Do Community Interest Companies Pay Tax? Here’s the Truth
Running a Community Interest Company (CIC) is all about making a difference — but that doesn’t mean you get to skip the taxman. Many social enterprises are surprised to learn they’re still subject to corporation tax, VAT, PAYE, and other reporting rules.
In this episode:
“Community Interest Companies and Tax: What You Need to Know”
We break down the essential tax rules for CICs — covering corporation tax, VAT, payroll, grants, and smart tax planning tips. If you’re running a CIC or thinking of starting one, understanding your tax obligations is vital to building a sustainable, compliant organisation.
With decades of experience supporting CICs and social enterprises, I explain the common tax myths, pitfalls, and practical steps you can take to stay on top of your finances — and stay focused on your mission.
Timestamped Summary:
[00:00:00] – Intro: Why doing good doesn’t mean you’re off HMRC’s radar
[00:01:04] – What is a CIC and how it fits into the social enterprise world
[00:01:53] – Corporation tax explained: rates, profits, and key misconceptions
[00:03:00] – VAT and CICs: when it applies and how to avoid nasty surprises
[00:04:36] – Payroll and employing staff: PAYE, National Insurance, and compliance
[00:06:15] – CICs by guarantee vs. CICs by shares — and how structure affects tax
[00:07:00] – Grants and tax: restricted income, VAT, and careful reporting
[00:08:23] – Smart tax planning tips for CICs — records, reserves, and advice
[00:09:21] – Final recap: tax is part of running a sustainable, community-focused business
Book a call for CIC tax advice
If this episode helped clear the fog around CICs and tax, feel free to share it with someone running a social enterprise.
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Plan it. Do it. Profit.
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Transcript
Being a social enterprise, specifically
Speaker:a not-for-profit community interest
Speaker:company does not give you a free ride
Speaker:when it comes to tax.
Speaker:If you are indeed running a not-for-profit, a
Speaker:community interest company perhaps,
Speaker:then this episode is right up your street.
Speaker:Now, today's episode, I'm gonna be diving
Speaker:into one of the most misunderstood topics
Speaker:in the world of cics.
Speaker:And that is in terms of taxation, it's quite
Speaker:a common question for a lot of my clients
Speaker:who run community interest companies to
Speaker:think that they are not subject to taxation.
Speaker:Unfortunately, that's not the case.
Speaker:I wanna start off with the basics about what
Speaker:a community interest company actually is.
Speaker:A CIC now, it's a special type of limited company,
Speaker:which is created to serve the community.
Speaker:It blends the best of both worlds.
Speaker:I. This is structure with social purpose.
Speaker:Think it like that bridge between a
Speaker:traditional for-profit company and a charity.
Speaker:It's not quite one or the other.
Speaker:And Serious Sea are designed to make a
Speaker:difference and often tackle social or
Speaker:environmental issues.
Speaker:But here's a key point, just because
Speaker:you're doing good.
Speaker:It doesn't mean you are off the tax man's radar.
Speaker:You are out of their grid.
Speaker:Now let's break it down.
Speaker:We'll look at firstly at CIS and Corporation
Speaker:Tax, and I mentioned corporation tax because
Speaker:CIS are companies and they're subject to
Speaker:the corporation tax regime, a great deal
Speaker:of cis will operate income through trading,
Speaker:like selling services, running workshops.
Speaker:Offering consulting or even selling
Speaker:products, that income that's generated
Speaker:minus the allowable expenses becomes the
Speaker:surplus or profit.
Speaker:To give it its alternative term.
Speaker:And here's the myth that I'm gonna sort
Speaker:of bust for you.
Speaker:Being a CIC in itself does not exempt you from
Speaker:paying corporation tax.
Speaker:You're still seen as a company.
Speaker:You still need to find your accounts,
Speaker:by the way.
Speaker:And if you make a profit, you will pay corporation
Speaker:tax as a default, just like any other.
Speaker:Private limited company would do.
Speaker:Now, current corporation tax rates in the United
Speaker:Kingdom for a single company range between up
Speaker:to 19% when you've got profits of up to 50 k,
Speaker:25% if it's over 250, and then you get something
Speaker:in the middle, which is called tax at 25% less
Speaker:what's called a marginal relief reduction.
Speaker:And remember, if you are making profits,
Speaker:which in itself is not a bad thing.
Speaker:It means you're going along the right lines,
Speaker:you are sustainable.
Speaker:So paying tax is not necessarily an
Speaker:indication of failure.
Speaker:It's an indication of success, what
Speaker:masses is, how you've managed that profit and
Speaker:what you do with it.
Speaker:And that's where the CIC model for other people.
Speaker:It's a very powerful thing.
Speaker:Now, gonna talk about grants later on in this
Speaker:podcast, by the way, but let's park that one
Speaker:for now and let's look at the next tax VAT.
