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Corporation tax on contribution from public

Corporation tax on contribution from public

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Hi All

I have been approached by a client whose company's activity is to empower and encourage a particular group in UK to be more actively involved in British media and politics. It focuses on media monitoring and improving the political literacy of the said group.

The company does not supply any goods or provide any other services to businesses or individuals. The company class itself as a not for profit making organisation albeit it has not been setup as either LBG or is registered with Charities Commission.

The company's activities are funded by "contributions" from general public as well as directors and there is no service to be provided in return for these contributions to any of the individual/orgnanisation contributing towards the cause.

The points I need to clarify are are as follows

1. Is the income generated by the company subject to corporation tax? The contributions are nothing more than donations. There is an underlying expectation by the "donors" that the company will continue to provide work in line with its objectives.

2. If the income is subject to corporation tax than would this also be VATable?

Any advise provided shall be received with immense appreciation.

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17th Apr 2019 10:06

It should of course have set up as a company limited by guarantee or a charitable incorporated organisation, although there are one or two examples of charities operating as limited companies with share capital.

Maybe you can argue it's like a flat management company and holds the funds as trustee for the donors etc., but it should stop operating as it is and restart as above.

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By kashpat
to Justin Bryant
17th Apr 2019 11:27

Thanks Justin. I have already advised on how this should be structured but noted some reluctance with the idea of this being setup as Company limited by guarantee or CIO.

There was always a shortfall of income over expenditure in previous years which has been reported by previous accountants as "trading loss" to carry forward for CT purposes.

Year and a half has passed since last set of accounts were prepared and we will eventually be looking at preparing accounts which are due shortly.

I was hoping to leave income and expenditure as such to be consistent with previous year(s) but disallow both for CT purposes to end up with no profit/no loss.

Do you think this will be an appropriate solution given the circumstances?

The key question is are these contributions subject to corporation tax on the basis the setup is not correct?

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to kashpat
17th Apr 2019 12:47

I suggest you consult a good CT text book or a good text book on revenue law. Tiley's is a good place to start. Also, Taxation of Charities - James Kessler Q.C.

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to WhichTyler
17th Apr 2019 14:47

That is probably not a reliable guide as it does not specifically address the point re companies limited by SC and with standard articles and tax normally following accounting treatment - such companies are of course geared to being commercial enterprises and that's why flat mgt companies get queried so often on this website (and frankly no-one understands them).

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By DJKL
to Justin Bryant
17th Apr 2019 15:45

A bit like The Schleswig-Holstein Question

The British statesman Lord Palmerston is reported to have said: “Only three people have ever really understood the Schleswig-Holstein business—the Prince Consort, who is dead—a German professor, who has gone mad—and I, who have forgotten all about it."

https://en.wikipedia.org/wiki/Schleswig-Holstein_Question

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to kashpat
17th Apr 2019 13:46

Quote:

Thanks Justin. I have already advised on how this should be structured but noted some reluctance with the idea of this being setup as Company limited by guarantee or CIO.

Why the reluctance? Talking about 'Not for profit' often signals woolly thinking...

Quote:

There was always a shortfall of income over expenditure in previous years which has been reported by previous accountants as "trading loss" to carry forward for CT purposes.

Have they actually been trading or do they intend to?

Quote:

The key question is are these contributions subject to corporation tax on the basis the setup is not correct?

'Possibly' is the key answer...

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By kashpat
to WhichTyler
17th Apr 2019 15:10

The reluctance stems from the fact the organisation has substantial media and political exposure and the directors do not wish to setup a new company with a different name or even seem to suggest they have changed name. The company's aims and objectives listed on their website clearly represents public benefit.

We have not yet accepted the client so have not seen their accounts. However the income has always been generated from donations by general public. They have never traded and do not intend to trade

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to kashpat
17th Apr 2019 16:42

Quote:

The reluctance stems from the fact the organisation has substantial media and political exposure and the directors do not wish to setup a new company with a different name or even seem to suggest they have changed name. The company's aims and objectives listed on their website clearly represents public benefit.

they may prefer to bite the bullet of setting up a properly constituted charity than face the alternative allegation that the private company's shareholders are the potential beneficiaries of these donations.

A bit like this... https://www.theguardian.com/politics/2019/feb/19/independent-group-criti...

Plus they could get Gift Aid if they are a charity. 25% more income at little cost...

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to kashpat
23rd Apr 2019 11:03

Quote:

The reluctance stems from the fact the organisation has substantial media and political exposure and the directors do not wish to setup a new company with a different name or even seem to suggest they have changed name. The company's aims and objectives listed on their website clearly represents public benefit.

We have not yet accepted the client so have not seen their accounts. However the income has always been generated from donations by general public. They have never traded and do not intend to trade

Cant they register the current company as Limited by Guarantee and if the company is for benefit of the public sounds like a charity and could apply to Charities Commission. No need to rename the charity and potentially no one would be aware of the change especially if they thought it was a charity all a long.

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By kashpat
to mike_uk_1983
23rd Apr 2019 11:35

I don't think it is possible to change the company ltd by shares into LBG. At least it's not something I have done before. However, I propose to suggest them to change the name of the current company (so that the name they want is available) followed by forming a new company ltd by guarantee and move everything across.

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17th Apr 2019 14:52

So they’ve been claiming trading losses in prior year returns but don’t want to declare a profit. They sound like a right bunch of chancers. Have done with them and move on. All sounds very dodgy anyway. Could it be money laundering?

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By kashpat
to Tim Vane
17th Apr 2019 15:22

Thanks Tim. Declaring profits is not an issue. It will take them years to be in a position to pay any CT due to level of losses brought forward.

It's just that we want to get this right if we are to take on the client. If the income is not taxable than we do not want to report this as taxable (irrespective of what their current accountants have done).

I think it might be better for me to ask them politely to take their business elsewhere.

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to kashpat
23rd Apr 2019 14:21

I'm by no means a CT expert but I suspect that the 'losses' incurred in previous years may never be claimable against future profits if they weren't incurred in pursuit of a trade...

So they are accounting losses but not CT losses, or to put it another way, if the income isn't taxable, neither are the losses

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23rd Apr 2019 10:35

I am with Justin on this case. I can not see that taking of contributions and then spending them is any form of trading. As already covered the company is probally set up in the wrong format.

Just a thought could a sister company (say by guarantee) be set up with "any profits" being covennanted to this sister company?

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to pauljohnston
23rd Apr 2019 17:28

I agree it's odd to say the company is trading, but does it need to be trading to be subject to CT?

But I don’t see how you can agree with Justin (by which I assume you mean you’d argue that the money doesn’t really "belong" to the company) and in the next breath have the company covenanting the money to another company.

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23rd Apr 2019 20:44

I agree that the company should probably have been set up as limited by guarantee for all sorts of reasons, but that wouldn't change its taxable status (unless it was registered as a charity, which is an entirely different question). Corporation tax is charged on a company limited by guarantee in the same way as one limited by shares. The only difference is that the former, of course, cannot declare dividends.

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25th Apr 2019 11:41

Genuine donations are not taxable income, so CT is not a problem. I assume also that the donations will not be classed as distributable profits but I am not an expert in company law. However, if this is a company limited by shares, what happens to any assets on the company being wound up? What is to stop the shareholders having a MVL and taking all the "donations"? If people are donating in the belief that the company is charitable, even though it does not hold itself out as such, the Charity Commission may take an interest. I think it would be advisable to raise this with them. If on the other hand the donations are on condition that the money is spent in a certain way, there is no tax relief for that expenditure so it cannot create an allowable loss

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