Company Limited by Guarantee - Taxable?

Looking for some advice on how big of a mess this may be...

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Hi all! A local group have run an annual carnival for ~15 years, they have been set up as a company limited by guarantee for the time.

Under the advice of one of the committee members who was a chartered accountant and prepared their accounts for them, they were advised that as a non-profit they did not have to pay corporation tax, and have therefore never submitted a corporation tax return as far as I am aware.

As that committee member has moved on now,  I have taken over their bookkeeping on a voluntary basis. I asked about the lack of tax being paid in previous years and was told of the prior conversation. The thing is I cannot find any supporting documentation from HMRC (or anywhere else online) that supports said chartered accountants words and to be honest, I do think tax is due. They take money from things such as stall bookings and advertising in the event progamme which I think constitutes as trading and is therefore taxable? They also receive donations and grant income which I'm not so sure about.

The other directors are understandably not very happy that they may owe tax as they took someone they thought was a professional at their word, but they are committed to untangling this mess and getting everything squared up so they are on the straight and narrow.

The thing is though I'm not sure the best way to go about this! Do we need to go to an accountant to get help to make a voluntary disclosure to HMRC? On a very rough calculation once you take into account that some years have been losses and some have had positive reserves, if counting all the income as taxable think it would be about £2,500 of tax owed overall. Will all the previous years accounts need to be re-filed, or can the adjustment be made on their next set of accounts? If we go cap in hand to HMRC is it likely they will suspend the penalties as the committee members were acting on the word of someone they thought was advising them correctly?

I should add that I am part way through my ACCA exams and work in practice, so I do have a fairly good understanding of accounts and tax but I fully admit that limited by guarantee is not something I know a ton about.

Thank you in advance to any advice or response. As a small local event run by volunteers money is obviously very tight (it's kind of a miracle it's still going after COVID at all), so the more information we have in advance of getting professional advice the more we can keep the cost down.

Replies (15)

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By David Ex
30th Apr 2024 20:28

I think you’re right but that’s the point at which you step away and advise them to seek professional advice ASAP. The full and precise details will be crucial and that’s not a subject for this forum.

As a student with no practising certificate, you don’t want to appear to be giving professional advice.

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Replying to David Ex:
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By jakeing
30th Apr 2024 20:39

Appreciate the response. We have discussed professional advice as mentioned in the original post - do you think an accountant would be the best person to go to in this scenario? Or a tax advisor specifically?

As I said no profit is taken out and it all goes towards funding the following years' event on quite a tight budget purely through a group of peoples' voluntary efforts, so I'm just kind of dreading what the bill could look like.

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Replying to jakeing:
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By David Ex
30th Apr 2024 21:00

jakeing wrote:

Appreciate the response. We have discussed professional advice as mentioned in the original post - do you think an accountant would be the best person to go to in this scenario? Or a tax advisor specifically?

As I said no profit is taken out and it all goes towards funding the following years' event on quite a tight budget purely through a group of peoples' voluntary efforts, so I'm just kind of dreading what the bill could look like.

An accountant who is also a tax advisor or a tax specialist.

The fact that there are donations and grants complicates matters.

I understand your concerns and the fact that there hasn’t been any profit motive as such. Unfortunately, there will be time and effort in providing analysis of income and expenditure. You might want to check but your student membership might allow you to assist (pro bono) the directors in getting a decent set of facts and figures for an advisor. That would help minimise costs.

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Replying to David Ex:
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By jakeing
30th Apr 2024 21:19

It's something I will look into, thank you.

I have also been a committee member and also helped volunteer at the event for many years (hence me helping and being involved in the first place) so anything I could do to keep their price down would be great. I'll mention it to whoever we go with and see if they will accept.

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By Paul Crowley
30th Apr 2024 21:05

I would not be too worried.
No dividends paid so if taxable it would just be temporary. Profit one year, loss the next.
Even if you cannot find evidence, then something was done to stop the HMRC sending out notices to file
An accountant needs to be appointed agent, then let him check the agent portal and contact HMRC
HMRC will often accept such companies as not taxable, if the intent is charitable.

