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Limited Company by Guarantee distribution of funds

How will the this be taxed on the director

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If a golf club that is supposed to be non-profit distributes surplus members fees to the directors.  What are the implications and how will this be taxed on the director as they can't take dividends.

By distributing surplus funds does this mean it is more of a commercial business and therefore VAT and Corporation Tax should apply ?

Replies (25)

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By johngroganjga
21st Apr 2021 12:46

Leaving aside the tax implications, is it permitted? Or are the directors just pulling a fast one hoping they won’t get found out? What makes these amounts “surplus” and what does the club’s constitution say?

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Replying to johngroganjga:
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By sanjay100
21st Apr 2021 15:27

I think the directors are pulling a fast one. Who will find out ?

Only two directors who will be members will have voting rights and the other members will not which seems odd

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Replying to sanjay100:
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By Tax Dragon
21st Apr 2021 15:44

sanjay100 wrote:

Only two directors who will be members will have voting rights

I note the future tense.

Confirmed here: https://www.accountingweb.co.uk/any-answers/limited-company-by-guarantee

So the whole thing is sounding fraudulent - tell the nonvoting members it's not for profit whilst ripping them off. Careful, Sanjay, it sounds like you are helping them with this (possible) fraud.

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RLI
By lionofludesch
21st Apr 2021 12:49

If there's excess money being distributed, it's not non-profit, is it ?

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Replying to lionofludesch:
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By sanjay100
21st Apr 2021 15:29

Its not being distributed at the moment but looks the intention from the questions they are asking and don't want be part of it where allegedly a non profit organisation is really a profit organisation

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By Paul Crowley
21st Apr 2021 12:58

They are taking directors fees
PAYE

But never come across this before
MUST declare the related party transactions in the accounts

When did the members approve?
What was done last year?
How long has this been going on?
Did they change accountants as a result of the accountants challenging the payments?
Have a phone call with prior accountant

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Stepurhan
By stepurhan
21st Apr 2021 13:37

Directors don't take dividends. Shareholders do. They are often the same at small business level, but you need to remember the distinction.

You need to establish why the funds are being distributed at all before anything else. As others have said, is it a legal distribution in the first place. Also is it a non-profit or a not-for-profit (again, distinct) and what sort of company is it? (limited by shares, limited by guarantee, CIC, etc)

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By sanjay100
21st Apr 2021 15:34

Its a limited company by Guarantee. I wouldn't know about the difference between non-profit or a not-for-profit

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Replying to sanjay100:
Stepurhan
By stepurhan
22nd Apr 2021 09:25

It is a subtle difference.

Broadly speaking a non-profit will be set up for a beneficial purpose in the eyes of the law. They will usually be tax-exempt and have specific uses for their funds. Charities will be non-profits.

A not-for-profit will be set up for a specific purpose, though not a charitable one. It is not intended to make profits and any profits it does make will not generally be distributable. This is the category I think your query falls into, since members clubs (where "profits" are ploughed back in for the benefit of members) is a common form of not-for-profit.

In either case, a simple distribution will usually not be allowed.

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My photo
By Matrix
21st Apr 2021 13:47

Distributions (if permitted) would be made to the members and not the Directors.

The profits are taxable and VATable unless there is an exemption. There is no exemption simply for being a non-profit organisation.

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Replying to Matrix:
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By sanjay100
21st Apr 2021 15:43

Possible to be exempt for VAT but think they would get caught under Notice 701/45, chapter 4 and Chapter especially on the commercial element.

Its not a charity so I assume corporation tax will be payable on the members fees

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By Matrix
21st Apr 2021 16:14

Look at mutual trading but this is not the question you asked in your post.

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By Matrix
21st Apr 2021 16:56

.

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By tom123
21st Apr 2021 13:53

You do find them, don't you Sanjay!

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By jonharris999
21st Apr 2021 14:15

It is very hard to see how this manoeuvre could be permitted by the Articles of Assoc. It appears a fundamental breach of the purpose of limit by guarantee. Urgent review by the Directors required, with solid professional advice to guide them.

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Replying to jonharris999:
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By sanjay100
21st Apr 2021 15:47

The problem is the articles may say one thing but in reality the directors maybe just earning from the members and not reinvesting the money or perhaps ultimately liquidate and run off into the sunset.

I think I need to go back to directors and ask them what their intentions are with the surplus funds.

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By Roland195
21st Apr 2021 15:58

You do know that you can turn down appointments right?

I'd maybe reconsider whatever marketing policy is bringing this to your door.

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By Montrose
21st Apr 2021 17:02

Random thoughts

Do the Mem and/or Arts require:-
i]Accounts to be sent to Members
ii]An audit?Are you the auditor?

Company law requires accounts to be filed but as presumably a micro company the accounts would not disclose this payment

What is the document authorising this proposed payment?
Who disenfranchised the members?

This is conspiracy to defraud.
Take legal advice

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Jennifer Adams
By Jennifer Adams
22nd Apr 2021 18:46

Bit old but have a look at this article (its still relevant) and answers your question:

Companies Limited by Guarantee - get the details right
https://www.accountingweb.co.uk/business/finance-strategy/companies-limi...

It states:
"Distributing profits/commercial status
As there are no shares any company profits cannot be distributed to the members as dividends; members also cannot have claim upon company assets

Pre 28 April 2013 the Model Articles for companies limited by guarantee included a clause prohibiting distribution of surplus profits but rather to reinvest them such that all profits were applied to the purpose for which the company was established.

The current Model Articles are silent on the subject.

Payments to board members can only be as remuneration (unless repayment of expenses only) and not dividend

If the CLG is a charity the Charity Commission has strict guidelines regarding payment to board members/trustees"

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Replying to Jennifer Adams:
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By sanjay100
23rd Apr 2021 11:48

Thank you this is most useful

My problem is trying to work out if a CLG is a façade for a profit making business. I have a feeling it is.

A surplus would mean the CLG would have Corporation tax but this could be avoided if the CLG paid a a salary upto the Surplus to the directors ?

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By tom123
23rd Apr 2021 11:51

Where is this money coming from?
What about the members / stakeholders?

Too many red flags here.

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By sanjay100
23rd Apr 2021 15:03

Its coming from members

Yes, I agree its too risky to take this on

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By jonharris999
23rd Apr 2021 12:29

Too many red flags as Tom and many have said, but more literally, I think that unless the Articles specifically state that the Directors can receive a salary (or any remuneration at all for anything) or that profits can be distributed (which it would be rather amazing if they did say), then they can't be because obvs the co is in breach of its own Articles if they do.

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By sanjay100
23rd Apr 2021 15:06

Glad I posted this question as more I think about it the more inclined the director is trying to be unscrupulous and take the members money and avoid paying corporation tax and VAT by using the CLG vehicle

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Replying to sanjay100:
RLI
By lionofludesch
23rd Apr 2021 13:18

sanjay100 wrote:

Thank you this is most useful

My problem is trying to work out if a CLG is a façade for a profit making business. I have a feeling it is.

A surplus would mean the CLG would have Corporation tax but this could be avoided if the CLG paid a a salary upto the Surplus to the directors ?

Of course it could.

But the earlier question would be "are such payments lawful in terms of the company's Articles ?" If the answer's no, your own question is irrelevant.

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