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CIC and Company Limited by Guarantee

Directors Remuneration and Tax in a Company Limited by Guarantee

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Somebody has approached me who wants to convert her current Community Volunteer Group to a CIC.  This is mainly because a lot of the community projects want to see a CIC in order to award funding.

She's quite hung up about the tax advantages of this but doesn't really understand the details - she is being given information by various people and she is taking bits onboard which she wants to hear (ie she pays less tax!) but I don't think it's all accurate.

What I have worked out so far is the following:

- To form a CIC, you need to form a Company Limited by Guarantee or a Company Limited by Share Capital/Dividends

- It seems that some of the groups awarding grants are asking for the Company Limited by Guarantee rather than that Limited by Share Capital.

- Directors of a Company Limited by Guarantee  generally pay themselves as an employee through the normal PAYE route.

- Where private work is carried out by the Director, that person can invoice the CIC as a self employed person.

- Corporation Tax can be minimised by ploughing profits back through training etc (as well as paying the director through the company)

I have two questions on this:

1. Are there any other ways for the Director to pay themselves which would be advantageous for tax?

2. She has been told that it is possible to claim the £12,500 tax free allowance TWICE by drawing a salary through the CIC and again as a self employed person.   I can't see how this would be possible as it is the same person and surely that would all come out in the wash on the SA Tax return? 

Replies (19)

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By jonharris999
20th Oct 2020 16:52

No and no!

Thanks (1)
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By Cheshire
20th Oct 2020 17:04

Sophie Basi wrote:

Somebody has approached me who wants to convert her current Community Volunteer Group to a CIC.  This is mainly because a lot of the community projects want to see a CIC in order to award funding.

She's quite hung up about the tax advantages of this but doesn't really understand the details - she is being given information by various people and she is taking bits onboard which she wants to hear (ie she pays less tax!) but I don't think it's all accurate.

What I have worked out so far is the following:

- To form a CIC, you need to form a Company Limited by Guarantee or a Company Limited by Share Capital/Dividends

- It seems that some of the groups awarding grants are asking for the Company Limited by Guarantee rather than that Limited by Share Capital.

- Directors of a Company Limited by Guarantee  generally pay themselves as an employee through the normal PAYE route.

- Where private work is carried out by the Director, that person can invoice the CIC as a self employed person.

- Corporation Tax can be minimised by ploughing profits back through training etc (as well as paying the director through the company)

I have two questions on this:

1. Are there any other ways for the Director to pay themselves which would be advantageous for tax?

2. She has been told that it is possible to claim the £12,500 tax free allowance TWICE by drawing a salary through the CIC and again as a self employed person.   I can't see how this would be possible as it is the same person and surely that would all come out in the wash on the SA Tax return? 

(2) Who told her this? I usually find asking that question makes them realise what amn idiot they are being, even sometimes without getting an answer!

Thanks (1)
Replying to Cheshire:
RLI
By lionofludesch
20th Oct 2020 17:11

Cheshire wrote:

(2) Who told her this? I usually find asking that question makes them realise what an idiot they are being, even sometimes without getting an answer!

[chuckle]

Hopefully, it's not the same person who's advising them what a great idea a CIC is.

Thanks (3)
RLI
By lionofludesch
20th Oct 2020 17:09

No and the second one just made me laugh.

Generally, there are no tax advantages of a CIC. It's just an ordinary company which has a number of additional restrictions such as limited dividends and asset locks.

If you go with limited by guarantee, make sure that the Articles make it very clear who is or is not a member, just in case who has a vote becomes an issue. Payment of a subscription is one idea. "Directors for the time being" is another.

Thanks (1)
Replying to lionofludesch:
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By Sophie Basi
20th Oct 2020 17:34

Ok great thanks. That's pretty much what I had worked out but it's good to have it confirmed.

Thanks (0)
Replying to lionofludesch:
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By Sophie Basi
20th Oct 2020 17:34

Ok great thanks. That's pretty much what I had worked out but it's good to have it confirmed.

Thanks (0)
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By Sophie Basi
20th Oct 2020 17:37

Glad to see these responses. I was thinking I might be going completely bananas but clearly not.

