Your club may now 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?  Recently the Dee Wildfowlers & Wetlands Management Club was contacted by Her Majesty’s Revenue and Customs regarding the club’s possible liability for corporation tax. It seems that from 1st April 2006 the government reduced the £10,000 starting rate for corporation tax to zero. The letter received by the club was in relation to money earned in bank interest, and went on to explain that returns would not be necessary from organisations where the tax at stake will be less than £100, which at a CT rate of around 20% means bank interest of less than £500 per annum.

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 (i.e. most clubs do not operate in commercial trading, the club’s financial trading is with it’s members and that is called “mutual trading” and is exempt from CT.  Investment income, such as bank interest, is taxable and since 1st April 2006 clubs are liable for CT if the amount received by the club exceeds £500 per annum. It’s possible that other sources of external income such as money from grazing rights, auction funds received from non-club members etc might be liable for CT; this is a new area for taxation and has not been tested so if a club thinks they might have income that is liable, they should contact their local HMRC office. Remember that tax evasion is an offence.

Corporation Tax is chargeable on investment income and trading profits generated by clubs and associations but that element of the net revenues which is essentially the re-cycling of members’ money for the purpose of running the recreational, sporting affairs of the club/syndicate will almost certainly be exempted on the basis of mutual trading. 

However, for a number of years there was an income band of £10,000 that was taxed at zero percent and accordingly liabilities to tax did not arise but it did not mean that no taxable income arose; 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.

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 £50k and the tax charge would be £105 - 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.

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.

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