We are a CIC, company ltd by guarantee, a public arts business. All our members are adults in touch with mental health services and are referred to us by NHS mental health services. Our income consists of the following:
- service level agreement from the Primary Care Trust
- earned income
- project funding
Our previous accountants simply returned our year end accounts stating that we are a non-profit making company and told us to pay tax on bank interest only. We since changed accountants and the new ones say that we have to pay tax, but they say it isn't quite clear what on. We feel that the Service Level agreement should be exempt, while the other activities are clearly trading activities and therefore taxable, and are suggesting to separate the two activities and allocate the costs accordingly. WE keep a detailed database of our daily activities and therefore could easily allocate costs.
We are currently talking to the tax office about this issue, but I wondered if anyone else has come across this before or has any advice on how to deal with the service level agreement, as our advisor at the tax office also seems unsure. Having to pay tax on this would significantly affect the service we are offering to a very vulnerable group of society.
technically speaking, a service level agreement is a commercial contract, so any surplus that's generated from it is 'profit' and all companies are liable to pay corporation tax on profits.
However, any good accountant should be working with you to enusre that you don't pay tax on your profits - instead assigning any profits against future costs, etc and therefore enable you to maximise your impact as a social enterprise
just involved in an argument with the tax office over this one. Probably the best starting point is to say that you consider yourself not for profit and tax only due if tax on interest in excess of £100...and send them your articles and mems.
In practical terms agree with Adrian...defer your portion of unspent grant/sla to next year
SLAs come in many guises, not all SLAs are commercial contracts but the majority of them will be.
I'm afraid that you cannot simply 'assign' profits to a later period, if it were this easy every plc in the land would be doing it. If you have been paid money for providing a service during the year and you got paid more than it cost you to do, that is a profit. This profit is taxable.
(Grants are different - grants are not usually contractual and it can be possible to defer recognition of the income to a later period in some circumstances.)
The big question here is - what did it cost you to do? Obviously you shouldn't just allocate the direct costs of the SLA to that income stream, you should assign every single indirect cost you can think of too. For example, how much of the Director's time (and salaries) was actually spent running the SLA and how much was spent running the CIC?
If you really get stuck, set up a charity and donate profits to it. Run the nice projects out of the charity. Probably easier just to pay some tax.
Similarly, do the projects you do make profits or are they loss making? If loss making, claim them as taxable and get the loss relief. If you claim them as being non-taxable then you won't get loss relief.
There is always the 'not trading with a view to making a profit' argument, whereby you only get taxed on bank interest and nothing else. If HMRC bothered to look closely they might argue that as a CIC you are actually trading with a view to making a profit (as that is what differentiates Social Enterprise from charity) but most of them aren't going to even know this is an argument let alone pursue it.