Not for profit companies: Get the details right

Odds are that at some point during your professional life as an accountant you will come across what is termed a ‘not-for-profit’ (NFP) company, explains Jennifer Adams.

Queries placed in past Any Answers show that most at least know that these companies exist but problems can occur if not met on a regular basis. This article attempts to assist by bringing together the most relevant points in a short text indicating websites where further information can be found.

Various legal structures

A useful schedule comparing possible legal structures for such enterprises can be found on the Business Link website.

Ordinary Limited Companies

Companies can be run for a social purpose and still make a profit. These companies are set up in the usual way via form IN01 being either limited by shares or more usually by guarantee using the same proforma memorandum and articles, as per the Companies House website. The company is then run as any other company - paying dividends (if limited by shares) and salaries, submitting accounts and returns, paying corporation tax on profits and registering for VAT as necessary. The only difference is an additional clause to the articles stating that the object of the company is for a social purpose (new companies automatically have unrestricted objects unless a specific cause is detailed).

Jennifer Adams FCIS TEP ATT is a freelance writer and author specialising in tax and company secretarial issues; she can be contacted at Abacus Business Solutions.

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Comments
Paul Scholes's picture

The Voluntary (3rd) Sector

Paul Scholes | | Permalink

Thanks Jennifer.

The term "Not for Profit" causes a great deal of confusion in the public's and profession's mind mainly, I think, because it encompasses not only organisations that trade and use their money for social benefit, ie "Not for profit for owners" but also voluntary organisations that operate for social benefit with the help of grants & donations, ie "Not for profit full stop".

This confusion is compounded by the belief that all purely social benefit organisations "must be" charities whereas there are hundreds of thousands of voluntary groups who feel OK to operate as just that without needing the publicity, badge or regulation of charitable status. 

On the tax side, HMRC are only too aware of the existance of these latter groups and so are happy to let them operate below the tax wire but, with donations & grants in short supply at the moment, many have looked to make use of the skills of their members & workers to supplement their income with some services or goods for sale and that's when it can get tricky.

Several questions on Any Answers are concerned with the trade v non-trade mix of an organisation's activities and, whilst they can be separated, thus creating two activities (for tax purposes) under one roof, it involves a difficult balancing act and eventually the organisation must either decide it's a Social Enterprise (ie taxable) or look at a way of formally separating the activities, perhaps into a charity & trading subsidiary.

The main benefit of this set up is that donating of profits from the trade to the charity, to avoid tax in the subsidiary, needn't take place until up to 9 months after the year end.  As Jennifer says above, in other situations, the donation must be made before the year end which can be very difficult to achieve both in terms of calculating how much and then having the cash flow to do it.

With the increase in number of older people who still want to do something, continuing lack of jobs and a growing disenchantment with the way commerce operates I can see an increasing role for the voluntary sector.  A great local example here is where a centre for voluntary services has expanded its payroll bureau to deal with local businesses as well as it's voluntary organisations.

A new string to our bows perhaps?

nigelburge's picture

It never ceases to amaze me

nigelburge | | Permalink

how many people seem to think that just because they call their company/business "not for profit", they do not have to pay any tax whatsoever or even register for VAT.

Indeed, they always seem to get very upset indeed when it is pointed out to them that it is treated by the government as exactly the same as any other business/company.

Furthermore, when it is explained to them that the only way they can achieve the object they desire is by registering as a charity, they get even more irate and start banging on about all the work and cost involved etc.

Folks, if you get one of these, be afraid, be very afraid and run like the wind in the opposite direction!!

Amazed?

kalewis | | Permalink

nigelburge wrote:

Folks, if you get one of these, be afraid, be very afraid and run like the wind in the opposite direction!!

I am a management accountant who is directly employed by a not-for-profit co.  We have offices in the UK, Japan and the US and invest our profits back into R&D.  We are registered for VAT, PAYE and all other trappings of being a 'real business' and pay tax just like everybody else.  Just would like to point out that there are some bona-fide not for profits out there!

nigelburge's picture

You misunderstood me Kalewis    1 thanks

nigelburge | | Permalink

kalewis wrote:

nigelburge wrote:

Folks, if you get one of these, be afraid, be very afraid and run like the wind in the opposite direction!!

