Would be grateful for some advice please. i.e. if there is a way to convince HMRC to not to pay corporation tax when set up a ltd company for charitable purpose only.
Couple of individuals set up a ltd company for the purpose of providing charitable services to local community. Since setting up they have managed to raise funds of over £5k for the year. Individuals have not taken any money out for themselves and have no intention to reimburse themselves so far. They all have other full time jobs and this is a part time venture. The company is ltd by guarantee and any surplus will be reinvested.
Spoke with HMRC to try and avoid corporation tax on the surplus. They initally asked to send a request in writing. I did this, but they later came back saying need to complete online form CHA1 for the request. Completed this, but they have now come back saying no corporation tax exemption allowed. Reason being, income over £5k so need to register with the charities commission first and then to reapply for exemption via CHA1, they will consider then.
Individuals have said they rather not register with the charities commission yet. Is there a way to convince HMRC
Would appreciate a reply.
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Replies (9)
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If you want the tax benefits of being a charity, you have to do things properly. Who has been advising them so far? Sounds like an absolute shambles, however laudable the intentions.
I think they just set up without thinking much on the structure. They believed that by providing evidence to HMRC i.e. articles, memorandum, bank statements etc HMRC will allow CT exemption. Also, appears they did not take any advice on this, just looked at other charitable organisation and thought they'll be ok too.
If you want charitable tax exemptions, you need to be an actual charity. Why would the founders shy away from registering with the Charity Commission?
They have suggested that individuals donating would not be happy if found out there is CT tax implication, plus if they can avoid CT tax then the additional money can be spent on activities.
Individuals donating may like to know that the organisation is properly constituted and can benefit from gift aid etc...
They have suggested that individuals donating would not be happy if found out there is CT tax implication, plus if they can avoid CT tax then the additional money can be spent on activities.
Would the individuals be happy realising that they haven't actually given to a charity at all?!
This covers the basics:
https://www.accountingweb.co.uk/any-answers/forming-a-small-charity
I think appears that these are the only options:
1. To keep the current Ltd status and pay the normal CT. As it is limited by guarantee then the surplus is reinvested. The donations received to date are all taxable income.
2. Appears, that a Ltd company can apply to become a CIC. Again, CIC has no special CT exemption i.e. to pay the tax. But the benefit is that there are assurances to the donors, such as, asset lock, registering with CIC regulator, plus annual additional report filing with Companies House. However, having said that, "CIC’s profits are fully taxable unless it can be shown that the terms of the contract are such that, in tax law, the organisation does not amount to a taxable trade". Possibly, appears some argument with HMRC i.e. taxable trade or non taxable trade and hence potential CT exemption route.
3. Appears may not be able to convert the current Ltd company to a charity, but advantage of a charity is certain CT exemptions, but on the flip there are far more reporting requirements and the trustees in addition.
Conclusion: Pay the CT, think of CIC or to set up a new charity.
Am i right in the above ?
If the company is limited by shares, you won't be able to register it as a charity. If it's been set up as limited by guarantee then you can, provided you can satisfy the Charity Commission about what you're intending to do.
If the company is limited by shares and you really want charitable status then the best thing to do is probably to start again and register a Charitable Incorporated Organisation.
There are more reporting requirements for charities than for companies, and for good reason - charity registration brings several privileges relative to a limited company.
They might be out of time but if you can extend the accounting period and they make a donation to an actual charity it could reduce taxable profit to nil?