Trading versus Non Trading

Trading versus Non Trading

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My client is a Community Interest Company (CIC) set up to run a photo festival each year.

For some reason this was set up as a Community Interest Company which unfortunately means it is subject to corporation tax. The accounts are prepared in line with the Charities SORP which means that if the company receives income just before its year-end that it is entitled to and it has fulfilled the criteria for receipt of this income, then the income cannot be deferred and forms part of the Statement of Financial Activities (and therefore the profit/surplus for the year).

The issue is that if the profit/surplus of the Community Interest Company is subject to corporation tax, then such tax is payable on funding received in a particular accounting period before the money is spent on the festival itself. This seem very unfair.

The client could compute accruals and include expenditure in the accounting period against the advance income received to mitigate tax exposure.

However is it not the case that given the income is all from funders that the Community Interest Company is not actually "trading" for tax purposes and there is no "view to a profit"?  None of the members/directors receive salary or other remuneration as such. The company uses all income/funding towards the cost of running the festival. Whilst the company cannot obtain charitable status whilst registered as a Community Interest Company, surely there is no "trade" to be taxed as such?

All advice greatly appreciated folks!

Replies (11)

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By User deleted
10th Dec 2014 15:49

It either is or it is not

If the company is not trading with a view to a profit then it cannot be a CIC. End of.

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Replying to charliecarne:
Kieran Phelan
By KPEM online
10th Dec 2014 15:51

I don't understand BKD?

Thanks BKD. There is no doubt that the company is a CIC. So do you mean this automatically means it is trading with a view to profit???

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By User deleted
10th Dec 2014 15:56

It might be a CIC at the moment

But it won't be for long if there is no intention to make a profit - that being one of the pre-requisites of CIC status.

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Replying to Jamie Thompson:
Kieran Phelan
By KPEM online
10th Dec 2014 16:04

So what happens next?

Thanks again BKD. The client appears to have been poorly advised, I have no idea why this was set up as a CIC in the first place. This really should have been a company limited by guarantee and with HMRC charitable status. Obviously this cannot be done retrospectively so they are kind of stuck with it.

But if the company isn't aiming to trade and make a profit, what happens? Who governs or polices such circumstances? Do the directors make a declaration of some sort to Companies House? Will the CIC then be struck off?

More importantly, can a Nil CT600 be submitted to HMRC to declare no trading profits in the circumstances I have outlined?

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By User deleted
10th Dec 2014 16:15

How could you file a nil CT600???

The company is not, as a matter of fact, a charity. If it makes a profit, then it's taxable on that profit.

I've yet to see what happens in practice where a company is in breach of CIC Regulations. I don't know whether it simply loses CIC status or what. (Although, acting for a few CICs, I should really make the effort and find out.)

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Portia profile image
By Portia Nina Levin
10th Dec 2014 16:22

Is the underlying problem

Not the application of the SORP, so that you have accounts showing income and expenditure, rather than profit and loss?

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Kieran Phelan
By KPEM online
10th Dec 2014 16:32

Nil CT600

BKD - Surely a Nil CT600 can be filed if there is no "trade"??

Portia - I agree to an extent - do you mean is the accounts include a Statement of Financial Activities incorporating income and expenditure account that this will reflect the "non trading" element of the company's activities?

I founds this on HMRC manuals:

http://www.hmrc.gov.uk/manuals/ctmanual/ctm40145.htm

"As a limited company a CIC is liable to CT just like any other company. It will be chargeable on any trading profits (though it will be a question of fact whether or not a particular CIC is trading) and on its investment income and gains."

 Surely my client, receiving grants from funders towards the project and then spending the funding on the project, is not a "trading" CIC????

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By User deleted
10th Dec 2014 16:44

If it isn't trading

Then what is it doing?

Don't get hung up on the word "trading" - the issue is whether or not it is generating profits. If it is, it will be taxable on them, If it isn't, and doesn't intend to, then it will likely fall foul of CIC regulations.

Feel free to submit a nil return if you want - don't hold me responsible for the consequences.

Over and out.

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Kieran Phelan
By KPEM online
10th Dec 2014 16:53

Responses

The company is a vehicle which obtains money from government bodies/agencies to showcase a photo festival in its locality to promote arts and culture. Does this fall into the definition of "trading"?

It is difficult not to get hung up on the "trading" question in this case. But I take your point that it will be subject to corporation tax if profits are generated.

One point I would like to make is about the nature of responses on Accounting Web. I post here regularly myself and read quite a few posts/debates in this forum. The nature of certain responses is often quite rude and obnoxious. The last few words on the most recent reply falls into this category unfortunately.

I would hardly hold anyone responsible for my own decisions. But thank you for your help on this.

 

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By User deleted
10th Dec 2014 21:53

OK - just a suggestion, then

Rather than canvas opinion here, and continue to challenge that opinion, why don't you just write to HMRC, giving them the full facts, and see if they will be prepared to treat the company as being outside the charge to corporation tax? After all, whatever I or anyone else says here, it will be HMRC's decision that matters.

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Kieran Phelan
By KPEM online
10th Dec 2014 21:28

Very true BKD
I find it useful to put down my thoughts and different options here to see if anyone can confirm any option that they have had success with before. In this case it seems not but you are correct, I should perhaps take my thoughts to HMRC for consideration.

Its good to have these debates in this forum so that several possible outcomes can be considered. Please don't think it is a matter of canvassing and challenging opinions for the sake of it.

Thanks again, appreciate your input BKD.

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