In today's podcast, we aim to explore and demystify the common misconceptions surrounding tax obligations for Community Interest Companies (CICs). As passionate advocates of business finance, we want to illuminate the intricate relationship between CICs and their tax responsibilities.

Understanding Community Interest Companies (CICs)

Defining CICs

Firstly, before tax, let's define what a Community Interest Company, or CIC, entails. Despite charities, CICs blend social enterprise with an entrepreneurial spirit, all in the pursuit of benefiting their communities.

CICs vs. Charities

In a crucial clarification, being a CIC doesn't equate to being a charity. Even though charities enjoy specific tax exemptions, CICs navigate a different landscape with its own set of rules and obligations.

Tax Obligations for CICs

Generating Surplus

Notably, CICs often find themselves generating a surplus, equivalent to profit in the private sector. Regardless of the positive connotations, it's important to note that this surplus is not exempt from corporation tax.

Mitigating Tax Liability

Furthermore, while there are strategies to mitigate tax liability, CICs engaging in commercial activities, grants, or donations must adhere to regular rules governing corporation tax.

Value Added Tax (VAT) Considerations

Impact of Commercial Activities

Shifting our attention to VAT considerations, it becomes relevant when CICs engage in commercial activities. Upon crossing the statutory turnover limit necessitates VAT registration.

Obligations Despite Structure

Moreover, whether limited by guarantee or shares, CICs cannot evade VAT obligations. This emphasizes the responsibility of navigating tax intricacies, regardless of their structural nuances.

Employment and National Insurance

Employee Tax Responsibilities

As CICs employ staff, they inevitably step into the realm of employer National Insurance obligations. This additional duty adds to the responsibility of operating payroll schemes, a critical aspect of tax compliance.

Clarifying Employee Status

Moreover, it's essential to recognize that the distinction between an employee and a freelancer is about the developed relationship. This topic we'll explore further in future podcasts.

CIC Structure and Tax Rules

Limited by Guarantee vs. Limited by Shares

By distinguishing between CIC structures, whether limited by guarantee or shares, it significantly impacts tax considerations. Dividends and fund withdrawals have specific rules that must be navigated.

Advisor Guidance

In cases of uncertainty about the intricacies of CIC structures, seeking advice from experts is paramount. Our inbox at IHATENUMBERS is open to support your queries, ensuring you have the guidance needed.

Grant Income and Accounting Considerations

Handling Grant Income

Grant income, essential for many CICs, comes with accounting nuances. Therefore, understanding restricted funds ensures accurate representation in financial records, a practice essential for tax compliance.

Not a Tax-Free Card

Further, with receiving grant income, CICs must recognize that it is not a carte blanche for tax exemption. Grant income serves specific project delivery purposes, and understanding its implications is critical.

Conclusion

In essence, being a CIC doesn't exempt one from tax obligations. It's a social enterprise vehicle combining an entrepreneurial trading spirit with income generated from various sources. We hope this episode clarifies common misconceptions about tax and CICs.

If you found this episode useful, we encourage you to share it within your network. CICs with specific questions or future topics can reach out to us. Until next time, this is your business finance fixer, signing off. See you on the other side.

Being a social enterprise doesn't necessarily mean that you don't pay any tax. In today's I Hate Numbers podcast, I'm going to be diving into a topic that many social enterprises in the form of community interest companies find confusing, and that's the area of tax. Specifically, I'm going to be looking at the common misconceptions around tax obligations for community interest companies, henceforth known as CICs.

I'm going to remind ourselves what a CIC is, and how tax affects those organisations. So grab yourself a cup of tea, sit back and let's crack on with the podcast.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Firstly, what is a community interest company commonly abbreviated to as a CIC? Now a CIC is a business model often formed by those who wish to deliver community benefits, have an element of social enterprise, but also an entrepreneurial spirit within that as well. They have a strong desire to contribute

positively to their community, whether that's a local area or a wider, broader community, geographically or otherwise. Now it's essential to bear in mind that being a CIC does not make you a charity. It could be a step forward to becoming a charity, but a CIC is not a charitable organisation. Charities have their own frameworks, their own legislative structures, that it gives them certain tax exemptions.

CICs, on the other hand, are a completely different ballgame. If you want to check the back catalogue on the podcast here, we've looked at CICs as business models before, so it's worthwhile to dive in and have a look closer. Now let's explore the issue of taxes and CICs. Now it's not unusual for CICs to actually generate a surplus.

