CIC Association

Serving Community Enterprise

Urgent help would be very much appeciated re schedule 2/schedule 3 CIC`s


I am really hoping someone will be able to help me. I am I bits at the moment about a mistake I have found out yesterday that I have made which goes back to the setting up of our CIC in 20010 so here goes with the background...


I set up a small Ltd company by shares with just myself and my life/working partner as directors and shareholders (hold nominal £1 share each if that`s of interest).  Set up in 2009 and transferred to CIC in July 2010 when the CIC model was still very new.  We are passionate about the value of nature based learning and have set up a Forest School and Forest School training organisation having such a positive effect on the mental and physical health & wellbeing of everyone involved.  Our personal income has been very low over the years, and only drawing what we need to, to live.  It`s been hard financially but very rewarding philanthropically.  We believe in the social value of what we do.


Like I would imagine many small CIC`s with very limited financial resources, we do everything ourselves working 7 days per week and 18 hrs per day.  My personal responsibility also includes the day to day admin and business administration.  I have an accountant who prepares annual accounts. 


In December last year, I submitted our annual accounts to the CIC regulator as normal for the year end 5.4.15 and our accounts were passed by the regulator in Jan 2016.  In that financial year (y.e 5.4.15), we paid ourselves a dividend of £3,000 each which was noted in the set of accounts accordingly (on the advice of the accountant to be tax efficient I understand).  Therefore, our personal salary including dividend for my partner and myself, for the year was £13,000 each.  Absolutely nothing for the work that we do and certainly isn`t commensurate to the position we hold.  However, saying that, we are growing (t/o £69,162 last year) and can see a good future ahead with a more commensurate salary when we scale up later this year.  We also had to pay our first corporation tax bill of £685 which hurt!   I actually feel proud that we have built this CIC from nothing but the faith I had in my personal ability to continue to drive this forward has just been crashed.


I contacted John Mulkerrin yesterday as I needed advice as we are about to take a huge leap of faith and scale up opening a new strand to our CIC – The School in the Wood – a full time, outdoor woodland school for teenagers who struggle in mainstream education – taking us potentially to a £400K turnover.  This part of the project is pioneering and I hope to change our attitudes to mainstream education in that not every child or teenager can learn effectively and successfully in conventional classroom settings so instead of labelling the young people as difficult because they can`t `conform`, and as a society, we believe that we need to change the way many young people access pathways for their personal learning and development.  Thank you John, I have never had a conversation with you before and I now wish I had of done.


As our conversation progressed, John asked if I was a schedule two or schedule 3 CIC.  I had no idea to be honest.  Dug out our Articles and found I was indeed a schedule 2.  I had no idea of the implications either when I set up (on advice given) or indeed until yesterday. 


It felt like a red hot poker through my heart yesterday and talking with John realised that we shouldn`t have received a dividend at all being schedule 2 and in fact I should have set up the CIC as schedule 3 right from the beginning.  I try very hard not to make mistakes and this has really affected me deeply and I feel dreadful and stupid.


Ironically, for the last 6 months, in preparation for our scale up, I have been attending business mentoring sessions with various local business support organisations, updating myself on lots of aspects of social enterprise – I even went on a `Legal Structures` workshop however, whether a CIC was a schedule 2 or 3, has never been mentioned throughout my CIC journey since 2010 by anyone until yesterday.  The only question ever asked is whether I was a CIC Ltd by shares or guarantee.


I immediately emailed the CIC regulator`s office yesterday and explained what I have discovered as my mistake.  I am petrified of any potential ramifications of this genuine error.  If it can be a paperwork adjustment, then I`ll be OK. If I need to pay anything back, then we will struggle.   My lay feeling is that the £6,000 we were paid as a dividend between the two of us, will need to be re-adjusted to be included as salary instead for that year and our annual accounts adjusted and re-submitted (if that is the way forward, I don`t know).  Again, looking simply, our salary shown in the accounts will therefore be £6K higher therefore corporation tax already paid of £685 should be lowered (if not now considered completely overpaid) and personal income tax payable accordingly.


I not only feel annoyed with myself in my naivety at taking advice without reading the small print, but also question the awareness and implications of schedule 2 & 3 because although I do actually consider myself to have a business brain so to speak; it has never come up in any business conversation in my entire journey as a CIC, I am flummoxed that I missed this, and I`m sure I cannot be the only one?  Of course, it is my responsibility as a director and from this experience now, I need to be much more aware and when we scale up, I need to employ someone who has detailed expertise in this area.


Sorry this post is long - I really am in bits emotionally and would appreciate any advice at all from anyone in this accounts group as to what I can do to move forward and what I can expect to happen.  If I am worrying completely over the top, please could you also let me know.


Yours hopefully and thankfully,







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Replies to This Discussion

Hi Clair, the easiest thing to do is resubmit the accounts (and also resubmitting the information to hmrc) with the dividend as salary and also amend your articles so going forward they are schedule 3. To do this there is a template special resolution on Companies House and unless you have special clauses in your current articles you would just adopt the model schedule 3 articles. When I had my accountancy business this was something that happened a few times, as well as limited by guarantee companies paying dividends when they don't have shares so don't worry about it.

Thank you so very much for your prompt reply Heidi.  I can`t tell you the relief you have given me.

Thank you Heidi.


Hi Heidi

I know I'm asking you to guesstimate but do you think CICs are doing this more regularly than ordinary LTDs?  

Ive caught many as they are starting up unaware of the Schedule 2/3 difference, but thought any incorrect application of dividend would be trapped in the process.

Do we need to try and do something?

Hi John, I think there is a general lack of understanding around dividends - partly because the majority of advice on the Internet says to pay yourself a minimum wage and take the remainder as a dividend if you have a company.  This advice ignores the fact that CICs are primarily limited by guarantee and also have a dividend cap, as well as the fact that to take dividends you need to have a profit/surplus!  I think it might be doing an article explaining the key differences between the different model articles or a checklist outlining the key features of each of the model Articles.



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