This month we have a look at some of the common misconceptions regarding the tax rules for Credit Unions.
Question- Credit Unions only pay tax on their bank interest, don’t they?
Answer- Unfortunately no. While for many Credit Unions bank interest is their only taxable income; other sources of income may be subject to tax. If you are taking on new activities then it may be worth speaking to your accountant to check if there are any tax implications.
Q- Are Credit Unions automatically exempt from paying tax on interest from members?
A- No, the exemption from interest received from members, being taxable, is subject to the Credit Union complying with HM Revenue & Custom’s (HMRC) rules regarding dividend returns.
One point worth noting for dividend returns is that while HMRC previously only required, members to be included on the return the first time their dividends passed the threshold limit, the new letters from HMRC suggests that members should be included even if they were reported in previous years.
Q- Vat does not affect Credit Unions does it?
A- Not necessarily- while most standard Credit Union activities are exempt from VAT, some income streams can be within the scope of VAT. Income from the secondment of staff and income from certain Service Level Agreements may potentially be classed as vatable income. Even if you have vatable income you don’t necessarily have a VAT liability. You only have to register for VAT if your vatable income from the last twelve months or expected vatable income in the next thirty days is over £79,000 (limit for tax year 2013/14). If this is the case then you need to register for VAT and have to start accounting for VAT. It would be unusual for this to be the case for a Credit Union but if you think you may be over the limit then you should obtain professional advice.
A more common VAT problem can arise where another organisation provides staff to your Credit Union. If they are VAT registered then they should be charging VAT on the staff cost. If you are in a position where VAT is not being charged on the provision of staff you (and the staff provider is VAT registered) then should check your agreement with the staff provider to see who would be liable for the VAT. Please note that if they are merely providing a payroll service and the staff are contracted to the Credit Union then there should only be VAT on the payroll fees but not the staff costs.
Q- Honoraria are not wages and don’t have to be taxed, do they ?
A- HMRC take the view that Honoraria made to reward the individual’s service to the organisation are taxable and subject to PAYE. Payments should be processed through the Credit Union’s wage/PAYE system.
Q- Are expenses paid to Directors tax free?
A- If they are made to reimburse the Director for actual costs incurred on behalf of the Credit Union then these are usually tax free. If the payment is for their time then it would be subject to PAYE. If you are unsure how a payment should be treated, please contact your accountant for more details.
If you have any doubts over the tax implications of any new areas of business it is worth discussing them in advance with a professional accountant. Early advice can often help avoid any unwanted tax surprises, or avoid an unnecessary liability.
Our tax team have extensive experience in advising Credit Unions on a range of tax issues. If you require any tax advice then please contact us at [email protected].