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Corporation tax and clubs

Your club may have to pay Corporation Tax because of changes to the law.

What is corporation tax? Corporation Tax is a tax on the profits of limited companies and some organisations including clubs, societies, associations, co-operatives, charities and other unincorporated bodies.

Taxable profits for Corporation Tax include:

  • profits from taxable income such as trading profits and investment profits (except dividend income which is taxed differently)
  • capital gains – known as ‘chargeable gains’ for Corporation Tax purposes

Why am I writing about it now? The Dee Wildfowlers & Wetlands Management Club was contacted by Her Majesty’s Revenue and Customs regarding the club’s possible liability for Corporation Tax (‘CT’). It seemed that from 1st April 2006 the government withdrew the £10,000 starting band of income that was charged to CT at 0%. The letter received by the club was in relation to income from bank interest, and went on to explain that returns would not be necessary from unincorporated organisations where the tax at stake would be less than £100, which at a CT rate of around 20% means bank interest of less than £500 per annum. Incorporated clubs are required to complete a tax return even if their tax liability is below £100.

In those years when there was an income band of £10,000 that was taxed at zero percent it did not mean that no taxable income had arisen, it simply meant that there was no tax to pay. This band was eliminated on 1 April 2006 and since then tax would have become payable, albeit on investment income and trading profits only.

What are club’s liable for? The activities of most clubs will be exempt from Corporation Tax on the grounds of what is called mutual trading which is essentially the re-cycling of members’ own money for the purpose of running the recreational, sporting affairs of the club/syndicate for their benefit.  Although income from mutual trading is exempt from CT, income from non-members, including income from grazing rights, and investment income, such as bank interest, is taxable and since losing 1 April 2006 clubs have been liable for CT if the tax charge exceeds £100 per annum.  So if a club thinks it might have income that is taxable, it should contact their local HMRC office. Remember that tax evasion is an offence.

While it may be that at some time a decision has been made not to collect tax on income below £500 my research indicates that this is not a concession that has been formalized and it is certainly not one on which I would place any reliance – at current rates this represents the return on a capital sum in excess of £25k and the tax charge would be £100 – I am only aware that HMRC writes–off balances of less than one Pound. However, it occurs to me that on investment income, some tax may have been accounted for at source so this might be why HMRC won’t expect a return from smaller clubs.

Another consideration is the change that came in 1 April 2011 in respect of all companies and organisations that have to complete a tax return; they are required to submit it online for any accounting period ending after 31 March 2010. Additionally, if you have to prepare accounts under the Companies Act 2006, you must submit your accounts and computations in a set format – Inline eXtensible Business Reporting Language (iXBRL).

So, in a nutshell, (save for a concession regarding trading undertaken to raise money for charity), club incomes other than that protected by the mutual trading provisions are taxable, however, it must not be forgotten that trading income will be subject to the deduction of related expenses and allowances. Combine this with the online reporting requirements and larger clubs would be well advised to consider taking professional advice.

For more information go to www.hmrc.gov.uk/ct/index.htm or contact your local HMRC office for more guidance.

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