I’m going to assume that we all know what an association is, and for the purpose of this post, I’m concentrating on trading associations owned by all members.
The purpose referred to above is suggesting favourable 1. Corporate structure; 2. Trading style; and 3. Tax regime to adopt.
- Consider incorporation (ie Limited) if members or the representatives are not jointly and/or individually happy to bear the liability if or when things go wrong, eg large debts to settle on dissolution, etc. A limited body is a separate entity from the owners/members and can be limited by shares or by guarantee. The former limits individual liability to the proportion of shares held whilst the latter limits it to the value of the guarantee. Note that a ‘limited by shares’ association seeking external funds may be disadvantaged because prospective donors may be concerned (rightly or wrongly) by its profit-making motives. Hardly anyone wants to donate to a company distributing funds to shareholders.
- Consider non-incorporation (ie not limited) if members or the representatives are happy to bear the brunt if and when things go wrong. Every member or selected representative is jointly and severally liable for the losses and debts of the association. A pro of being unincorporated is that donors may favour the structure especially when profit motives are considered. It is probably easier to convince third parties of non-profit objectives when an association is not seen as having shareholders with claims to surpluses.
- Consider Strict Mutual Trading if there is a large body of members (or a large pool to recruit members from) for trading purposes. Strict mutual trading means all sales of products or services are from members to members only.
- Consider Partial Mutual Trading if trading will be split between members and non-members. This means selling to members and the general public, and there are systems in place to properly distinguish between the income and surpluses made from members and those made from non-members.
- Consider Non Mutual Trading if the goal is to sell to anyone, regardless of membership status and there are no systems in place to distinguish between customers.
Whether incorporated or not, all associations must notify the HMRC of trading status and MAY have to pay corporation tax on surpluses. If tax is payable, the deadline for the payment of tax is nine months and a day after the trading year ends, and the deadline for the submission of the tax return is twelve months after the trading year ends. Submission must be made whether a profit or loss is made.
I emphasise ‘may’ above because:
- If the trading style is Strict Mutual, an exemption from submission may be granted by the HMRC since trading is only between members, and a body selling to itself should not have to pay tax on surpluses generated internally.
- If the trading style is Partial Mutual, tax is payable on surpluses made from selling to non-members.
- If Non Mutual, tax is payable on all surpluses.
In all cases, full accounts must be prepared and documentary evidence maintained to prove status. These must be available in the event of a random or routine check by members or the tax authority.
SO, WHAT SHOULD MY SSOCIATION GO FOR?
In my view:
- If there is absolutely no risk of losses year on year and:
- trading is between members only, consider non-incorporation or incorporation as a company limited by guarantee, and request exemption for mutual trading.
- trading is between members and non-members, consider non-incorporation or incorporation as a company limited by guarantee, and adopt a partial mutual trading style.
- trading is non-discriminatory, consider non-incorporation or incorporation as a company limited by guarantee, and adopt the non mutual trading style.
- If there are likelihoods of losses:
- consider incorporation as a company limited by guarantee and declare profits for tax purposes. This is because if no tax is paid on profits, there will be no provisions for losses, meaning that losses cannot be set off against future or past reported profits.
Finally, regardless of the status adopted, interest generated on investments, even that gained from accounts held in a bank, are fully taxable.
[Note that I accept no responsibility or liability for any consequence of your reliance on the above information. For tailored advice, get in touch.]