We have recently come across several instances where clients have formed Community Interest Companies (CICs). So, now seems like a good time to highlight some of the VAT issues associated with these entities.
The crucial point to be aware of is that setting up as a CIC does not confer any special status for VAT purposes.
We have heard of a number of CICs who mistakenly believed that CIC status in itself would bring them within one of the VAT exemptions (e.g. for supplies of education or welfare).
This is not the case.
The education and welfare exemptions are subject to a number of very stringent (and VAT-specific) tests. Very broadly, for education, this will mean that the company will have to be precluded from distributing any profits (and in practice ensure that it does not distribute them). Surpluses need to be ploughed back into the activity which generated them.
For welfare, the exemption is generally restricted to state-regulated or charitable providers of specified welfare services.
Key message: CIC status does not equal ‘VAT exempt’ status. You may still achieve VAT exemption – but this is subject to satisfying a different (and VAT-specific) set of tests.