CIC Association

Serving Community Enterprise

We are considering setting up a self funded CIC but I am concerned we will be taxed more as a CIC (and less to re-invest) than if we set up as a normal Ltd company.   From my understanding a normal Ltd compnay (with 2 £1 private shares) can pay say a 20k take home pay to a Director through dividends which is offset from Corp tax, which is far more tax efficient than salary.  Thus a true social enterprise which re-invests over 90% of its profits back into the enterprise and wants to remunerate its Directors with a 20k take home salary would have significantly more money left in the pot to reinvest as a normal Ltd company than a CIC (by being able to offset the 20% or so Corp Tax).  If I have this right it seems strange to penalise CICs in this way, or have I missed an obvious work round that negates this penalty?

 

Any help here would be much appreciated as the other aspects of a CIC would suit us very well.

  

Kind Regards,

 

Rick Crockett

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Dividends are disallowed when calculating taxable profits for the company, and therefore the corporation tax payable. Corporation tax is due on profits (out of which dividends are subsequently paid). The company would pay employer's NIC on salaries which would be an extra cost - but if you are a new company you will be eligible for the employer's NIC holiday (unless you are in the SE, London or East of England). The tax efficiency achieved by paying dividends is for the Directors - who would pay less tax on dividends, and also no national insurance. It makes no difference if you are a CIC or normal ltd co - the tax treatment would be exactly the same. The only additional issue for a CIC is that it would have a dividend cap, limiting the amount of money that can be paid out as a dividend.
Hi Rick
Its definitely an issue, although quite difficult to fully answer without all the facts. Whether directors in traditional ltd companies are engaged with tax avoidance/mitigation by taking profit via dividend is a subject in itself without adding the CIC dimension to it. (the Liberal Democrats are putting proposals together which may well change the way normal Ltd company directors can take dividend in their strategy to reduce tax which may well influence your decision)
There's definitely a trade off between social outcome and personal profit, but that's the point. My own personal view is more needs to be done to reward the founding directors for their sweat equity in a reasonable way, but there's a lot to do to build the argument. Not being a CIC will allow you more control, but being a CIC will likely open doors for you that being an ordinary Ltd company wont.
If your committing assets to the company its quite easy to make sure you dont lose out, The value in being a CIC will be the assurance to investors/clients/customers that your social impact has primacy over director/shareholder profit. You can always convert to CIC status at a later stage, im quite interested in developing this discussion so if you could tell us a little more about what the CIC will do, any assets your committing etc we can hopefully give you a some more detailed information.

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