I am a management accountant who is directly employed by a not-for-profit co.  We have offices in the UK, Japan and the US and invest our profits back into R&D.  We are registered for VAT, PAYE and all other trappings of being a 'real business' and pay tax just like everybody else.  Just would like to point out that there are some bona-fide not for profits out there!

It is the ones who think they know all about it when in fact they haven't got a scooby that are really scary, not people like you who clearly know what is what.

Cos registered under the Industrial and Provident Societies Act

tonytpt | | Permalink

Has anyone had any experience of the regulatory and accounts format requirements of "not for profit" organisations incorporated under the Industrial and Provident Societies Act 1965?

Industrial & Provident Societies

johnt27 | | Permalink

These are similar to companies/not for profits in that they must submit corporation tax returns, register for VAT and PAYE if necessary etc. With regard to CT some I&Ps aren't subject to tax because they are deemed to be a mutual society. However, if a CT return is required this must be submitted, with the accounts in iXBRL format.

I&Ps are regulated currently by the FSA not Companies House, the CIC regulator or the Charity Commission. There are, however, moves afoot to change the regulator from the FSA to Companies House.

Annual accounts and an annual return must be prepared and submitted to the FSA annually. Most I&P's also require an audit under there constitution, which being a stututory requirement must be done by a registered auditor. I&Ps can apply to the FSA to remove the requirement for an audit subject to certain conditions. This is a one off notification and is really useful given the potential cost savings.

Hope this helps!

I&P socs

tonytpt | | Permalink

Thanks John. This confirms what I was thinking more or less but do you know whether the accounts have to follow any stautory format or is there a "light touch" regarding this?

It depends....

johnt27 | | Permalink

Hi Tony,

Depending on what the I&P does depends on what needs to be included in the accounts or disclosed. There is no prescribed statutory format, but you won't go wrong following a standard Ltd co template and adapting as necessary.

I&Ps can still adopt the FRSSE but they don't fall under the Companies Act so there is no need to prepare abbreviated accounts to file. Full accounts will be filed with the FSA but aren't held on public record for viewing.

This webpage provides more advice than is possible to squeeze into a reply on here!

http://www.fsa.gov.uk/Pages/Doing/small_firms/MSR/returns/index.shtml

Community Interest Company

Rogercaven | | Permalink

A really useful article.

We are preparing accounts for a CIC.

Can anyone tell me where I can obtain a proforma CIS 34 report as mentioned in the article.

Also if the company has made a loss, does that mean the asset lock test has failed? and if so what are the implications?

 

Many thanks  

 

 

CIC's

johnt27 | | Permalink

Follow this link to CIC forms including the CIS34. This should have been sent out to the company's registered office but a new one can be downloaded.

http://www.bis.gov.uk/cicregulator/forms-introduction/index/cic-reports-accounts 

If a CIC does make a loss this won't affect the asset lock test. The asset lock is there to prevent CIC's transferring assets at less than market value not monitor profitability.

As long as the CIC has been pursuing a trade, the losses only incur the usual commercial risks that would for a normal company ie going concern, insolvent trading etc.

Thanks for this. I did

Rogercaven | | Permalink

Thanks for this. I did subsequently find this website and the form.

Looks straightforward enough, except trying to work out who the stakeholders in the company are apart from the one shareholder. 

 

regards 

Stakeholders

johnt27 | | Permalink

The CIC directors will have had to identify who the stakeholders would be when the CIC was incorporated. It is up to them to continue to monitor whether or not the CIC is fulfilling it's obligations to it's stakeholders - hence the form!

Assuming the CIC is doing something in the local community or is part of a charitable group the stakeholders should be relatively easy to identify.

If two people form a

David Franks | | Permalink

If two people form a partnership under a not for profit arrangement with funding from the MOD, should they pay their own wages (shown as a cost in order to reach break even), via paye? if they take as a drawing presumably this is out of the 'profit' and then its not 'not for profit'?