Speaker:Or to give it its alternative term,
Speaker:very awkward tax.
Speaker:Now, VAT is a tax that catches out many cis,
Speaker:and if I was, to be brutally honest, here,
Speaker:catches out a lot of businesses per se.
Speaker:Now, if your income predominantly comes from
Speaker:grants or donations.
Speaker:Then you may think that that doesn't apply to
Speaker:you, and in some cases that's largely true.
Speaker:When we look at the necessity of having
Speaker:to register for VAT is based on the level
Speaker:of VAT turnover over a rolling 12 month basis,
Speaker:grants or donations are not included in
Speaker:that calculation.
Speaker:However, if you earn money from selling goods
Speaker:or services, you do need to track your turnover.
Speaker:You do need to review that turnover.
Speaker:You do not want it to go over 90,000 pounds over a
Speaker:rolling 12 month period.
Speaker:If it does, then you've got to register
Speaker:for V-A-T-V-A-T is not dependent on
Speaker:profitability, is based on the level
Speaker:of VA turnover.
Speaker:As a side note, by the way, you can.
Speaker:If it's appropriate for your business and you
Speaker:appropriate for your business model, volunteer
Speaker:to register for VAT.
Speaker:More of that in a different podcast.
Speaker:Now, VA registration does allow you to claim
Speaker:VAT on what you buy in, which can be handy,
Speaker:but it also means you need to start charging
Speaker:VAT to your customers and doing VAT returns.
Speaker:Now if your end.
Speaker:Community, your end client, your end customer
Speaker:is not VAT registered, then obviously that's
Speaker:gonna be a very expensive burden.
Speaker:Remember, A CIC doesn't give you an automatic
Speaker:VAT exemption that might apply to some
Speaker:charities but not cics.
Speaker:So be mindful, keep your income reviewed
Speaker:on a regular basis.
Speaker:Digital accounting helps you to do that
Speaker:and keep an eye on that VA threshold.
Speaker:Now let's look at the situation when it comes
Speaker:to employing people and that includes yourself.
Speaker:But if you're growing excellent, that means
Speaker:that you might then move towards more having staff
Speaker:employees as opposed to subcontractors.
Speaker:And if you do employ people, the system
Speaker:of PAYE or pay as you earn comes into
Speaker:play if you decide.
Speaker:And there are good economic grounds for
Speaker:thinking to do so.
Speaker:You are wanting to recruit staff
Speaker:employees that might be indicative of your
Speaker:funding arrangement.
Speaker:It might suit your business model better.
Speaker:Then you've gotta register as an
Speaker:employer with HMRC.
Speaker:You've gotta operate a payroll.
Speaker:Deduct the appropriate amount of tax
Speaker:national insurance from your employees.
Speaker:Pay employees national insurance contributions.
Speaker:And from 24 25 onwards, the rules have changed.
Speaker:So if your employees earn more than 5,000 pounds
Speaker:in a year, then you are subject to employer's
Speaker:national insurance.
Speaker:You may be entitled to an allowance, which
Speaker:will mitigate that, but employer's national
Speaker:insurance kicks in at 15 percentage points.
Speaker:Obviously, other things such as employment
Speaker:contracts, national insurers also will
Speaker:come into play, as well as contracts of
Speaker:employment, holiday pay, pension entitlements,
Speaker:and the like.
Speaker:Now if you're hiring freelancers or
Speaker:contractors, by the way, be very careful.
Speaker:You as the engager need to do the assessment
Speaker:and the status test on that individual to see
Speaker:if they actually comply, and they are legitimately
Speaker:freelancers more that on a different episode.
Speaker:It's about the working relationship you
Speaker:follow the control, the rules, and the
Speaker:equipment that's used.
Speaker:I'll unpack that in a future episode,
Speaker:but for now, no.
Speaker:It is not your choice or your employee's choice or
Speaker:your freelancer's choice.
Speaker:It's the criteria that decides that.
Speaker:I wanna take a step back here and just look
Speaker:at the idea that not all cics are the same.
Speaker:Please do check out the previous episodes where
Speaker:we talk about this, but some cics are either
Speaker:limited by guarantee or thereby share capital.
Speaker:Now, if you're limited by guarantee.
Speaker:You don't have shareholders.
Speaker:Instead, you have members.
Speaker:There's no profit distribution allowed,
Speaker:and all surpluses are reinvested back into
Speaker:your community purpose.
Speaker:Now, if you're limited by shares,
Speaker:you can pay dividends.
Speaker:There is a cap on them, a legal dividend cap set
Speaker:by the regulator to make sure you're not actually
Speaker:masquerading as a private business, but as a
Speaker:true social enterprise.
Speaker:Either way, any dividends paid to
Speaker:shareholders are not tax deductible expenses,
Speaker:so they don't reduce your corporation tax.
