A client has got involved in running a local free newspaper for which he and others submit articles. The paper is financed by selling advertising space, none of the contributors receive any payment. He is, however, concerned about the legal structure of this enterprise. It is simply a group of friends getting together to produce and distribute the paper: there is no constitution and no (as far as they are aware) legal entity (company, club, partnership, etc.), although it does have its own bank account. The amount of money involved is tiny (c£3,000 per annum), so they don't want to have to start producing accounts, filing tax returns, etc.
His concerns are:
(i) Should there be some form of legal entity, and if so, what? Or is one already implicit in the organisation?
(ii) Are there any tax issues? There is always some spare cash in the bank account, so, although a not-for-profit organisation, there could be said to be a surplus most years.
(iii) Although more of a legal than accounting issue, is there any collective liability (e.g. if an article could be deemed defamatory)?
Any thoughts/ideas/ help would be very gratefully received.
Replies (35)
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(i) Looks like a partnership already exists to me.
(ii) Yes see (i).
(iii) Yes. Your example is one that is a very real possibility and the move to limited liability should be discussed.
Someone is
You say none of the contributors receive payment but then say they are selling advertising space. So who receives the advertising payments ? Seems to me they are at risk.
Follow cheekychappy's advice above.
Loss
If they were making a loss every year, you might argue it was a hobby. But, it seems, they don't.
Your client might not want to get involved in books, accounts and tax but it looks like he is.
As cheeky says, a limited company seems appropriate here.
Mutual Trading ??
I fully agree the comment about getting limited liability to cover the individuals' potential liability - that does seem eminently sensible. Subject to that, though, could a members' association get round the accounting and tax issues?
Not unless they are the only customers for advertising.
Which seems unlikely.
Tell them to get on with that company.
You keep mentioning a bank account. Some entity owns the bank account. That would be a big clue.
My answers
... for what they are worth, are:
It is clearly an unincorporated association, like many clubs.Unincorporated associations are subject to corporation tax on whatever profits they make.An unincorporated association can be sued, but I have no idea about collective responsibility of the members beyond whatever may be in the association's bank account.
Clearly ?
... for what they are worth, are:
It is clearly an unincorporated association, like many clubs
Clearly ? I'm surprised by your thoughts. There doesn't seem to be any evidence of this. For me, it's a partnership.
Not that there's a great deal of evidence of that, either. But I'd be surprised if, assuming HMRC were sufficiently bothered to take an interest, they'd plump for a Corporation Tax entity over Income Tax.
Timbuktu Times ?
And as what sort of entity does the bank regard "Timbuktu Times" ?
Presumably there was some Money Laundering stuff going on when the account was opened. Did they ask for a copy of a constitution for an unincorporated association ?
I'm tipping the bank thinks "partnership". But you'll have to ask the right questions to find out.
Well, you can ...
Well, you can always ask. But it sounds like your clients just don't want all the hassle of keeping accounts and filling tax returns and things in. I don't either - but the Government says I have to.
Partnership or Unincorporated Association - there's no mutual trading here, there are going to be forms to fill in and maybe taxes to pay.
Maybe rather than decide what it is they ought to consider what it ought to be?
If they have any thoughts as to creating something that will endure past the individuals currently involved( a partnership also has issues if one/other falls out, stops being involved, drifts away) considering what type of entity would best fit that purpose might be a good idea.
A company limited by guarantee can serve well where individual shareholdings are not appropriate , maybe discussing with them what they want to achieve/who they want to benefit from the activity and a little longer term vision might help clarify what they ought to do next.
Hobby trading
If the enterprise is not set up with a view to profit then it is a hobby and not returnable to HMRC.
Now, HMRC can NOT have it both ways!
EITHER it is a partnership and tax relief for losses is obtainable (offset against participants other income)
OR it is a hobby joint venture and losses are not tax relievable
I did wonder if the venture might be beter formed as a CIC, but then the costs might be prohibitive for a small scale non-profit-making venture?
https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...
My approach would be write to HMRC and say that this is a hobby. It is not designed to make a profit. It's raison d'etre is to benefit the local community by providing local information. HMRC should be given a choice (ultimatum):
either accept that as a hobby they do not need returns (unless profits consistently exceed losses)
or it's losses will be allowed for tax relief against other income if HMRC insist on returns (that way some of the high professional costs will be recouped by tax refunds)
Bottom Line
The bottom line is that you need to agree whether or not they're going to take an interest in this.
The problem might arise if you agree it's a hobby and then, a few years down the line, it turns into something else.
A bloke I know started a fanzine in 1976. It's now a huge business with several publications, employing dozens of folk.
CIC ?
A CIC ?
I'm surprised that, given the apparently small scale of operations, that they want to add another tier of admin. Their decision, obviously.
Hobby
its hardly another tier its more of a protection
Against what ?
This is just a hobby, so we're told. Minimal profits, sometimes losses, the OP said.
As long as they're aware of the extra reporting requirements, fine. But, personally, I wouldn't want to saddle myself with the downsides for no good reason. If the hobby turns into a business, they can always switch to a CIC later.
CIC?
I think the protection they seek is against the risk that the paper might publish something that could be viewed as defamatory and hence actionable.
But that doesn't need a CIC. A bog-standard limited company will do just as well.
CIC better than Ltd
from a reporting point of view.
Provided they can convince the Charity Commissioners they qualify as a charity, and the size is small enough, they only need to send a simple, cash based, I&E to the CC each year. There are no CH requirements or HMRC reporting required.
Are you sure?
from a reporting point of view.
Provided they can convince the Charity Commissioners they qualify as a charity, and the size is small enough, they only need to send a simple, cash based, I&E to the CC each year. There are no CH requirements or HMRC reporting required.
https://www.gov.uk/government/publications/community-interest-companies-...
Especially Ch 8
CIO - Charitable Incorporated Organisation
Apologies to all - thanks cbp99 for telling me - a classic case of seeing what you expect not what is really there.
On reading the description of the activity undertaken I assumed the best structure (if it could be achieved) was that of a Charitable Incorporated Organisation which only reports, very simply, to the Charity Commissioners, but has limited liability for the Trustees etc.
As a result when CIC was suggested I read CIO - sorry again to everyone who replies
CIO
Apologies to all - thanks cbp99 for telling me - a classic case of seeing what you expect not what is really there.
And thanks to Marion for reminding me of the CIO format, which may be the most suitable format for the OP's client, giving limited liability with the minimum compliance issues.
However this would depend on its being a charity, ie having a charitable purpose: https://www.gov.uk/government/publications/what-makes-a-charity-cc4
Link to sample CIO constitution for consideration
https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...
Disadvantages of a CIC are producing the written report, only being able to file by post, a £15 fee on top of the Annual Return fee - plus restrictions on dividends and the sale of assets, neither of which I would see as significant at the moment.
Advantages - can't think of one.
Not enough information really
but assuming there is no political aspect, I would suggest that the charitable purpose it could fall within is the advancement of citizenship or communal development,
It must then be 'in the public benefit; so provided the distribution is wide enough and no one gets a personal benefit I think registration may well succeed.
As long as ...
Wouldn't be my recommendation but, if that's what the client wants, that's grand.
CIC34
I've only done one CIC but the directors were grand about the CIC34 until they realised that they had to write the report, not the accountant. Instantly, it became a problem.
But your lads are journalists.