Co-ops and charities: Are they mutually exclusive?

What is the difference between charities and co-operatives?

Since the Co-operative and Community Benefit Societies Act in 2014, only two types of society can now be registered: co-operatives, which exist to benefit their members; and community benefit societies, which exist to benefit the community.

Co-operatives can choose different legal structures, including limited companies, community interest companies, community benefit societies or co-operative societies (bona fide co-operatives).

But as enterprises that aim to benefit their members, bona fide co-ops cannot achieve any of the available charitable statuses.

“The purpose of benefiting members is self-interest and therefore not charitable,” says Jim Pettipher, deputy executive director of Co-operative Futures, a business consultancy for co-ops.

“The main point of being a charity is to get protection for a charity’s income and its assets from taxes. Any society that has charitable status is not, and cannot be, a fully functioning co-operative.”

The Charity Commission agrees. “Operating as a true co-operative is not a charitable purpose and likely to be inconsistent with charitable purposes and status,” says a spokesperson.

There are four types of charity structures in England and Wales – charitable company, unincorporated association, trust and – since the Charities Act 2006 – the charitable incorporated organisation (CIO).

The advantages of the CIO include simpler accounting and reporting requirements: only one annual report – unlike charitable companies, which also need a directors’ report – and no statutory fee to register.

A CIO must be registered with the Charity Commission and set up with exclusively charitable purposes.

But if co-ops don’t pass the public benefit test, that’s not the case with community benefit societies.

Mr Pettipher says: “Exempt charity status is granted by HMRC to organisations that already have a sufficiently rigorous regulator.

“HMRC accepts that since they are already effectively regulated, they are exempt from the requirement to become a registered charity, regulated by the Charity Commission. Exempt charities are almost exclusively community benefit societies and educational institutions – such as housing associations or universities.”

The government wants all exempt charities to become registered charities and be regulated by the Charity Commission, but it has not set a timetable for this.

Exempt charities are entitled to the same tax benefits as registered charities, including relief from income tax, corporation tax and capital gains tax, exemption from inheritance tax and relief from business or non-domestic rates.

“Community benefit societies can be set up for solely charitable purposes. A charitable community benefit society is exempt under the Charities Act from registration or regulation by the Charity Commission,” comments the Charity Commission. “Operating as a co-operative (i.e. to benefit their members) would be inconsistent with their community benefit status as well as charity law.”

Charitable community benefit societies are community benefit societies with charitable purposes such as Hastings Pier, Neenton Community Society and West Cumbria Care and Support.

To qualify for charitable status a community benefit society must have a purpose that is beneficial for the public in general.

They must also have an asset lock. This must take the form of a rule stating that if the society is dissolved, any residual assets must be transferred to another charity with the same or similar charitable purposes. The asset lock rules prescribed by the Community Benefit Societies (Restriction on the use of assets) Regulations 2006 cannot be used, as they do not give exclusive rights to charities.

“There is a prospective benefit of being a charitable society (either exempt or registered) as the Charity Commission now accepts that charitable societies may pay interest on community / withdrawable shares as an additional type of fundraising / investment mechanism,” says Mr Pettipher.

The FCA currently prevents community benefit societies from identifying themselves as co-ops. Co-operatives UK, the umbrella organisation for co-ops, is working with the FCA to try to remedy this and is speaking with members ahead of its response to a wider consultation.

As exempt charities, community benefit societies with exclusively charitable purposes are registered with the FCA and not the Charity Commission. Those that are registered social housing providers are regulated by the Homes and Communities Agency. This includes approximately 600 housing providers registered with the FCA.

“There are a small number of registered charities which have a co-op ethos, but it does not form part of their charitable purpose or allow non-charitable benefits to members,” adds the Charity Commission.

A co-op can also set up a charity into which it donates some of its money to deliver charitable objects. An example would be the Midcounties Co-operative Community Fund, set up in 2011.

Mr Pettipher adds: “In my view, the last 2.5 co-op principles (education / co-operation among co-ops / good corporate citizen) are  outward-facing obligations that co-ops should be supporting.

“A co-op could set up an external charity to which it might choose to donate money as a way of covering off its obligations under these principles without having to incorporate them into its day job.

“A good example of this might be big retail societies, which may not have the in-house skills to deliver on these principles.”

But he warns that charities should not be perceived as a “tax-efficient way of buying a PR” or a “marketing exercise for social goals” or “corporate responsibility”.

“The whole point of a charitable donation is that it is a donation,” he says. “You are not buying anything. You have no right to expect any sort of return other than a desire to see the charitable object furthered.”

He adds: “That is fundamentally what separates co-operative objectives from community or charitable objectives. One is collective self-interest. The other is for the greater good. Mixing them up is stupid and will achieve neither.”

Charities are not restricted from using the words “co-operative” or “co-op” in their name but a charity’s name should accurately reflect its charitable purpose.

“Given that being a co-op is not charitable, the scope is somewhat limited,” adds the Charity Commission. “If the charity is a company, then Companies House will determine whether it can have the word co-operative in its name.”

Case studies:

The Foster Care Co-operative

The Foster Care Co-operative is the only co-op operating in foster care in the UK
The Foster Care Co-operative is the only co-op operating in foster care in the UK

The Foster Care Co-operative is the only co-op operating in foster care in the UK. As a co-operative any surplus income it makes is re-invested to provide care support and training or to recruit more foster carers. The co-op formed in 1999 and in 2010 set up a charity as a subsidiary, the Foster Care Co-operative Charitable Trust.

Executive director Ian Brazier said: “Foster carers may not have a commercial interest in the agency they work for. We therefore put a structure together to ensure they had consultation rights in what we do.

“Our focus is the children we care for, so none of us draw a dividend and all proceeds remain in the organisation.

“It was felt that there was a need to provide some support to our children who have left care and are in need. Looked-after children have much to cope with and additional tuition can be a big benefit.

“These needs were gathered in a charter for a small charity fund to ring-fence such support and clarify eligibility for such funding.

“It was felt this gave the transparency and audibility required to use the co-op’s money for such purposes. It is not a large charity and the calls on it by our carers are considered and surprisingly restrained – often due to the generosity of our carers themselves.”

The Co-operative College

After three years of consulting on the change in the governance structure, the Co-operative College has become a CIO.

The new structure will enable it to have a wider membership, giving members the opportunity to have a voice in how it is run. They also have the chance to become trustees.

Under the previous structure the College was an unincorporated charity and had to report to the Charity Commission. As a CIO it will be regulated solely by the Charity Commission.

“It is important to get engagement from different stakeholders,” says vice principal Emma Willder. “In a CIO you can decide what your membership structure will look like.”

The CIO structure means the college can develop a membership proposition making it as close to a co-op as a charity can be, she added.

The membership proposal is currently under development and could include offers for individuals, societies, co-operative schools and international organisations, helping it diversify its income sources.

Another advantage is that the college now  has a legal entity of its own, allowing it to develop a constructive working relationship with its former trustee, Co-operatives UK.

“Trustees cannot benefit from charity so in the past we couldn’t always work with Co-operatives UK. Now we can and look forward to working together for a better co-operative future,” adds Ms Willder.

For more charity case studies, click here