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I am on the committee of a local residents' association. We receive some funding from the local council and we have advertising income from a quarterly newsletter. We arrange some local events, fetes, etc. This is all done on a somewhat 'ad hoc' basis, which worries me slightly. Could any of your readers explain the potential tax issues that might be relevant? Also, I have heard of community investment companies. Should I suggest that the committee forms such a body and if so, what activities should it undertake?
Query T16,727 — Royston.
I am on the committee of a local residents' association. We receive some funding from the local council and we have advertising income from a quarterly newsletter. We arrange some local events, fetes, etc. This is all done on a somewhat 'ad hoc' basis, which worries me slightly. Could any of your readers explain the potential tax issues that might be relevant? Also, I have heard of community investment companies. Should I suggest that the committee forms such a body and if so, what activities should it undertake?
Query T16,727 — Royston.
Reply by Southern Man:
I think that Royston may be getting his 'investment' and his 'interest' a little mixed up. However, the two terms may both have relevance to his group's community activities.
Community investment tax relief is available to companies and individuals who invest in a community development finance institution (CDFI). These are government-accredited institutions that use investors' funds to finance small businesses and social enterprises in disadvantaged communities. Tax relief is available to investors in CDFIs and is given by reducing the investor's tax liability by a maximum of 25% of the 'invested amount', spread over a five-year period.
To obtain the relief for an investment:
(a) the body must be accredited as a CDFI when the investment is made; and
(b) the investment must be a 'qualifying investment'.
In addition, the CDFI must not be under the control of the investor, who must be the beneficial owner of the investment, and must not be a CDFI itself. The capital must not be partnership capital and the investment must not be for a tax avoidance purpose. HMRC have guidance on the community investment tax relief on their website at www.hmrc.gov.uk/specialist/circ_guidance.htm.
However, I suspect that what Royston may be more interested in is the community interest company (CIC). These are a relatively new type of company (available from July 2005) and are 'designed for social enterprises that want to use their profits and assets for the public good'. The website of the CIC regulator (www.cicregulator.gov.uk) has information on this subject and suggests that examples of the types of social enterprise that might be carried out are environmental improvement, community transport, fair trade, etc. Some of the activities could be charitable and if it was for charitable purposes, for the benefit of the public, etc., an organisation could seek to register as a charity. However, while this might have tax advantages, charities are subject to a more stringent regulatory system. The residents could of course form an 'ordinary' limited company; however, a CIC might more visibly show that it is for community purposes, this is because there is an 'asset lock' on such companies that prevents their assets being transferred to the shareholders, even on a winding up. That said, dividends on shares are allowed subject to limitations. There is also a certain 'transparency' to the CIC's activities because to become a CIC applicants must show that their enterprise or business will be carried on for the benefit of the community and, in addition to the normal filing requirements, an annual community interest statement must be sent to Companies House to show that the company continues to serve the community rather than operating for private profit motives.
Companies House has useful information on CICs at www.companieshouse.gov.uk/promotional/cics.shtml.
There are no special tax rules relating to CICs, although they may receive qualifying investments from a CDFI.
It must be remembered that clubs and associations (which would seem to cover Royston's group) are also liable to corporation tax and detailed information on clubs and associations is in the Business Income Manual, which also has information on mutual trading (BIM24015), community associations (BIM24320), property management companies (BIM24782) and community amateur sports clubs (BIM24325); areas which may also be of interest. Royston should also obtain leaflet IR46, Income Tax and Corporation Tax: Clubs, Societies and Associations and Tax Bulletin 32, which dealt with members' clubs. That said, the first £10,000 of profits is subject to a nil rate of tax.
One other point that occurs is that a community interest company could conceivably be associated with another company. If, for example, some of the community-minded residents had their own company (I was originally thinking of a trading company, but this could be, for example, a company owning the freehold of a block of flats) and were also shareholders of the CIC, then if an 'irreducible group' of the shareholders had control of both companies then they would be associated, which might adversely affect corporation tax liabilities; unlikely perhaps, but forewarned is forearmed.
Reply by N.K.:
Regarding 'community investment companies' I think that the definition factor in the legislation — FA 2002, s 57 — is 'disadvantaged communities'. Also, the basis behind the legislation is that there has been an investment made in under-invested areas, which appears not to be the position as outlined, with there being just income and its maintenance.
The starting point, for tax purposes, is HMRC's booklet IR46, which '... gives some general information about the tax position of clubs, societies, voluntary associations and similar bodies which are run either for the benefit of their own members, or for the wider public good'. A general note is made that the term 'club' is used throughout the booklet.
It starts quite clearly with advice that the booklet does not cover clubs, funds or associations that are formed with the intention to make a profit, with the first question being 'our club is not a profit making organisation. Why should it be affected by tax'?
The answer is 'even though your club does not aim to make profits, it may get funds from activities or transactions which produce taxable income or chargeable gains'. It then goes on to say that 'Clubs have to pay corporation tax on their taxable income and chargeable gains which are called “profits”'. Even clubs, which are not limited companies, still have to pay corporation tax. There is a special tax definition of a 'company' under TA 1988, s 832(1) which shows that they include 'unincorporated associations'; there are also some minor qualifications under s 832(2). Most clubs, which are not limited companies, are 'unincorporated associations' and therefore have a duty to notify chargeability to corporation tax.
Reference points as to definition of 'unincorporated associations' can be found in HMRC's Company Taxation Manual at CT4750, with the perhaps most important being that 'whether an organisation is an unincorporated association is a question of fact and will depend upon a consideration of all the relevant circumstances. It cannot be determined by simply looking at what the organisation calls itself or the form of its rules'.
It should be noted that, from what we are told, any monies received whether by grants, advertising or trading are kept for future use of the association, and so it is unknown as to whether this can be classed as 'for charitable purposes'. If the association can be classified as having a charitable object, then under Extra-statutory Concession C4, it would not be liable to corporation tax on such income. See also Business Income Manual BIM24792 to 24797 entitled 'Mutual Association: Voluntary organisations & charities', which 'covers the treatment of income and expenses incurred by local bodies and charities in conducting fund raising events. The section also describes a concession and the conditions required for it to apply'.
Obviously the easiest way to obtain an answer would be to contact the local office of HMRC and put the question of facts to them.
Reply by A.N.A.:
Royston is right to be concerned. Corporation tax applies not only to the profits of companies, but also unincorporated associations (TA 1988, s 832(1) refers). The funding income and advertising income he refers to is almost certainly subject to corporation tax. Income from local events may also be subject to corporation tax. As a starting point he should obtain leaflet IR 46, Clubs, societies and voluntary associations, which can be found at www.hmrc.gov.uk/pdfs/ir46.htm#form.