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Replying to Paul Crowley:
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By jakeing
30th Apr 2024 21:15

I think the chartered accountant marked them as dormant for corporation tax, hence no notices to file. I am in the process of getting access to the corporation tax side of HMRC at the moment.

Paul Crowley wrote:

HMRC will often accept such companies as not taxable, if the intent is charitable.

This is very interesting as it's not what I have been able to see through research online, but would obviously be a much better result for us. Do you know of any legislature or writing regarding this by any chance?

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Replying to jakeing:
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By Paul Crowley
30th Apr 2024 22:04

No
HMRC are actually allowed to to apply judgement.
I used to have an Industrial and Provident company that was not a charity, but accepted as charitable and had been issued a number by HMRC.
Service charge companies can be agreed as not requiring to submit tax returns provided that the interest received would not give rise to a taxable liability exceeding £100.
That was mentioned on here quite recently

https://www.gov.uk/hmrc-internal-manuals/cotax-manual/com23110
https://www.accountingweb.co.uk/any-answers/dormant-for-ct-purposes

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Replying to Paul Crowley:
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By jakeing
01st May 2024 00:17

Thanks, I am aware of property management companies being exempt but I haven't been able to find anything about non charities being considered charitable and therefore non taxable. If that is the case, it would be great. Appreciate the reply.

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DougScott
By Dougscott
30th Apr 2024 23:38

What do the Mem & Arts say? In my experience HMRC will often accept Companies Limited by Guarantee as non-taxable due to their constitution and nature of their activities. Your lack of knowledge in this area is clear and you should not be advising them. There are plenty of specialist charity accountants who can give proper, informed advice to the not for profit sector.

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Replying to Dougscott:
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By jakeing
01st May 2024 00:14

The memorandum and articles of association have mention of charities and the charities act, despite the company not being a registered charity so I think that is something else that needs to be looked into.

My main issue is that I struggle to see how renting out stalls and advertising etc. would not be classified as trading activity and therefore taxable, and pretty much everything I have read online unfortunately seems to agree with that. If you have any legislature which suggests otherwise I would really appreciate you linking to it.

As I have fully admitted, this is not my area of expertise at all. However I do have much more of a grasp of accounting and tax than any of the directors, hence why I am taking the lead in working out who we need to contact and what we need to do to ensure we are compliant.

Specialist charity/non for profit accountants can be expensive in my experience, especially when you are a group of volunteers running on a very tight budget. That is why I am trying to gain as much information as I can before entering into any meetings in order to keep our costs down as much as possible.

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Replying to jakeing:
DougScott
By Dougscott
01st May 2024 09:21

The first thing you need to learn is that many charitable organisations are not registered with the Charity Commission. I used to work as FD for an organisation that had a £20 million turnover and 300 employees and it was charitable and paid no tax and received no CT600s from HMRC - it had income from contracts, grants, donations, fundraising events, rent, bank interest and all of its activities were deemed "charitable activities" and it typically made surpluses of £2m per annum. My particular organisation was classed as an "exempt" charity (look it up). What it did do was get HMRC Charities Unit to confirm it was charitable when it was formed and issue a reference which was XR12345 or similar. This may have occurred in your organisations case. It rarerly heard from HMRC again, other than in relation to VAT and PAYE, in its 35 year history. You are the one who may open a can of worms and cost your organisation dearly by not getting expert advice.

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Replying to Dougscott:
DougScott
By Dougscott
01st May 2024 11:30
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By Leywood
01st May 2024 07:14

You’ve said you work in practice, so why not ask where you work?

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paddle steamer
By DJKL
01st May 2024 09:27

Can the company's activities in any way be considered mutual trading?

Notwithstanding if it expends most of what it takes in, even if its activities are subject to CT, there surely cannot be much in the way of "profits"

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By CJS88
01st May 2024 16:26

The chartered accountant will no doubt have considered that the company's activities would fall under the mutual trading provisions.

Do the company's activities fit under any of the charitable headings in the new(ish) charities act, if so then maybe worth actually registering now.

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