[cma-l] Charity/Limited Company - or what?

[Two Lochs Radio]

As Ian and others have said, you need to check out the pros and cons of this and be sure you will get sufficient benefit from nbeing a charity.

However, I'm not sure I'd agreed with the suggestion that a CIC is the most flexible. I would say (for non-profits) a CLG is the most flexible, and charity the most restricted, with a CIC somewhere in between. In particular, a charitiy's trustees may not also be employees of the charity, whereas a CLG's directors can be. 

A CIC is normally also a CLG (or regular profit making limited company). A CLG may be registered as a charity as long as it's objectives are accepted as charitable. The constitution of a CLG may also provide for 'lock-in' of assets - indeed they almost always do. The CIC structure was mainly introduced to ease some practical problems for provident associations I believe, not for any perceived difficulties of CLGs being charities.

I agree entirely that almost any Community Radio operation that is not entirely grant/donation funded is likely to benefit from VAT registration, especially in the start up phase. and there are two things to note that are often overlooked or misunderstood.

There is nothing to stop a charity from registering from VAT as long as it is carrying out some business activities. Do not confuse 'business activies' for VAT purposes with 'profit making' - it is perfectly normal and proper to be carrying out business activities in VAT terms while not making a profit (and not being liable therefore for Corporation Tax). However there are rules about how much trading a charity can do, and usually it must not become a large proportion if its acitvity.

For VAT purposes, business is simply defined as providing goods and/or services within the scope of VAT in return for payment, whethe ror not that actually leads to eventual profit. Receipt of grants or donations is not withoin the scope of VAT. So for example it would be quite proper and normal for a CLG registered as a charity to derive, say, 20% of it's turnover from business activities and to register for VAT, and therefore be able to reclaim VAT on its purchases.

The main downside is that VAT must also be charged on business invoices which makes your services dearer if you are supplying to end consumers, but most CRs would be supplying services to other VAT registered businesses who would not be affected. Fundraising events can be declared 'outside the scope of VAT' with nothing reclaimed from their costs and nothing charged to their participants (eg no VAT on tickets), so these can be unaffected by VAT reg.

We have looked at possibly registering a charity several times, but have each time come to the conclusion that the benefits of being able to apply for funding to a wider range of bodies was not worth the disadvantages of additional restrictions and governance, but we get well over 50%  of our income from trading. For a CR not abloe to take or get commercial advertising the balance may be very different. As Ian says, a common and possibly beneficial arrangement is to have two seaparate entities, one of of which charitable and one of which is business, and use the latter to fund the former. However the former then may have more difficulty registering or reclaiming VAT on purchases unless it also carries out some business activities.

But in either case registering for VAT is a separate question, and for us has definitely been beneficial.

Alex  
  ----- Original Message ----- 
  From: Ian Hickling 
  To: tlr ; cma-l ; Clare Penketh 
  Sent: Sunday, September 11, 2011 8:09 PM
  Subject: Charity/Limited Company - or what?


    
  I think the best move it simply to itemise the benefits and liabilities.
  The Licence must be held by a Non-for-Profit organisation, which can be a Community Interest Company, a Registered Charity or a Company Limited by Guarantee - and there are two other formats I believe.
  A CIC is the most flexible and an RC is the most restricted.
  If you are either of these, there is nothing at all to stop you having a separate Limited Company which can operate conventionally and be VAT registered - which I heartily recommend as vital to any normal trading organisation.
  If you have Charitable Status, it is so much easier to get funding from large organisations and other Charities, but you won't usually be able to reclaim VAT on that funding - which will mean you effectively lose 16,6% of everything you spend.
  Not good!
  So use the commercial Limited Company to fund the CIC and look after its tax and debts - and the Charity/Charitable Arm to source and feed it lumps of direct funding.
  One reasonably bright person can look after all the accounting, which should take no more than two working days a month.

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