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