As noted in the previous paragraph, credit unions are
incorporated as industrial and provident societies and are
therefore within the definition of company for tax purposes at
ICTA88/S832 (1) and are within the charge to CT. They are subject
to the normal rules applying to the taxation of companies, as
modified by ICTA88/S486 (which applies to all industrial and
provident societies) and ICTA88/S487(which applies only to credit
unions).
The effects of these provisions on the corporation tax
liability of credit unions are as follows:
(i) In computing the income of the credit union, the activities of making loans to members or placing on deposit or otherwise investing surplus funds are not regarded as the carrying on of a trade or part of a trade (Section 487 (1)(a)).
(ii) Interest received by the credit union on loans made by it to its members is not chargeable to tax under Case III of Schedule D (Section 487 (1)(b).
(iii) ‘Dividends’ and other forms of ‘share interest’ paid or credited by the credit union are not treated as a distribution for corporation tax purposes Section 486 (1) and (12)). Neither is any deduction available as either a trading expense or as a non trading loan relationship debit for any dividend, share or loan interest, annuity or other annual payment, paid or payable (Section 487 (3) and (3A)).
(iv) A credit union is not regarded as an investment company for the purposes of ICTA88/S75 (management expenses) and plant and machinery allowances (Section 487 (4)).
These provisions mean that liability to CT will normally arise
only in respect of a credit union’s investment income and
chargeable gains unless, exceptionally, it is carrying on a trade
not covered by (i) above.
The effect of (iii) and (iv) above is that investment income
is normally chargeable in full, without any deduction for expenses
or loan relationship debits. However, any liability under Schedule
A (for example, on the sub-letting of the credit union's own office
premises) should be computed in the normal way.
The making of loans to its members by a credit union will
(notwithstanding the provision in (i) above, which applies only for
the purpose of computing income) normally amount to the carrying on
of a trade. Rollover relief may therefore be available under
TCGA92/S152 to TCGA92/S158 (CG60250+) on certain chargeable gains.
Although often described as a ‘mutual’
organisation (in the sense that it is owned by its members) the
business of a credit union should not be regarded as satisfying the
conditions of mutual trading (which subject is covered in detail at
BIM24000 onwards).
