The Economic Crime and Corporate Transparency Act 2023: key considerations for charities

Background  

The Economic Crime and Corporate Transparency Act (the Act) received Royal Assent on 26 October 2023 and the first tranche of provisions in the phased roll-out came into force on 4 March 2024. 

The Act will see significant changes being made to company law, and trustees of charitable companies together with directors of not-for-profits and community interest companies, will need to be aware of what those changes mean for their organisations.  

The key objectives of the Act are to strengthen the UK’s ability to tackle economic crime and improve transparency over corporate entities. Amongst other reforms, Companies House will receive additional powers as a regulator which will see it moving from being a largely passive regulator, primarily receiving and publishing information, to an active gatekeeper of that information with powers to verify, decline, share and remove information submitted to it. 

For more information around the wider impact that the Act will have, please see the article put together by our corporate colleagues here.  

Enhanced powers for Companies House 

The Act has provided Companies House with enhanced powers to regulate and scrutinise the corporate entities on their register. These include:  

• stronger checks on company names 
• new rules for registered office addresses  
• a requirement for all companies to supply a registered email address  
• a requirement for all companies to confirm they are forming the company for a lawful purpose, and that its intended future activities will be lawful  
• greater powers to query information and request supporting evidence  
• the ability to annotate the register when information appears confusing or misleading 
• powers to “clean up” the register using data-matching to identify and remove inaccurate information 

• powers to proactively share data with other government departments and law enforcement agencies. 

If a company fails to comply with the new requirements under the Act, new civil and criminal penalties could apply, including financial penalties and director/trustee disqualification.  

What does this mean for charitable companies?  

Charitable companies are already dual regulated by both Companies House and the Charity Commission, but the implementation of the Act could lead some trustees to consider whether the increased regulatory burden outweighs the benefits of operating their charity as a company. With that in mind, it is worth noting that it is possible to convert from a charitable company to a charitable incorporated organisation (CIO). 

A CIO is an incorporated structure designed specifically and exclusively for charities which, crucially, is not subject to company law. Instead, CIOs are only regulated by the Charity Commission and only have to comply with charity law.  

What is the process for converting from a charitable company to a CIO? 

The process for conversion is relatively simple but it cannot be used if the charity is an exempt charity since exempt charities cannot be registered with the Charity Commission (a pre-requisite for CIOs). 

Given the conversion will not result in a new corporate body (it simply results in the re-registration of an existing corporate body as a CIO), the charity can usually retain its registered charity number, charity name and existing bank account. It also means that there is no requirement for a transfer of assets and liabilities (including employees) and it should not be necessary to assign or novate any contracts. 

The process starts by the company submitting an application to the Charity Commission, together with the following documents: 

• A copy of the special resolution approving the charitable company’s decision to convert to a CIO (either passed by a majority of not less than 75% of members during a general meeting or passed unanimously by way of written resolution). 
• A copy of the proposed CIO constitution.  
• A copy of the resolution adopting the CIO constitution.  

• Trustee declarations and any other documents the Charity Commission may request follow receipt of the application.  

If everything is satisfactory, the Charity Commission will request that Companies House remove the company from the register and notify the trustees that the conversion is complete.  

What if the charitable company holds property? 

Once the company has converted to a CIO, an application must be made to the Land Registry to update the details of the legal owner on the property register. No transfer of the property is required as the legal persona remains the same. 

Is the process the same for a CIC to convert to a CIO?  

Although there is a similar conversion process for Community Interest Companies to convert to a CIO, it is different from the above. Please get in touch with a member of the Charities Team should you wish to find out more.    

The Birketts view: key considerations  

If you are thinking of converting to a CIO, you may wish to consider the following:  

• Employees: given there is no change in legal persona upon conversion, TUPE will typically not apply. However, you should take independent legal advice if the charity has employees, in particular to flush out any potential pension issues which might be triggered by the conversion.  
• Third party consents: as mentioned above, the conversion will not require the transfer of assets or liabilities, so contracts should not need to be assigned or novated.   However, it would be prudent to consult with third parties to ensure that they are aware of the conversion before it takes place. 
• Funding arrangements: this is particularly important in relation to agreements with funders which may contain provisions requiring the recipient to obtain the funder’s prior consent to any restructuring. Early discussions will likely be necessary. 
• Register of charges: unlike Companies House, the Charity Commission does not have a register of charges and certain funders (particularly those providing secured funding) may, therefore, be less willing to give their consent to the proposed change.  

Historically, companies have been the incorporated structure of choice for many charities since they are well understood by third parties, particularly when compared with CIOs which are a relatively new incorporated structure having only been available since 2013. However, having to operate under both company law and charity law can be awkward and with the prospect of Companies House becoming a more active regulator, we suspect that some trustees might consider that converting from a charitable company to a CIO is preferable in order to reduce the regulatory burden.  

If you would like to discuss the conversion of your charitable company to a CIO, please feel free to get in touch with any member of the Charities Team here at Birketts.