Being a social enterprise, specifically

a not-for-profit community interest

company does not give you a free ride

when it comes to tax.

If you are indeed running a not-for-profit, a

community interest company perhaps,

then this episode is right up your street.

Now, today's episode, I'm gonna be diving

into one of the most misunderstood topics

in the world of cics.

And that is in terms of taxation, it's quite

a common question for a lot of my clients

who run community interest companies to

think that they are not subject to taxation.

Unfortunately, that's not the case.

I wanna start off with the basics about what

a community interest company actually is.

A CIC now, it's a special type of limited company,

which is created to serve the community.

It blends the best of both worlds.

I. This is structure with social purpose.

Think it like that bridge between a

traditional for-profit company and a charity.

It's not quite one or the other.

And Serious Sea are designed to make a

difference and often tackle social or

environmental issues.

But here's a key point, just because

you're doing good.

It doesn't mean you are off the tax man's radar.

You are out of their grid.

Now let's break it down.

We'll look at firstly at CIS and Corporation

Tax, and I mentioned corporation tax because

CIS are companies and they're subject to

the corporation tax regime, a great deal

of cis will operate income through trading,

like selling services, running workshops.

Offering consulting or even selling

products, that income that's generated

minus the allowable expenses becomes the

surplus or profit.

To give it its alternative term.

And here's the myth that I'm gonna sort

of bust for you.

Being a CIC in itself does not exempt you from

paying corporation tax.

You're still seen as a company.

You still need to find your accounts,

by the way.

And if you make a profit, you will pay corporation

tax as a default, just like any other.

Private limited company would do.

Now, current corporation tax rates in the United

Kingdom for a single company range between up

to 19% when you've got profits of up to 50 k,

25% if it's over 250, and then you get something

in the middle, which is called tax at 25% less

what's called a marginal relief reduction.

And remember, if you are making profits,

which in itself is not a bad thing.

It means you're going along the right lines,

you are sustainable.

So paying tax is not necessarily an

indication of failure.

It's an indication of success, what

masses is, how you've managed that profit and

what you do with it.

And that's where the CIC model for other people.

It's a very powerful thing.

Now, gonna talk about grants later on in this

podcast, by the way, but let's park that one

for now and let's look at the next tax VAT.

Or to give it its alternative term,

very awkward tax.

Now, VAT is a tax that catches out many cis,

and if I was, to be brutally honest, here,

catches out a lot of businesses per se.

Now, if your income predominantly comes from

grants or donations.

Then you may think that that doesn't apply to

you, and in some cases that's largely true.

When we look at the necessity of having

to register for VAT is based on the level

of VAT turnover over a rolling 12 month basis,

grants or donations are not included in

that calculation.

However, if you earn money from selling goods

or services, you do need to track your turnover.

You do need to review that turnover.

You do not want it to go over 90,000 pounds over a

rolling 12 month period.

If it does, then you've got to register

for V-A-T-V-A-T is not dependent on

profitability, is based on the level

of VA turnover.

As a side note, by the way, you can.

If it's appropriate for your business and you

appropriate for your business model, volunteer

to register for VAT.

More of that in a different podcast.

Now, VA registration does allow you to claim

VAT on what you buy in, which can be handy,

but it also means you need to start charging

VAT to your customers and doing VAT returns.

Now if your end.

Community, your end client, your end customer

is not VAT registered, then obviously that's

gonna be a very expensive burden.

Remember, A CIC doesn't give you an automatic

VAT exemption that might apply to some

charities but not cics.

So be mindful, keep your income reviewed

on a regular basis.

Digital accounting helps you to do that

and keep an eye on that VA threshold.

Now let's look at the situation when it comes

to employing people and that includes yourself.

But if you're growing excellent, that means

that you might then move towards more having staff

employees as opposed to subcontractors.

And if you do employ people, the system

of PAYE or pay as you earn comes into

play if you decide.

And there are good economic grounds for

thinking to do so.

You are wanting to recruit staff

employees that might be indicative of your

funding arrangement.

It might suit your business model better.

Then you've gotta register as an

employer with HMRC.

You've gotta operate a payroll.

Deduct the appropriate amount of tax

national insurance from your employees.

Pay employees national insurance contributions.

And from 24 25 onwards, the rules have changed.

So if your employees earn more than 5,000 pounds

in a year, then you are subject to employer's

national insurance.

You may be entitled to an allowance, which

will mitigate that, but employer's national

insurance kicks in at 15 percentage points.

