6.3 6.3 Distributions in co-operative societies

The term profit is rarely used by co-operatives because it does not sit easily with co-operative values and principles. Instead, the term surplus is used by the International Co-operative Alliance’s (ICA) Statement on the Co-operative Identity, Values and Principles, which states how surpluses should be used:

“Members allocate surpluses for any or all of the following purposes: developing their co-operative, possibly by setting up reserves, part of which at least would be indivisible; benefiting members in proportion to their transactions with the co-operative; and supporting other activities approved by the membership.” 

This suggests that co-operative societies should only distribute current surpluses, or at least have a policy limiting the distribution of historical reserves.

Surpluses can be distributed to members in proportion to their transactions with the co-operative. This is usually referred to as a dividend or rebate. Only a co-operative society is allowed to distribute surpluses this way, a community benefit society cannot distribute profits in the form of a dividend on member transactions.

The rules of a society describe who can be a member, and the basis of the member’s transactional relationship with the society, for instance, purchases by customer members, sales by supplier members and wages of employee members. The amount of share capital held by a member of a co-operative society has no bearing on the dividend they might receive. Instead, dividends are normally proportionate to a member’s level of transactions with the society.

This principle enables co-operative societies to exercise financial prudence in their transactions with members. It can also be an important source of competitive advantage, encouraging member loyalty and rewarding member participation. Members transact at price levels which improve the likelihood that their co-operative will make a surplus. If and when this surplus is achieved, some of it can be returned to members in proportion to their transactions. Thus, the surplus paid by members is rebated to them in the form of a dividend. Members of a consumer co-operative may accept paying higher prices in the knowledge that some of the surplus generated is returned to them in the form of a dividend.

A co-operative society is free to set dividends at whatever rate it deems reasonable, bearing in mind the guidance provided by the ICA Statement on the Co-operative Identity. The FCA offers no guidance on this matter, and society legislation imposes no limits. The management committee of a co-operative society has a duty to determine a rate that will further the objects of the society. In most cases, the management committee will recommend a dividend rate for approval at an annual general meeting of members.

If a society’s rules allow it, dividends can be paid into the member’s share account, which will bolster the share capital held by the society. Dividends are treated as a pre-profit expense and are deductible for corporation tax purposes. The income tax treatment of co-operative dividend income is dealt with in Section 8.3.  

In contrast to dividends, interest on share capital has a lesser role in co-operative societies. The ICA Statement on the Co-operative Identity, Values and Principles, says “members usually receive limited compensation, if any, on capital subscribed as a condition of membership.” This could be taken to mean that it only applies to the minimum investment requirement, not the actual amount of share capital held by a member.

A co-operative society that trades exclusively with its members, and distributes surpluses only to members in the form of dividends, may qualify for mutual trading status and be exempt from paying Corporation Tax on its profit (see Section 8.10.2)

If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at communityshares@uk.coop