BIM24320 - Mutual trading: members' clubs: community associations

What to do in practice

Community associations provide recreational or similar facilities to local communities in the interests of social welfare. Many of these associations began as village halls and over the years the refreshment facilities provided have grown into permanent licensed bars. They normally have a constitution that enables them to be considered as charities under the Recreational Charities Act 1958.

A community association with charitable objects is not a members' club. The sale of refreshments constitutes a trade. Profits arising from such a trade are not exempt from tax on the basis of mutual trading. Nor are they profits of a kind which can be exempt in the hands of a charity (see ICTA88/S505 (1)(e)) for Corporation Tax, ITA07/S524 & S525 for income tax.

However, you can accept the situation where the bar operation is carried on by a subsidiary company. This company can then covenant its profits to the community association. The company may then claim a deduction under ICTA88/S338 (charges on income deducted from total profits). There is guidance concerning the conditions to be satisfied at CTM40065 and at RE1830+.

Advice along these lines has been published by the representative body, the National Federation of Community Organisations. Where this advice is not followed, associations may have earned profits that are chargeable to tax. Where any community association has fully disclosed its circumstances in the past, and it has been agreed not to assess the profits, the question should not be reopened for past years.

Deeds of covenant in favour of community associations should be referred to The Centre for non-residents, Bootle, S739 Group in view of the charity's possible claim for a tax repayment.