interest companies regulated by?'', ''Who do I complain to about a community interest company?'', ''Do community interest companies get tax breaks?'', ''How can community interest companies raise finance?'' or ''Can community interest companies pay directors?'' That confusion would create a barrier to building understanding of the community interest company among the public in general and among those wishing to become community interest companies, give advice on them or finance them.

The policy that we are introducing is based on our successful consultation last year. Responses to it raised specific concerns that community interest companies and charities should be clearly separate. As my right hon. Friend the Member for Leeds, West, pointed out, the Charity Commission itself raised that concern and supports our position. We have considered the arguments for an amendment, but we remain convinced that our policy is right.

Amendment No. 35, tabled by the hon. Member for Sutton Coldfield, seeks, as he said, to restate our policy in different words. Although I again thank him for his helpfulness, I believe that the amendment is not only unnecessary but may have unintended and unwelcome consequences.

As I said in my comments on the other amendments in the group, the purpose and effect of clause 24(3) is to ensure that a community interest company cannot have charitable status. That is achieved by providing that it is not a charity and cannot be recognised as a Scottish charity. The provision also refers to charitable purposes, because that is the language used in some statutes and in tax legislation in particular. Even though a community interest company cannot be a charity, it may still be set up for purposes that would be charitable. For example, a community interest company could be set up to research cures for disease. Clause 24 therefore explains, for the avoidance of doubt, that a community interest company with charitable purposes should not be treated in the same way as any other organisation with charitable purposes.

Our policy in the area is clear, but the amendment might make it possible for someone to argue that a community interest company established for

charitable purposes would be eligible for tax breaks. I repeat that our policy is clear: community interest companies will not be eligible for special tax breaks or for any tax breaks designed for charities. That is entirely in line with our intention that they should be a non-charitable company form.

I agree with my right hon. Friend the Member for Leeds, West that consultation with the organisations involved in social enterprise is crucial, and we have undertaken such consultation up to this point. For example, we involved those organisations in the consideration of the job description and appointment of the community interest company regulator. I assure my right hon. Friend that we will continue to keep up that important and fruitful relationship and continue to consult.

We have already published draft—what we call ''dummy''—regulations with respect to community interest companies. I have sent those to members of the Committee and am happy to circulate them again. In a few weeks, we will consult formally on the draft regulations.

Finally, I am happy to reassure my right hon. Friend that community interest companies will be no different from other companies in terms of the requirements that apply to them when they engage in public procurement. That means, for instance, that the rules applying to the transfer of employees will be the same, regardless of whether the company is a community interest company.

The Government see, as my right hon. Friend does, that public procurement is an area in which social enterprises, including community interest companies, have an important part to play. Although they will compete on a level playing field with private companies, social enterprises may enjoy some competitive advantage simply because they can market themselves as working for the community, as he pointed out, rather than for private gain. We produced a tool kit last October specifically to help social enterprises to bid for local government contracts.

I hope that hon. Members will not press their amendments and that we can proceed with the important work of boosting social enterprise and the economic development of our communities through the development and institution of community interest companies.

Mr Brian Cotter (Shadow Minister (Trade & Industry), Trade & Industry; Weston-Super-Mare, Liberal Democrat)

First, I thank you, Mr. Conway, for allowing us to have a brief but wide-ranging debate on community interest companies. The right hon. Member for Leeds, West feels particularly strongly about this, as we all do on both sides of the Committee. That is welcome in itself.

The Minister has not exactly made me crumble with her remark, but I accept that the concern about charities has been raised in the other place. There was a long debate and a close vote, indicating concerns that

are fairly widespread. She has advanced some points and the uncertainty about charities is very much in the arena. On the basis that the matter has been rehearsed twice at length and very clearly, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Mr. Mitchell seeks to catch my eye.

Mr Andrew Mitchell (Shadow Minister, Economic Affairs; Sutton Coldfield, Conservative)

I do not want to press my amendment, following the Minister's withering rejection of it, but I hope we can return to CICs on Report. There is undoubtedly strong support across the House for the concept. I listened once again with great care to the Minister's description of the difference between the CIO and the CIC. I will read what she said in Hansard, but I still do not think that we are there. As I said on Second Reading—

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Order. I may not have given the hon. Gentleman a clear enough steer. I thought he was seeking to raise a point of order with me about whether we may debate his amendment now because it was not the lead amendment, which was moved by Mr. Cotter. That means that there is now no amendment before the Committee. The hon. Gentleman may call a Division on his amendment, but I am afraid that he cannot debate it again.

Mr Andrew Mitchell (Shadow Minister, Economic Affairs; Sutton Coldfield, Conservative)

May I complete my remarks on CICs?

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

Yes, we could do so in a brief clause stand part debate.

Question proposed, That the clause stand part of the Bill.

Mr Andrew Mitchell (Shadow Minister, Economic Affairs; Sutton Coldfield, Conservative)

I am most grateful, Mr. Conway. I still believe that this is not joined-up government and that the cart was placed before the horse. The Minister said that this is a case of two horses pulling the same cart, but I fear that we are observing two horses from a great distance without being able to distinguish between them—they are both greys. As a result, I am unable to place my bet on which horse would most adequately fulfil my demands for it. Because we have not seen all the secondary legislation and have seen none of the legislation in connection with the CIO, we cannot tell whether the horse is a nag or a racehorse.

Mr Derek Conway (Old Bexley & Sidcup, Conservative)

I am grateful for the Committee's tolerance of my slight confusion there.

Question put and agreed to.

Clause 24 ordered to stand part of the Bill.

Clause 25 ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 26 ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 27 ordered to stand part of the Bill.

Schedule 5 agreed to.

Clauses 28 to 31 ordered to stand part of the Bill.

Schedule 6 agreed to.

Clauses 32 and 33 ordered to stand part of the Bill.