CTM40505 - Particular bodies: industrial and provident societies: background

Societies registered under the Industrial and Provident Societies Acts are bodies corporate. Industrial and provident societies are therefore companies for tax purposes and are liable to CT in respect of their profits, which are computed in accordance with normal rules as amended by ICTA88/S486. The key differences lie in the treatment of ‘share and loan interest’ paid by a society (see CTM40560 to CTM40570) and, for those societies carrying on a trade, the treatment of dividends paid by reference to the transactions a member has with the society (see CTM40515).

Industrial and provident societies are registered (since 1 December 2001) by the Mutual Societies Registration section of the Financial Services Authority (they were previously registered by the Registrar of Friendly Societies) in England, Wales and Scotland, and by the Registry of Companies, Credit Unions and Industrial and Provident Societies in Northern Ireland. They enjoy limited liability in the same way as companies registered under the Companies Acts.

A society may register as an Industrial and Provident Society if it satisfies either of the two conditions found at Section 1 (2) of the Industrial and Provident Societies Act 1965.

The conditions are that:

• the society is a bona fide co-operative society,

or

• in view of the fact that the business of the society is being, or is intended to be, conducted for the benefit of the community, there are special reasons why the society should be registered under the Industrial and Provident Societies Act 1965 rather than as a company under the Companies Act (a ‘bencom’).

Bonafide co-operative society

There is no statutory definition of a 'bona fide co-operative' society but there are criteria laid down by the Financial Services Authority and the appropriate registry in Northern Ireland. The criteria are:

• conduct of the business must be for the mutual benefit of the members with the benefits they receive deriving mainly from their participation in the business,
• control of the society must be vested in the members equally, the principle of 'one man, one vote' is fundamental,
• interest on capital will not exceed a rate necessary to obtain and retain sufficient capital to carry out the society's objects,
• profits, if distributable amongst the members, will be distributed in relation to the extent members have either traded with the society or taken part in the society's business,
• membership must not be artificially restricted with the aim of increasing the value of any proprietary rights and interests.

The aim is to ensure a genuine community of interest amongst a society's members based on something other than the amount of capital they have placed in the society. The Industrial and Provident Societies Act 1965 defines a co-operative society as not including 'a society which carries on, or intends to carry on, business with the object of making profits mainly for the payment of interest, dividends, or bonuses on money invested or deposited with or lent to, the society or any other person'.

Benefit of the community

A society 'for the benefit of the community' must principally show that:

• the business must be run primarily for the benefit of people who are not members of the society and must be in the interests of the community at large,
• the rules of the society must not allow distribution of profits or assets to the members: profits should be ploughed back into the business,
• the organisation has special reasons for registering under this part of the industrial and provident society legislation rather than as a company,
• on dissolution the assets of the society must pass to some other body with similar objects, not to the members.

A ‘bencom’ must also meet the requirements in respect of interest on share on loan capital as for a bona fide co-operative society.

Subject to the above constraints societies are entitled to carry on any business or trade.

Examples of industrial and provident societies include:

• retail co-operatives,
• sports clubs,
• community associations,
• housing associations / registered social landlords,
• credit unions.

An industrial and provident society must have at least three members (but this is reduced to two where both are industrial and provident societies, in which case it is known as a ‘federal’ industrial and provident society. There is no equivalent to the authorised share capital of a Companies Act company and therefore no limit to the number of shares that may be issued. There is a maximum share subscription limit of £20,000 for individuals and non-industrial and provident society corporates although these limits do not normally apply to shares held by another industrial and provident society or local authority. The rules of any particular industrial and provident society may specify lower limits.

Close companies

A registered industrial and provident society is not a close company because of ICTA88/S414 (1)(b).