Speaker:So choose the structure carefully and think
Speaker:about what your long-term mission is.
Speaker:We've dealt with clients who have both cics that
Speaker:are registered by shares and also ones that are
Speaker:limited by guarantee.
Speaker:I mentioned earlier on in the podcast I
Speaker:was gonna talk about grants, so let's crack
Speaker:on with that now.
Speaker:Now grants of I, for many cis, it's not unusual.
Speaker:All the cis that I've looked after will
Speaker:always have a grant component as part of
Speaker:their income stream.
Speaker:Those grants come from local authorities,
Speaker:trust foundations, public bodies, bodies
Speaker:like the arts council.
Speaker:But how does that work when it comes to
Speaker:tax and accounting?
Speaker:Well, if a grant is for a specific project, it's
Speaker:in conversation terms classified as restricted
Speaker:income, which means you can only use it
Speaker:for an agreed purpose.
Speaker:When you report that in your accounts,
Speaker:you recognize the income in the year
Speaker:the activity occurs.
Speaker:So if a funder gives you 30 grand for a year long
Speaker:project, but you've only delivered half of that,
Speaker:then by the end of the financial year, only half
Speaker:will be shown as income.
Speaker:The other half will be called deferred income.
Speaker:Now most grants will not count towards
Speaker:VAT turnover for the registration limits.
Speaker:Unless there's an element of service delivery, the
Speaker:devil is in the detail.
Speaker:Now, girls don't give you a get out
Speaker:of tax free card.
Speaker:They may be non-taxable, but if you generate
Speaker:a surplus from them, then tax rules
Speaker:could still apply.
Speaker:In my experience, if your organization is
Speaker:funded mainly by grants, they're gonna be profit
Speaker:neutral on the grounds.
Speaker:That when a grant application is made,
Speaker:there's a budget that's presented to the funder
Speaker:and the cost should match the grant income.
Speaker:Now, that's a very simple overview, but it's
Speaker:worth bearing in mind.
Speaker:Now, here's some tips to think about.
Speaker:If you are running a CIC and you wanna get
Speaker:involved in a bit of smart tax planning, I.
Speaker:Clarity of records always keep good
Speaker:records from day one.
Speaker:Again, my preference is always for an
Speaker:organization to have a system set up that's
Speaker:fit for purpose, and a digital cloud
Speaker:accounting system is gonna fit the bill.
Speaker:Number two, plan for those tax bills.
Speaker:If you do make a surplus, put money aside for the
Speaker:corporation Tax a ahead.
Speaker:Rule of thumb, put away for argument's
Speaker:sake of 10% of all your turnover to deal with
Speaker:the corporation tax.
Speaker:Put that money to one side, put it on deposit.
Speaker:Earn a bit of interest as well, but don't
Speaker:wait until the deadline to Scrabble around
Speaker:finding the tax.
Speaker:Step number three or tip number three, to be more
Speaker:specific, understand what your obligations are.
Speaker:Corporation tax, V-A-T-P-A-Y-E.
Speaker:You are not exempt from those, and
Speaker:you've got obviously reporting framework of
Speaker:company's house HMRC and the CIC regulator.
Speaker:Tip number four, seek advice early.
Speaker:A CIC accountant, koff, or advisor will save you
Speaker:time, money, and stress.
Speaker:And lastly, remember making a profit a
Speaker:surplus and paying tax is not a bad thing.
Speaker:It means you're building something, a
Speaker:sustainable business that's gonna serve your
Speaker:community long term.
Speaker:So let's recap.
Speaker:Now, being a CIC does not exempt you
Speaker:from paying tax.
Speaker:You may be values led.
Speaker:Socially minded and community focused,
Speaker:but tax orders will still apply to you.
Speaker:Corporation tax is based on your profits.
Speaker:VAT is gonna apply to your trading income.
Speaker:If you employ staff, payroll is
Speaker:gonna be an issue.
Speaker:Your structure, whether it's by shares or
Speaker:guarantee, affects how the profits
Speaker:are distributed and grants, even though
Speaker:a vital component.
Speaker:May not be taxable in their own right, but you
Speaker:still need to account for them carefully.
Speaker:Get the right systems in place.
Speaker:Don't be scared, be knowledgeable and take
Speaker:strength from that.
Speaker:Ask questions and plan ahead.
Speaker:I. The folks.
Speaker:That's it for this episode of From Creating
Speaker:Your Passion to Profit.
Speaker:I hope it's helped clear the fog
Speaker:around cis and tags.
Speaker:If you found this episode useful, please do share
Speaker:it with your network.
Speaker:If you've got questions, I wanna dive deeper
Speaker:into your own numbers than head to the link
Speaker:in the show notes, book a call and until this
Speaker:time next week, plan it.
Speaker:Do it and profit.
