I run a community accounting service for charities and not-for-profit organisations.
My own particular area of expertise and main market for the business is charities who have a greater need for my services and have greater reporting requirements than CIC's for example.
However I have a few CICs that I am helping and the question of tax on profit has come up with some of them.
Am I right in thinking that where they have had a grant which is not to deliver a specific project or service then that will not count towards their profit when calculating corporation tax.
For the CICs I have helped they are making a trading loss but the grants are giving them a surplus to carry through. I am showing the profit/loss after trading and then adding in the grant afterwards.
In one case a grant from the National Lottery to deliver a specific service included expenditure in the following year which I have shown as cash and a liability in the balance sheet rather than income to show there was no trading profit. Is this the correct way to do this?
Community Accounting Services Kernow CIC
Revenue / Income grants are taxable. Whether you have costs to reduce the taxable grant (such as specific project costs) is a subsequent issue, but the Grant itself should be included in taxable income. (As always, certain cases can be exempt but the grant documentation would specifically say it is non-taxable and this would only ever be from a government body).
A grant might be a capital grant (to buy a piece of equipment) in which case for tax the value of the grant should be reduced from the expenditure qualifying for capital allowances. This is not usually how they are treated in the accounts (accounts usually maximise depreciation based on asset cost and release grant income to offset) so be careful to add-back both Dep and Income released.
For your National Lottery grant then the balance sheet for the subsequent period expenditure sounds like the best place for it. I'm no UK GAAP expert, and the "Matching" concept isn't relevant any more, but this sounds reasonable.
Similarly, read all the small print on any other Grants that are moving a loss-making CIC into profit. Look at the date the grant was given, and what it was given for. Maybe you could argue that if it is to cover the general running costs of the CIc for the next year, and it was given 1 month before year end, that 11 months of it should also be on the Balance Sheet as Deferred Income?
Although - think about the wider implications. Paying a little bit of tax might be worth it if you can have a positive surplus for the year in reserves (banks would like that, as would Councils you're tendering to).
Thanks for the reply - the only information I can glean about the subject comes from a chartered accountant's website:-
"Unincorporated associations and not-for-profit companies, including CIC’s, will usually be liable to Corporation Tax on their income sources in the normal way. (There is however an exemption from tax where the sum of tax payable is less than £100 – it costs too much for the Revenue to collect it.) But not all income is taxable, most importantly grants received from funding sources will not normally be taxable since they have not arisen from a taxable source i.e. they do not arise from trading."
I'm going to the Community Accounting National Network conference later this month and will hopefully get more information on this and report back.
DId you get more info at the conference? My accountant is interested in this as we will be making a profit this year (hooray!) so facing tax (boo!)