BIM24790 - Mutual associations: specific activities: community associations with charitable objects

Not a members’ club

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 (see BIM24200 onwards) and the sale of refreshments organised on a commercial basis will be a trade. Profits arising from such a trade are not exempt from tax under the principle of mutuality. Nor are they profits of a kind which can be exempt in the hands of a charity (see ICTA88/S505 (1)(e)). However, where the bar operation is carried on by a subsidiary company you can accept that this company covenants its profits to the community association, claiming a deduction under ICTA88/S338. However, the conditions in ICTA88/S339 must be satisfied for this to be effective. There is guidance on ‘profit shedding’ deeds of covenant at CTM40065 and RE1830+.

The representative body, the National Federation of Community Organisations, has published advice along these lines. 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 HMRC has agreed not to assess the profits, you should not reopen the question for past years.

You should send deeds of covenant in favour of community associations to CAR Charities Technical in view of the charity's possible claim for a tax repayment.

You should also refer to BIM24795.