About this episode

Being a social enterprise does not automatically mean being tax-free. Community Interest Companies, often known as CICs, can do valuable community work, generate income, receive grants, employ staff, and still have tax responsibilities to manage.

In this episode, we explain the common misconceptions around Community Interest Companies and tax. We look at why CICs are not the same as charities, how corporation tax can apply to surpluses, when VAT becomes relevant, and why payroll, National Insurance, grants, and company structure all need careful attention.

What you’ll learn in this episode

• What a Community Interest Company is and how it differs from a charity.
• Why CICs are not automatically exempt from tax.
• How corporation tax can apply when a CIC generates a surplus.
• Why VAT can still affect CICs that carry out commercial activities.
• How employing staff brings payroll and National Insurance responsibilities.
• Why CIC structure matters when funds, dividends, and withdrawals are involved.
• How grant income and restricted funds should be treated carefully in the accounts.

What is a Community Interest Company?

A Community Interest Company is a business model designed for organisations that want to deliver community benefit while also operating with an entrepreneurial spirit. CICs are often used by social enterprises that want to trade, generate income, and make a positive difference to a local or wider community.

However, a CIC is still a company. It may be limited by guarantee or limited by shares, and it has its own legal and financial responsibilities. That means good financial control, clear records, and proper tax planning are still essential.

CICs are not the same as charities

One of the biggest misconceptions is that a CIC is the same as a charity. It is not. A CIC may have a strong social purpose, and it may be a step towards charitable status for some organisations, but it is not automatically treated as a charity for tax purposes.

Charities have their own legal framework and specific tax exemptions. CICs operate under a different structure, so they need to understand which tax rules apply and when those obligations arise.

Corporation tax and CIC surpluses

Community Interest Companies often generate a surplus. In commercial language, we may call this profit. The surplus is generally the income generated by the CIC, minus allowable expenses.

That surplus is not automatically exempt from corporation tax. If a CIC earns income from commercial activities, grants, donations, or other sources, it still needs to consider the normal corporation tax rules that apply to company profits.

There may be ways to manage or reduce tax liability, but that does not mean the liability disappears. Making a surplus and paying tax can also be a sign that the CIC is financially active, sustainable, and able to keep serving its community.

VAT and Community Interest Companies

VAT can also apply to CICs. If most income comes from grants, VAT may not be triggered in the same way as commercial trading income. However, when a CIC delivers paid workshops, consulting, services, or other taxable commercial activities, those activities can count towards the VAT registration test.

Once taxable turnover crosses the current VAT registration threshold, VAT registration may be required. Being a CIC does not remove that obligation.

This matters because a CIC may still pay VAT on goods and services it buys. If it is not VAT registered, that VAT usually becomes part of the cost. If it is VAT registered, it must manage VAT charging, VAT claims, records, returns, and payments properly.

Payroll, employment and National Insurance

Many CICs employ staff. Once staff are employed, payroll responsibilities become part of the organisation’s tax compliance.

If employees earn above the relevant limits, the CIC may need to operate payroll, deduct tax, deal with employee National Insurance, and pay employer National Insurance where required. In practical terms, the CIC becomes part of the tax collection system.

It is also important to understand that employee status is not decided simply by what the individual wants to be called. The relationship between the organisation and the worker matters. A person described as a freelancer may still be treated as an employee depending on how the working relationship operates.

CIC structures and tax rules

A Community Interest Company can be limited by guarantee or limited by shares. The structure affects how funds can be handled and how money can be withdrawn.

If a CIC is limited by shares, dividends may be possible, but there are rules and restrictions. Dividends paid out are not normally treated as tax-deductible business expenses.

If a CIC is limited by guarantee, there are also restrictions on how funds can be withdrawn by the people involved in the organisation. This is why structure matters from the start. When in doubt, it is better to check with an adviser before making assumptions.

Grant income and restricted funds

Grant income is important for many CICs, but it needs careful accounting treatment. If a grant is given for a specific project, it is usually tied to that project. This is often described as a restricted fund.

Restricted funds are common in the charity and not-for-profit world. They help show that money has been received for a specific purpose and should be matched to the project delivery it relates to.

This means the full amount of grant cash received may not always be shown as income straight away in the income and expenditure account. The accounting treatment depends on how much of the project has been delivered during the relevant period.

Grant income is not a tax-free card. It is there for project delivery, and CICs still need to understand how it affects their accounts, surplus, and tax position.

Practical tax steps for CICs

• Remember that CIC status does not automatically create tax exemption.
• Track commercial income separately from grants and donations where useful.
• Review whether surpluses may create a corporation tax liability.
• Monitor taxable turnover for VAT registration purposes.
• Keep clear payroll records when employing staff.
• Check worker status carefully instead of assuming someone is self-employed.
• Understand whether the CIC is limited by guarantee or limited by shares.
• Record restricted grant income properly and match it to project delivery.
• Speak to an adviser before making decisions about dividends, withdrawals, VAT, or corporation tax.

Related episodes

• Social enterprise and Community Interest Companies
• Asset Lock in Community Interest Companies
• UK Business Taxes: Understanding Your Tax Obligations

Key takeaway

Community Interest Companies can do good work, support communities, and operate with a strong social purpose. However, that does not remove the need to understand tax.

CICs still need to think about corporation tax, VAT, payroll, National Insurance, grant income, restricted funds, and the rules linked to their company structure. Good intentions are important, but good financial management keeps the organisation stable, compliant, and ready to keep making an impact.

If you run a CIC and are unsure how tax applies to your organisation, visit ihatenumbers.co.uk or get professional support before making assumptions.

Plan it, Do it, Profit.

“Being a CIC does not exempt you from paying tax.”

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Episode Timecodes

• 00:00 – Why CICs still need to understand tax
• 01:38 – What a Community Interest Company is
• 02:27 – Why CICs are not the same as charities
• 02:47 – Corporation tax and CIC surpluses
• 03:50 – VAT considerations for CICs
• 05:00 – Payroll, employment and National Insurance
• 06:01 – CIC structures, dividends and fund withdrawals
• 06:47 – Grant income, restricted funds and accounting treatment
• 07:57 – Final thoughts on CIC tax responsibilities

About the Podcast

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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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.