The co-operative disadvantage: Why the movement needs a level playing field

Who would voluntarily choose to be a co-operative or a community benefit society? Or – to put the same question in a slightly different way – who would...

Who would voluntarily choose to be a co-operative or a community benefit society?

Or – to put the same question in a slightly different way – who would choose to register a new co-operative business or a new organisation aiming to help its local community under the Co-operative and Community Benefit Societies Act (CCBSA) when other legal models are arguably simpler, cheaper and more flexible?

British law has been famously generous in the choice of legal vehicles it makes available to new co-operatives or community groups. Many small worker co-ops have traditionally used co-operative rules for the Companies Act, for example.

These days, there are other options. “Co-ops have been registered as partnerships, as LLPs [limited liability partnerships], as companies, and there’s even model rules available for a co-operative CIC [community interest company],” says Ian Snaith,
co-operative law consultant.

Despite the alternatives, there remains a soft spot in the co-operative movement for the Co-operative and Community Benefit Societies Act, the latest iteration of the Industrial and Provident Societies Act steered through Parliament by co-operative leaders  such as Edward Vansittart Neale in the mid-19th century.

But sentiment can sometimes cost you dear.

Advertisement

In a number of ways – some minor, some less so – the rules and regulations currently in force can be seen as penalising those choosing the CCBSA route.

There’s a sense of this inequality even in the fees charged for accessing business information. Basic information on companies is available free from the Companies House register, while accounts or more detailed records typically cost a pound. Try a similar search on the Mutuals Register (which holds CCBSA data) and each report will cost £12.

There is a much tighter requirement on CCBSA societies when it comes to auditing, as Ian Snaith explains. “The accountancy rules set lower audit threshold limits for societies than companies,” he says.

Private companies can normally avoid the expense of audits providing they meet at least two of three small company criteria: turnover under £6.5m, balance sheet assets under £2.3m or fewer than 50 employees.

CCBSA societies, by contrast, have a £5.6m threshold (£2.8m for charities) but even below this there are additional requirements.

“A society with turnover in excess of £90,000 the previous year has to obtain an ‘accountant’s report’, something a company wouldn’t have to do,” Ian says. He adds that credit unions, housing and insurance societies are policed more rigorously still.

The act of legal incorporation is also much more straightforward and cheaper as a company than as a CCBSA society.

Model articles for companies) are available online from the government (s.coop/1wpwq), and the Charity Commission also offers its own models for charitable CLGs (s.coop/1wpwr). Registering at Companies House costs £15.

By contrast, anyone registering a new co-operative or community benefit society normally needs to use a set of model rules and will pay a fee to the registering body (the Financial Conduct Authority) of between £40 and £950, depending on how many changes are made to the model’s wording.

Model rules are available from a number of organisations (including Co-operatives UK), many of which normally charge for their use. Adding together the model rule providers’ charges and the FCA fees will result in several hundred pounds of expenditure, even where model rules are used unamended.

This in itself is potentially unsatisfactory. While Companies House rules can be easily adapted (one set of rules for collectively managed workers’ co-operatives even chose to rename the board of directors as the workers collective, for example), many co-operative and community benefit societies stick with the model rules, even where minor changes might be preferable.

Cath Muller, who is co-editing the forthcoming revised edition of Radical Routes’ How to Set up a Workers’ Co-op, says that all this tends to make the Companies Act route much more tempting for new co-operatives.

“It’s cheaper and easier, and most small new co-ops don’t have a great deal of money,” she says. “In the absence of any funding, we advise people to use Company legislation and do it themselves.”

A further advantage is that two founder members can form a Companies Act co-op; under CCBSA legislation the minimum number of members is three.

Not-for-profit community organisations also need to choose their legal structure with care, particularly if they are seeking charitable status.

Provided the objects clause is properly charitable, registering a Company Limited by Guarantee (or a new Charitable Incorporated Organisation) in England and Wales with the Charity Commission is relatively straightforward.

Charitable community benefit societies must instead be approved as ‘exempt’ charities directly by HM Revenue and Customs.

HMRC, already under fire for poor staffing levels for its taxpayer support services, seems to have similar staffing issues in its Charities department in Bootle.

Earlier this year, it was taking more than three months to process new applications; an online filing service recently introduced may have reduced this time-lag a little, but the HMRC delay remains much longer than the turnaround time at the Charity Commission.

A new arrangement to replace the HMRC role for charitable community benefit societies has been floated by the government but would appear not to be a priority.

As Ian Snaith points out, company regulation falls ultimately within the scope of the Department for Business, Innovation and Skills (BIS), while the Treasury is the lead government department for co-operative and community benefit societies.

“By contrast with the Treasury, BIS has something of a can-do promotional remit towards business,” he says, adding that some people have suggested moving CCBSA society registrations away from the FCA to Companies House.

Another possibility, he suggests, could be to move responsibility for (at least) community benefit societies across to the Office of the Regulator of Community Interest Companies, effectively part of Companies House.

He admits, though, to having some sympathy with FCA staff, who are under a statutory requirement to ensure new CCBSA registrations meet the requirements of the Act.

“The dilemma is this: how strict do you want the FCA to be?” he says.

The FCA’s current public consultation on how it should approach registration of new societies has brought a flood of responses, some contradictory. The FCA’s mutuals staff, who are seen as generally sympathetic to the movement, could justifiably feel that whatever they do will be deemed by some to be wrong.

“Co-operative and community benefit societies are expensive and troublesome, but there is one advantage: you can have withdrawable share capital,” Ian Snaith adds.

The recent growth of interest in community share issues, supported by the Manchester-based Community Shares unit, has undoubtedly led to many new co-operative and community ventures choosing to incorporate the CCBSA way. On the other hand, the opportunity still exists for other types of co-operative or community organisation to raise capital through community loan stock.

Ian also makes the point that the co-operative brand is better protected through the FCA’s tighter control of CCBSA co-operatives in comparison with company law – something reflected, he says, in the fact that the Co-operative Bank as a plc is still able to use its name unchanged.

There is a broader perspective for all this. The International Labour Organization’s Promotion of Co-operatives Recommendation, agreed in 2002, requires governments to treat co-operatives legally “on terms no less favourable than those accorded to other forms of enterprise”.

Some people might argue that, when it comes to the Co-operative and Community Benefit Societies Act, Britain hasn’t quite got there yet.

In this article


Join the Conversation