What is a Not-for-Profit Company?
First things first, a not-for-profit company is an organisation that doesn’t aim to make a profit for its owners or shareholders. Instead, any money made is reinvested back into the organisation to support its mission, whether that’s helping the community, supporting a cause, or providing subsidised services.
Not-for-profit companies are usually companies limited by guarantee, sometimes but not always, registered as a community interest company (CIC).
This factsheet relates to non-charity not-for-profit companies.
Corporation tax
Now, onto the big question: do not-for-profit companies pay tax? The answer is unfortunately yes. All companies and unincorporated associations must pay corporation tax on any surplus arising each year. The only escape from the corporation tax net is to register as a charity.
The surplus that is taxed is generally the net profit shown in your income and expenditure account. This will be the same as the increase in the balance sheet total (all assets less all liabilities) year on year.
Unincorporated associations also fall under the net of corporation tax (noting the implicit misnomer of “corporation tax”). Unincorporated associations are treated the same as companies for all tax purposes.
Rates of corporation tax
The general rate of corporate tax in the UK is 25%. If you are a close company (five or fewer members of the company, or all members are directors) and you rely solely on grant income (i.e. do not trade in goods or services) then you pay corporation tax at 25% regardless of the level of your profits.
However, if you are trading, or are not a close company, and your surplus is less than £200,000, then your tax rate is reduced, potentially down to 19%.
Grants and donations
Grants and donations are a big part of funding for not-for-profits. Generally, any surplus from grant funding is taxable, just as any other surplus is taxable.
Payroll matters
Most not-for-profit organisations, including all companies limited by guarantee, cannot or do not pay dividends. There is a general bar, with very limited exceptions, to directors of companies invoicing their own company on a “freelance” or self-employed basis. This means that almost all payments to directors of not-for-profit companies must be made through payroll.
Mutual trading
There is a tax exemption for surpluses arising from mutual trading. As you may expect there are strict criteria that must be met to avoid tax on this basis. In summarised terms the members of the company who would share in any final distribution on closure of the company, must be the same set of people who are buying goods or services from the company.
Community Amateur Sports Clubs (CASCs)
CASCs enjoy limited tax exemptions on certain trading activities but can claim gift aid on donations received and an 80% discount on business rates. Registration as a CASC is subject to detailed criteria which we can help you with.
Losses
Generally, companies that make a loss in an accounting period (expenditure more than income, balance sheet total reduces) can set the loss against any taxable surplus for the previous year. This can generate a refund of some of the tax paid on the past surplus. However, if your not-for-profit organisation is entirely grant funded and not trading, losses can only be set against future surpluses, not past ones.
VAT
Not-for-profit organisations are subject to the same VAT rules as companies with shares aiming for profits to distribute as dividends.
Staying compliant
It’s crucial for not-for-profits to stay on top of their tax obligations. This includes keeping accurate records, filing necessary forms, and ensuring that any income is correctly categorised. If you’re unsure, it’s always a good idea to consult with a tax professional or accountant who specialises in not-for-profits, such as ourselves.
If you have any more questions or need help with your not-for-profit’s taxes, feel free to book a free online meeting for professional advice.
