Early finances, setting up a bank account, applying for tax relief

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Start up finance

Somewhere between first meeting as a group and getting a property you will find you need to spend some money. It is difficult for unincorporated groups to open bank accounts so pre-registration you are likely to have to use members' personal accounts. If you keep good records of this income, and expenditure made against it, the income can be recorded as a loan to the co-op and repaid later if the project gets off the ground. These records need to include: Date; type of transaction (e.g. “subscription income”, “travel expense”, etc); who is owed or paid; and where the evidence of the transaction is kept (i.e the receipt).

You might need money for travel to meetings and workdays or for registration fees. You could have a whip round when necessary, but for people on low incomes the possibility of being asked for money unpredictably can be worrying. A 'subscription' system, where every member pays say, £5 per week into a kitty can be a good way of spreading costs, and it can help clarify who is committed to the group. Bear in mind for people on extremely low incomes Be clear about whether everyone paying subscription has been accepted for membership.

Having a pot of money which you manage together is also a good chance to practice consensus decision making as a group.

Things co-ops have done to raise money include:

  • Asking friends and relatives for donations
  • Holding fundraisers like crowdfunding appeals, jumble sales, car boot sales or benefit gigs
  • Organising sponsored events in aid of your project
  • Asking local companies to make a donation to your cause
  • Applying to charities. You may qualify for help from charities or other grant-making bodies. If some of your members are disabled you might be able to get money from appropriate charities or social services. Get a copy of ‘A guide to the major trusts’ published by the Directory of Social Change, or ask for it at your local reference library. This may also be a route to financial support for buying a property.

Opening a bank account

Once your co-op is registered with the FCA it should open a bank account. The bank's application form will include the wording of a motion which a co-op general meeting will need to pass. Get a bank account with at least a 'dual mandate' system which means all cheques need two signatures and online payments need two authorisers.

Getting tax relief from Corporation Tax

What it is

Fully mutual housing co-ops gets tax advantages and it is very important that you apply for these as soon as possible.

Once approved you can disregard all the rental income from members when calculating your taxable turnover. In other words, you don't pay any tax on rents paid from members to the co-op.  This tax relief only applies to rent from members.

This tax exemption is a big advantage of the mutual structure, enabling the co-op to save up to carry out major improvements or buy another house. In the simplest terms, in a conventional worker co-op or company, any income that is not spent is taxed. Fully mutual housing co-ops don't pay tax on their main source of income, so it is easier to build up your cash in the bank.

This exemption is only available to housing co-ops that have rules that restrict:

  • All tenancies of the Co-operative to members, and all membersips to tenants or prospective tenants of the Co-operative. If you have non-member tenants then you are disobeying your rules and will not be eligible to this exemption.

If you have other income. like rent from an office, loan stock or bank interest, then you must pay tax on this. You must also disregard any interest paid from these tax deductible expenses (ie the interest from a loan related to a property that has tenancies). In other words you can't reduce your tax bill by using mortgage interest.

How to apply

Before your co-op starts to have money moving in or out of its bank account, write a letter to HMRC asking to be granted approval for tax relief. State that your company is entitled to exemption from corporation tax under the CTA 2010 act section 642. As accompanying evidence, enclose a copy of your fully mutual rules and your registration certificate. They may send you a form to fill in and send back. Once they have processed your form, they should send you a certificate to show you are exempt.

If you use an accountant, you should show them copies of all of this. Particularly if your accountant is not experienced in dealing with housing co-operatives, they may not know about the tax relief.

Exemption from filing corporation tax

You will need to apply to HMRC seperately to get exemption from filing corporation tax. Write to HMRC stating that you have to pay no or very little tax, but the cost of filling in the form is disproportionately expensive.

You should list all your taxable income. Very early on this may not be very much at all, later it may include:

  • bank interest (it is worth checking ig this has already been taxed at source)
  • loanstock insterest
  • rent of a community space if you buy a property that has community space to rent out

Point out in your letter that you cannot use the free filling software offered by HMRC. This service is called CATO (Companies And Tax Online) and it currently doesn't allow you to enter non taxable income. This means you would need to use an accountant or buy specific Corporation Tax filing software, unless HMRC grants you an exemption

They often give 5 year exemptions on filing corporation tax, after which you will need to re-apply for this exemption.


Capital Gains Tax

A fully mutual housing co-op is also eligible for exemption from all capital gains tax. Capital gains are the increase in value of the property that your co-op owns.

For example, if you buy a house for £60,000, and then sell it a few years later for £100,000, the capital gain of £40,000 [minus inflation] is not taxable, which it would be if the co-op was a workers’ co-operative/company/non-mutual body.

Annual Tax on Enveloped Dwellings (ATED) aka Mansion Tax

Annual Tax on Enveloped Dwellings, or ATED for short is also sometimes called Mansion tax which might apply to a coop with ANY SINGLE property valued more than the £500k threshold. It is a self-assessment tax, meaning the onus is on the taxpayer to file returns with HMRC (with penalties for non-compliance).

This gov.uk covers the basics of ATED - https://www.gov.uk/guidance/annual-tax-on-enveloped-dwellings-the-basics

ATED is based on five-yearly valuations and the current (as of April 2024) applicable valuation date is 1 April 2022.

Co-ops are eligible for the Social Housing Relief exemption, which is another way of saying that housing coops can claim relief on the basis that "the house is owned by a registered provider of social housing or a qualifying housing co-operative".

To claim the relief, a Relief Declaration Return needs to be submitted, by 30 April each year. You can request a paper form if the online service does not work by emailing paperforms.ated@hmrc.gov.uk

This gov.uk provides further guidance - https://www.gov.uk/guidance/register-for-the-annual-tax-on-enveloped-dwellings-online-service#submit-a-return-where-a-charge-is-due