Thanks (1)
Replying to Sophie Basi:
RLI
By lionofludesch
20th Oct 2020 17:42

Sophie Basi wrote:

Glad to see these responses. I was thinking I might be going completely bananas but clearly not.

Somebody is but it's not you.

Thanks (0)
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By Paul Crowley
20th Oct 2020 17:53

Double personal allowance

Priceless

BUT FOR OLD Awebbers

There was a time when a director could have her personal allowance AND company also have a zero rate tax band

Thanks (0)
Replying to Paul Crowley:
RLI
By lionofludesch
20th Oct 2020 21:50

Paul Crowley wrote:

Double personal allowance

Priceless

BUT FOR OLD Awebbers

There was a time when a director could have her personal allowance AND company also have a zero rate tax band


And no dividend tax
Thanks (0)
Replying to lionofludesch:
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By Tax Dragon
21st Oct 2020 10:53

lionofludesch wrote:

Paul Crowley wrote:

Double personal allowance

Priceless

BUT FOR OLD Awebbers

There was a time when a director could have her personal allowance AND company also have a zero rate tax band

And no dividend tax

During the war?

Thanks (0)
Replying to Tax Dragon:
RLI
By lionofludesch
21st Oct 2020 12:24

Tax Dragon wrote:

lionofludesch wrote:

Paul Crowley wrote:

Double personal allowance

Priceless

BUT FOR OLD Awebbers

There was a time when a director could have her personal allowance AND company also have a zero rate tax band

And no dividend tax

During the war?

During the war, £2000 a year was considered plenty. 100% Excess Profits Tax on anything above that.

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My photo
By Matrix
20th Oct 2020 20:53

She is taking £25k payment from a voluntary community group?

Thanks (0)
Replying to Matrix:
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By Paul Crowley
20th Oct 2020 22:48

But she's worth it

Thanks (0)
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By WhichTyler
21st Oct 2020 05:38

Sophie Basi wrote:

- Corporation Tax can be minimised by ploughing profits back through training etc (as well as paying the director through the company)

Just to note that minimising tax will also minimise the company's reserves. And the payments/training would have to happen in the year (before you know what the 'profit' is). so solvency (which funders may want to know about) could be an issue...

Thanks (0)
Replying to WhichTyler:
RLI
By lionofludesch
21st Oct 2020 06:04

None of the "advantages" listed in the OP are special to a CIC. They apply to any company.

Directors can pay themselves a salary? Sheesh!! What next ?

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Replying to WhichTyler:
RLI
By lionofludesch
21st Oct 2020 06:05

.

Thanks (0)
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By Sophie Basi
21st Oct 2020 10:46

Hello all I'm going to turn the notifications off for this post as you all have pretty much confirmed what I think I already knew - but glad it gave you all a good laugh anyway! But what has also been highlighted through this discussion is the issue of whether she is doing this for the right reasons. As pointed out, £25K would be a lot to take out of a community funded concern even if it were all tax free (I know!) and that shouldn't be the motivation. She's hung up on the wrong things. Also, I agree the point about solvency and being able to project forward so you have an idea of what your profits are in order to plough them back in through training etc. This individual is clearly wide of the mark on a lot of this understanding and she has a lot of work and thinking to do. Thanks everybody for crystallising my thoughts.

Thanks (0)
Replying to Sophie Basi:
RLI
By lionofludesch
21st Oct 2020 12:22

Sophie Basi wrote:

Hello all I'm going to turn the notifications off for this post as you all have pretty much confirmed what I think I already knew - but glad it gave you all a good laugh anyway! But what has also been highlighted through this discussion is the issue of whether she is doing this for the right reasons. As pointed out, £25K would be a lot to take out of a community funded concern even if it were all tax free (I know!) and that shouldn't be the motivation. She's hung up on the wrong things. Also, I agree the point about solvency and being able to project forward so you have an idea of what your profits are in order to plough them back in through training etc. This individual is clearly wide of the mark on a lot of this understanding and she has a lot of work and thinking to do. Thanks everybody for crystallising my thoughts.

I actually wouldn't act for her on the basis of what you say.

But things can be misinterpreted.

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