The Dividend Cap Is Broken — Here's How We Fix It

Twenty years from now, when people look back at the Community Interest Company legislation, I suspect they’ll identify one thing above all others that held us back. It won’t be the asset lock, or the community interest test, or any of the other features that make CICs what they are. It’ll be the fact that we never quite managed to build a share structure that actually works.

That’s a bold claim, I know. But when Anthony Gaughan and I sat down to write the “A Fair Share” report for the CIC Regulator last year, the evidence hit us between the eyes. We have 7,500 CICs in this country. At least 1,695 of them are limited by shares. And yet the share structure — the thing that was supposed to unlock private investment for social purpose — is barely functioning.

Let me give you the headline numbers from our survey of share CICs. Of the 48 limited-by-share respondents, only 8 had issued more shares than the original allotment. Only one had actually paid a dividend. The majority — 58% — had never even looked at how to calculate their dividend cap. When your regulatory framework is so complex that most of the people governed by it can’t figure out the basic arithmetic, you’ve got a problem.

The root cause is simple enough to identify. The dividend cap is pegged to the initial paid-up value of the share. That sounds like a technical detail, but its effects are devastating. It means that if you put £1 into a CIC at incorporation, your maximum dividend is calculated against that £1 forever — regardless of how much the business has grown, how much value you’ve created, or how much additional capital you’ve raised. For a founder who’s sweated blood to build a thriving social business, the message is clear: your sweat equity counts for nothing.

This isn’t just unfair — it’s economically irrational. It locks out employee share schemes, makes it impossible to reward early-stage investors as the business grows, and creates a liquidity problem where there’s no secondary market and no incentive to trade shares. The CIC share is, in effect, a share that doesn’t do what shares are supposed to do.

Our recommendation is straightforward: remove the peg to the initial paid-up value of the share. Let the dividend cap operate on distributable profits, not on some arbitrary historical number. If a CIC generates £100,000 in profit and wants to distribute £20,000 to its investors at the 20% aggregate cap, that should be a decision for the directors and shareholders — not something pre-determined by a regulatory formula that was written before most of these businesses even existed.

We also recommended increasing the performance loan interest cap from 9% to 20%. The current rate is disproportionately low — so low that it’s barely worth a social investor’s time to structure a performance loan. At 20%, you open up genuine quasi-equity innovation. You give CICs a tool that sits between debt and equity, which is exactly where most of them need to operate.

The Regulator asked us to review the 2010 changes and tell her whether they’d worked. The honest answer is: they helped at the margins, but they didn’t solve the fundamental problem. The cap changes in 2010 were a step in the right direction, but they were like adjusting the wing mirrors on a car whose engine won’t start.

What we need now is structural reform. Not tinkering. Not another consultation that kicks the can down the road. A genuine overhaul of the share mechanism so that CICs can finally do what they were always supposed to do — attract investment on terms that work for both investors and communities.

The “A Fair Share” report has been submitted to the Regulator. The recommendations are on the table. Now we need to see if there’s the political will to implement them.