What we might commonly call profits in the private sector. Now a CIC can end up with a surplus because it's income will be generated from sources outside of grants. That surplus or profit as I commonly like to call it is the income that's generated minus all the allowable expenses. That surplus, that profit is not exempt from corporation tax.

Unfortunately, there's no free pass here. So if you generate your income from commercial activities, which is a hallmark of a social enterprise, grant funding, generous donations, you're going to be subject to the normal regular rules that govern Corporation tax when it comes to paying tax on your profits.

There are certainly ways that you can mitigate that tax liability, but a tax liability will nevertheless be generated. And that's not actually a bad thing. Making profits and paying tax is better than not making any profits at all and not paying any tax. I want to consider the next type of tax and that's VAT.

Now VAT, strictly speaking standing for value added tax or very awkward tax as I like to consider it, is another tax consideration. Now if your primary income is generated from grants, then VAT is unlikely to be impacted by that. When it comes to VAT and paying it, if you're not a VAT registered entity, then all the supplies that you receive, all the bills that you've got, which have got VAT added on, you will have to pay that.

Now if you engage in commercial activities like workshops, consulting services, then that will contribute to a VAT turnover test. And once that exceeds the statutory limit, which is currently 85,000 pounds, then you will have to register for VAT. Being a CIC, by the way, does not negate you, does not absolve you from having to pay tax.

If you're a charity organisation, by the way, there are certain supplies made to you which can be exempted from VAT in the first place. So unfortunately CICs are not exempt from having to pay over VAT. You have to navigate the nitty gritty just like any other entity. The other area where taxes may come into play is when you take on staff, when you employ people.

Now CICs employ many people, and if you're entering into that realm, again subject to limits and amounts and this is not the purpose of this podcast to drag you down with physical limits, then it's likely that if you take on an employee and their income is over a certain level, currently about twelve and a half thousand pounds, From 24 onwards, then you will have to pay employers national insurance.

Now, depending on the employees that you have in terms of numbers, there may be a ways to exempt some of that employers national insurance, but nevertheless, you are still within that responsibility of having to operate payroll schemes if your employees earn over a certain level of money. You are effectively going to be an unpaid tax collector.

It's all part of that responsibility package. And one thing is worth mentioning folks, before we go to the tail end of the podcast, is that it's not a question of the individual choosing whether they're an employee or a freelancer. That's all about the relationship that's developed. More of that in another podcast.

In essence, the standard tax rules that apply to private companies also apply to CICs in many respects. There's a couple of more bits I want to throw into the mix here. I want to talk about those CICs that are either limited by guarantee or limited by shares. Now a CIC is a company. It can either be structured as limited by guarantee or it can be limited by shares.

Now if you're limited by shares that means that within the funds that you've had contributed you got from shareholders you can pay them what are called dividends there are limits and caps on that and those dividends that are paid out do not qualify for tax deductions. If you're limited by guarantee you have a restriction and how those funds could be withdrawn for the individuals who make up the membership of the CIC.

If in doubt, make sure you check it out with your advisor. If your advisor doesn't know the answer to the question, then drop us a line at I Hate Numbers and we'd be more than happy to support you on that. The last thing I want to mention is about grant income and the adjustments. Now, many CICs will receive grant income as part of their funding.

If it's specifically for a particular project, then it's tied in that and that becomes what's known as a restricted fund. Now, restricted funds are vocabulary used in the charity sector, but they also apply into the not for profit sector as well. Now, when it comes to accounting for those grants, you only include the element that relates to the project proportion you've delivered in that time period. We're going to be dealing with grants in more detail on a future podcast, but for now, I'm just flagging that up.

Now that money, even though you received the cash rate completely, may not be completely measured as income in your income and expenditure account. Grant income is for project delivery, it tends to be profit neutral, and unfortunately it's not a get out of tax free card. So in conclusion, hopefully this podcast has shed some light on the common misconceptions about tax

and CICs. The essence is that being a CIC does not exempt you from paying tax. A CIC is a social enterprise vehicle where there's an expectation, there is a entrepreneurial trading motivation, as well as income generated from sources such as grants and donations. If you found this episode useful then I'd love it if you could share it with your network.

And if you're a CIC with specific questions or topics you'd like us to cover in future episodes, then let me know. Until next time, folks, this is Mahmood, your business finance fixer, signing off. See you on the other side. We hope you enjoyed this episode and appreciate you taking the time to listen to the show.

We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.