Paying Corporation Tax - Mystery Solved/Conclusion?

The Hackspace
1

Hi All,

Since I joined the space, there’s been a muttering that we shouldn’t be paying corporation tax, but no one’s been quite sure why that is, as we are officially a ‘Private company limited by guarantee without share capital’ which roughly translates to not-for-profit, though this isn’t an official designation in the UK.

I think I’ve found the background to these mutterings, though it doesn’t apply to us as our constitution currently stands. I’ll try and explain in brief.

Rule of Mutuality:

It is a basic principle of taxation that you cannot make a taxable profit by trading with yourself, and this means that in the case of a company which is owned by its members and which exists to provide them with (for example) facilities, any profit made from the fees paid by the members is not liable to tax.

What this means to us
On this basis, it would look like we should not pay tax on our membership takings, however our constitution states that if our company (The Hackspace) were to dissolve (close) then we would transfer all our possessions to another entity with similar aims to our own, e.g. another Hackspace.

For the rule of mutuality to apply, the finances of the space, and all its assets would need to be distributed back to its current membership. As our constitution says we can’t do this, this is not a loophole by which we can get out of paying corporation tax.

Conclusion
There may be other loopholes that mean we don’t need to pay corporation tax, but so far I have been unable to find them after a fair amount of researching. Last year we paid ~£700 corporation tax, which equates to roughly 5% of our yearly spending money once we’ve paid rent and utilities.

We could change our constitution so that the rule of mutuality applies:
:heavy_check_mark: We wouldn’t pay corporation tax, saving about £700-1000+ a year depending on annual profits.
:heavy_multiplication_x: There could be knock on effects we aren’t aware of.
:heavy_multiplication_x: It could make us more vulnerable to asset stripping - though upon dissolving the company the assets would be shared between the entire membership, not just the board of directors.
:heavy_multiplication_x: It could make it harder to apply for funding - though currently we don’t apply/qualify for much anyway.
:heavy_multiplication_x: There would need to be some differentiation of money spent my members in the space, vs money spent by visitors. E.g. if we sold 20 sodas to visitors at a public event, these would be taxable. Whereas 20 sodas sold to members would not be taxable.

I’m not suggesting anything at this stage, just recording my findings to avoid anyone needing to repeat my research. If anyone wishes to build on this or offer advice then please do.

Sources:
Corporation Tax And Mutuality - Jeffs&Rowe
Join the Club – Members’ Clubs and Taxation - Tax Insider
Constitution Manchester Makers Ltd.docx - Google Docs

2

My understanding is that in the event we had to wind up the company, that only surplus (ie money - what you’d call profit in a normal company) would have to be distributed evenly between members (after creditors had filled their boots).

Assets can still be asset locked, otherwise a CIC would be entirely unable to perform mutual trade, as they legally have to have their assets locked.

3

This is at the very limits of my knowledge, but I think there is some ambiguity around the term ‘members’ in our context. At a member meeting last year chaired by Ollie (who is a solicitor but essentially too busy to be very active in the space) he pointed out that ‘member’ usually refers to those with an interest in the company, in our case the directors. It’s just confusing for us because we also refer to the 200+ people who use the space as ‘members’.

4

We’re at the limits of my knowledge too here, but to quote the second article linked:

The simplest rule of thumb to distinguish between these two types of club is whether the ownership of the club is different from the membership. If this is the case, it is likely that the club will be a commercial enterprise, run to make a profit for the owners out of its dealings with the members. Other clubs are owned by their members, in the sense that all the assets of the club belong to the membership, and so do the profits.

As the board of directors, we have no perks or privileges above anyone else. Therefore we would also class as members of an equal level to everyone else.

This is where I mention our constitution currently forbids any member of the club from owning any bit of it. And also where thinkl33t raises an interesting point.

5

Dragging this up again…

I’ve been reviewing our constitution today and am convinced we should not be paying corporation tax on membership subscriptions, as the constitution says in the event of Hackspace going bust, all members would owe £1 to debtors, meaning that Hackspace is indeed owned by its members.

I’ve got in touch with some other spaces who might know a little more to double check.

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