Being a social enterprise or Community Interest Company does not mean tax obligations disappear. In this episode, we walk through the real tax position for CICs, clearing up misunderstandings that regularly catch directors out. We cover corporation tax, VAT, payroll, grants, and how structure affects your tax exposure.

What Is a Community Interest Company?

A Community Interest Company is a special type of limited company created to serve the community. It sits between a traditional profit-making business and a charity. While the purpose is social or environmental, CICs are still companies and remain firmly within the UK tax system.

Corporation Tax and CICs

CICs pay corporation tax just like any other limited company. If trading income exceeds allowable expenses, the resulting surplus is taxable. Being values-led or not-for-profit does not remove this obligation. Corporation tax rates currently range from 19% for profits up to £50,000, rising to 25% for profits over £250,000, with marginal relief applying in between. Making a surplus is not a failure — it shows sustainability. What matters is how that surplus is managed and reinvested.

VAT: A Common CIC Trap

VAT frequently causes problems for Community Interest Companies. Grants and donations are usually outside the scope of VAT and do not count toward the registration threshold. However, income from selling goods or services does. If taxable turnover exceeds £90,000 over a rolling 12-month period, VAT registration becomes mandatory. Profitability is irrelevant. Voluntary registration may be possible, but charging VAT to non-VAT-registered communities can create real cost pressures. Digital systems such as Xero cloud accounting help track turnover accurately and reduce the risk of missing VAT thresholds.

Employing Staff and PAYE

Once a CIC employs staff, PAYE applies. This includes registering as an employer, operating payroll, deducting tax and National Insurance, and paying employer contributions. From April 2025, employer National Insurance applies once earnings exceed £5,000 per year, charged at 15%. Employment Allowance may reduce the impact, but payroll obligations remain.

Freelancers, Contractors, and Risk

CICs using freelancers must assess employment status correctly. The engager is responsible for determining whether someone is genuinely self-employed. This is based on control, substitution, and equipment — not personal preference.

CIC Structure: Shares vs Guarantee

CICs can be limited by guarantee or by shares. Guarantee-based CICs have members and reinvest all surpluses. Share-based CICs may pay dividends, but these are capped by regulation and are never tax-deductible. The structure chosen affects profit distribution, funding options, and long-term strategy.

Grants and Tax Treatment

Grants are a major income source for many CICs. Most grants are restricted income and recognised in line with project delivery. Unused funds are deferred rather than treated as profit. Grants usually fall outside VAT, unless linked to specific service delivery. While grants themselves may not be taxable, any surplus generated can still create tax implications.

Practical Tax Planning Tips

Keep Clear Records

Accurate records from day one reduce risk and stress. Cloud accounting provides visibility and control.

Plan for Tax Bills

If a surplus arises, setting aside funds early avoids last-minute pressure. Tax is a sign of success, not failure.

Understand Your Obligations

Corporation tax, VAT, PAYE, Companies House filings, and CIC regulator reporting all apply.

Seek Advice Early

Working with a CIC-aware adviser saves time, money, and unnecessary compliance issues.

Key Takeaways

Community Interest Companies are not exempt from tax. Corporation tax applies to surpluses, VAT applies to trading income, payroll applies to employees, and grants require careful accounting. The right systems and planning make compliance manageable.

Episode Timecodes

• [00:00:00] – CICs and tax myths
• [00:01:33] – Corporation tax explained
• [00:03:00] – VAT and registration thresholds
• [00:04:36] – Employing staff and PAYE
• [00:06:15] – CIC structures compared
• [00:07:00] – Grants and restricted income
• [00:08:22] – Practical tax planning tips
• [00:09:58] – Final recap

Listen and Learn

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Additional Links

• Book a Call
• Xero Accounting Support
• I Hate Numbers YouTube Channel
• I Hate Numbers Book

:: 00:00

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 going to be diving into one of the most misunderstood topics in the world of CICs,

:: 00:22

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.

:: 00:41

I want to 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. This is structure with social purpose. Think of it like that bridge between a traditional for-profit company and a charity.

:: 00:59

It's not quite one or the other. And CICs 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 CICs and Corporation Tax, and I mentioned corporation tax because CICs are companies and they're subject to the Corporation Tax regime. A great deal of CICs will operate income through trading, like selling services, running workshops,

:: 01:33

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 going to 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.

:: 01:53

You still need to file 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.

:: 02:20

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 matters is how you've managed that profit and what you do with it. And that's where the CIC model for a lot of people

:: 02:38

is a very powerful thing. Now, I’m going to talk about grants later on in this podcast, by the way, but let's park that one for now. 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 CICs, and if I was, to be brutally honest, here, catches out a lot of businesses per se.

:: 03:00

Now, if your income predominantly comes from grants or donations. Then you may think that VAT 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.

:: 03:20

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 VAT. VAT is not dependent on profitability, it’s based on the level of fat turnover.

:: 03:41

As a side note, by the way, you can if it's appropriate for your business and appropriate for your business model, volunteer to register for VAT. More of that in a different podcast. Now, VAT 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.

:: 04:01

Now if your end community, your end client, your end customer is not VAT-registered, then obviously that's going to 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.

:: 04:19

Digital accounting helps you to do that and keep an eye on that VAT threshold. Now let's look at the situation when it comes to employing people and that includes yourself. If you're growing - excellent, that means that you might then move towards more having staff employees as opposed to subcontractors.

:: 04:36

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 of thinking to do so, that 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 got to register as an employer with HMRC.

:: 04:57

You've got to 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.

:: 05:15

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.

:: 05:32

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 and

:: 05:52

I'll unpack that in a future episode. But for now, no it’s not your choice or your employee's choice or your freelancer's choice. It's the criteria that decides that. I want to 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 there are by shared capital.

:: 06:15

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.

:: 06:38

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.

:: 06:55

I mentioned earlier on in the podcast I was going to talk about grants, so let's crack on with that now. Now grants are vital for many CICs. It's not unusual. All the CICs 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.

:: 07:14

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 recognise the income in the year the activity occurs.

:: 07:30

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

:: 07:46

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 organisation is funded mainly by grants, they're going to be profit neutral on the grounds

:: 08:05

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 want to get involved in a bit of smart tax planning.

:: 08:22

Clarity of records - always keep good records from day one. Again, my preference is always for an organisation to have a system set up that's fit for purpose, and a digital cloud accounting system is going to fit the bill. Number two, plan for those tax bills. If you do make a surplus, put money aside for the Corporation Tax. A handy

:: 08:39

rule of thumb, put away, for argument's sake, a 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.

:: 08:57

Corporation tax, VAT, PAYE. You are not exempt from those, and you've got obviously reporting framework of Companies House, HMRC and the CIC regulator. Tip number four, seek advice early. A CIC accountant (cough, cough), 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.

:: 09:21

It means you're building something, a sustainable business that's going to 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.

:: 09:40

VAT is going to apply to your trading income. If you employ staff, payroll is going to 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.

:: 09:58

Get the right systems in place. Don't be scared, be knowledgeable and take strength from that. Ask questions and plan ahead. Now folks, that's it for this episode. I hope it's helped clear the fog around CICs and tax. If you found this episode useful, please do share it with your network.

:: 10:17

If you've got questions, or want to 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.