If you’re thinking of setting up something that will help the community firstly, let me applaud you. Anything that helps a Local Community is up there in my book! You basically have two choices.
You can set up a CIC (a community interest company) or a charity.
Essentially, Charities and CIC’s both benefit the public. They can be anything from relieving poverty to protecting the environment. They’re both designed to offer some benefit, but they are very different in terms of funding and taxes.
Normally a CIC is funded by selling something. They sometimes get grants and funding, but the majority of their money will come from trade. A grant might come in handy when you get started to help build your infrastructure. A charity on the other hand usually relies on donations and grants.
Further differences lie in the way the Board is set up. In a charity, the Board Members are volunteers, however staff can be paid and normally staff still work on a volunteer basis, which enables all the monies raised going to fund the cause which is why people want to help. With a CIC, Board Members can be paid, and the structure is set up like a business
A charity can’t make a profit. Basically, everything they make, they give to the cause. A CIC by contrast is expected to make a profit. There should be a surplus at the end of every reporting period and CIC’s are expected to reinvest their surpluses to do more of their work, but they can pay a proportion of this out to the owners or investors.
Charities have a tax advantage. They don’t pay tax on income and gains on anything used for charitable purposes. So, tax isn’t paid on things like donations and any profits from trading, but what you will pay tax on is dividends received from UK companies.
CIC’s are taxed in the same way as normal companies. They’re subject to Corporation Tax and VAT but, if a CIC makes donations to charity they can deduct this as a charge when calculating the profit for Corporation Tax purposes.
Finally, a charity can own a CIC which would allow them to pass assets to the charity. A charitable company may convert to a CIC and a CIC may convert to a charitable company in the UK. However, a company cannot be both a charity and CIC.
If all this is as clear as mud and you’re seriously considering moving forward as a Charity or CIC, please give me your friendly accountant a call (that’s us!) and we’ll talk you through it!