Obviously, other things such as employment

contracts, national insurers also will

come into play, as well as contracts of

employment, holiday pay, pension entitlements,

and the like.

Now if you're hiring freelancers or

contractors, by the way, be very careful.

You as the engager need to do the assessment

and the status test on that individual to see

if they actually comply, and they are legitimately

freelancers more that on a different episode.

It's about the working relationship you

follow the control, the rules, and the

equipment that's used.

I'll unpack that in a future episode,

but for now, no.

It is not your choice or your employee's choice or

your freelancer's choice.

It's the criteria that decides that.

I wanna take a step back here and just look

at the idea that not all cics are the same.

Please do check out the previous episodes where

we talk about this, but some cics are either

limited by guarantee or thereby share capital.

Now, if you're limited by guarantee.

You don't have shareholders.

Instead, you have members.

There's no profit distribution allowed,

and all surpluses are reinvested back into

your community purpose.

Now, if you're limited by shares,

you can pay dividends.

There is a cap on them, a legal dividend cap set

by the regulator to make sure you're not actually

masquerading as a private business, but as a

true social enterprise.

Either way, any dividends paid to

shareholders are not tax deductible expenses,

so they don't reduce your corporation tax.

So choose the structure carefully and think

about what your long-term mission is.

We've dealt with clients who have both cics that

are registered by shares and also ones that are

limited by guarantee.

I mentioned earlier on in the podcast I

was gonna talk about grants, so let's crack

on with that now.

Now grants of I, for many cis, it's not unusual.

All the cis that I've looked after will

always have a grant component as part of

their income stream.

Those grants come from local authorities,

trust foundations, public bodies, bodies

like the arts council.

But how does that work when it comes to

tax and accounting?

Well, if a grant is for a specific project, it's

in conversation terms classified as restricted

income, which means you can only use it

for an agreed purpose.

When you report that in your accounts,

you recognize the income in the year

the activity occurs.

So if a funder gives you 30 grand for a year long

project, but you've only delivered half of that,

then by the end of the financial year, only half

will be shown as income.

The other half will be called deferred income.

Now most grants will not count towards

VAT turnover for the registration limits.

Unless there's an element of service delivery, the

devil is in the detail.

Now, girls don't give you a get out

of tax free card.

They may be non-taxable, but if you generate

a surplus from them, then tax rules

could still apply.

In my experience, if your organization is

funded mainly by grants, they're gonna be profit

neutral on the grounds.

That when a grant application is made,

there's a budget that's presented to the funder

and the cost should match the grant income.

Now, that's a very simple overview, but it's

worth bearing in mind.

Now, here's some tips to think about.

If you are running a CIC and you wanna get

involved in a bit of smart tax planning, I.

Clarity of records always keep good

records from day one.

Again, my preference is always for an

organization to have a system set up that's

fit for purpose, and a digital cloud

accounting system is gonna fit the bill.

Number two, plan for those tax bills.

If you do make a surplus, put money aside for the

corporation Tax a ahead.

Rule of thumb, put away for argument's

sake of 10% of all your turnover to deal with

the corporation tax.

Put that money to one side, put it on deposit.

Earn a bit of interest as well, but don't

wait until the deadline to Scrabble around

finding the tax.

Step number three or tip number three, to be more

specific, understand what your obligations are.

Corporation tax, V-A-T-P-A-Y-E.

You are not exempt from those, and

you've got obviously reporting framework of

company's house HMRC and the CIC regulator.

Tip number four, seek advice early.

A CIC accountant, koff, or advisor will save you

time, money, and stress.

And lastly, remember making a profit a

surplus and paying tax is not a bad thing.

It means you're building something, a

sustainable business that's gonna serve your

community long term.

So let's recap.

Now, being a CIC does not exempt you

from paying tax.

You may be values led.

Socially minded and community focused,

but tax orders will still apply to you.

Corporation tax is based on your profits.

VAT is gonna apply to your trading income.

If you employ staff, payroll is

gonna be an issue.

Your structure, whether it's by shares or

guarantee, affects how the profits

are distributed and grants, even though

a vital component.

May not be taxable in their own right, but you

still need to account for them carefully.

Get the right systems in place.

Don't be scared, be knowledgeable and take

strength from that.

Ask questions and plan ahead.

I. The folks.

That's it for this episode of From Creating

Your Passion to Profit.

I hope it's helped clear the fog

around cis and tags.

If you found this episode useful, please do share

it with your network.

If you've got questions, I wanna dive deeper

into your own numbers than head to the link

in the show notes, book a call and until this

time next week, plan it.

Do it and profit.