Making it easier to convert a company into a society

It is increasingly common for companies to convert into community benefit societies or co-operative societies. This is an important route for businesses to adopt the co-operative model. Issues with HMRC, Companies House and others can make this process more complex, burdensome and costly than it needs to be.

The Financial Conduct Authority (FCA) recorded 40 such conversions in 2019. With the help of the our members, including the Community Shares Company, we have gathered evidence that issues with HMRC and Companies House can result in as much as £11,000 in additional costs for a newly converted society. 

HMRC

Positive update: In February 2020 HMRC agreed to our request to clarify its internal policy and guidance, to confirm that when a company converts into a society, it continues as the same corporate entity for tax purposes. 

This will help reduce instances in which HMRC mistakenly determines that following conversion, a company has ceased trading and a new entity has come into being. Too often this results in the creation of a new Unique Tax Reference (UTR), requiring in turn new VAT and payroll registrations, while wiping clean relevant financial history such as recent operating losses. Meanwhile when a company is mistakenly considered to have ceased trading, a partial set of accounts must be prepared. And a new payroll registration can result in issues with pension schemes and payroll service providers.

All this creates significant and unnecessary administrative burdens for newly converted societies, which have calculated to be in the order of £5,000. 

Companies House

At present conversions from company to society result in the following status being recorded on the Register of Companies: “Closed/Converted”. In the vast majority of cases, a company with the status is closed. Most users of the Register of Companies, such as banks, take this status as denoting closure. But where the company has converted, this is incorrect.

This ambiguity in the status recorded by Companies House causes difficulties for companies that have converted into societies:

  • HMRC can mistakenly treat the recently converted society as a new organisation for tax purposes, with a new Unique Tax Reference, requiring in turn new VAT and payroll registrations, while wiping clean relevant financial history such as recent operating losses
  • Meanwhile when a company is mistakenly considered to have ceased trading a partial set of accounts must be prepared
  • New payroll registrations can result in issues with pension schemes and payroll service providers
  • Credit reference agencies and financial institutions mistakenly respond as if the society is a new entity, reducing ease of access to services and sometimes increasing costs
  • Some newly converted societies face difficulties accessing corporate insurances, such as directors’ and officers’ indemnity insurance
  • Suppliers do no extend existing credit arrangements to the newly converted society; sometimes this can be resolved once efforts have been made to reassure suppliers but in other cases new credit arrangements have to be negotiated  

All of the above create significant administrative burdens for newly converted societies and can lead to higher operating costs and lost opportunities. 

A recently converted society has attempted to quantify costs incurred as a result of their difficulties. Taking into account time taken up on additional administrative tasks, solicitor’s fees and additional costs incurred with suppliers, they estimate the additional cost to their business has been approximately £11,000.

We have asked Companies House to change the way it records and displays the status of companies that convert into mutual societies. We have suggested that when a company converts into a society, the utility of the Register of Companies would be greatly enhanced if it could:

  • specify that such a conversion had taken place
  • record the new mutual society registration number
  • provide a link to the Mutuals Register search page

Contact

e: [email protected]

t: 0161 214 1775