Updated guidance on gift aid donations from trading subsidiaries to parent charities

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The Charity Commission is to amend its guidance on gift aid donations from a charity trading subsidiary to its parent charity following a report published by the Institute of Chartered Accountants in England and Wales (ICAEW).

Some charities own subsidiary trading companies through which they carry out trading activities. For example, a charity that runs a charity shop might decide to set up a trading subsidiary for the purpose of buying new products and selling those new products in the charity shop, in addition to the sale by the charity of items that have been donated by the public. The usual practice is for the trading subsidiary to donate all of its taxable profits to its parent charity each year, and to claim charitable donations relief on those donations in order to reduce its corporation tax liability. The ICAEW technical report clarifies the law in this area and makes it clear that any donations made in excess of the subsidiary's distributable profits for that tax year are unlawful distributions.

Until now, in line with the Charity Commission's guidance, it has been industry practice for trading subsidiaries to donate all taxable profits to maximise corporation tax relief. However the report highlights that there is often a difference between taxable profits and distributable profits, and that where any payments made exceed distributable profits in accounting terms, those payments are unlawful. Differences between these figures may arise for example as some expenses are disallowable for tax or where there is a time difference between when the expense is taxed and when it becomes eligible for tax relief (e.g. fixed pension contributions).

The Charity Commission's guidance (guidance note CC35) previously stated that a trading subsidiary could pay total taxable profits to the parent charity even if it meant paying more to its parent charity than the level of distributable profits available. This guidance has now been withdrawn and is being reviewed in light of the ICAEW report.

The ICAEW report also advises on the consequences of past overpayments, including a recommendation that where a trading subsidiary has made unlawful distributions to its parent charity, the parent charity needs to recognise this as a liability in its accounts, and the excess amounts should be repaid to the trading subsidiary. It also notes that "HMRC are considering the tax impact of this for charities and their trading subsidiaries and we understand that they will publish their view in due course".

The full report is available here.

If you are a charity that receives payments from a trading subsidiary and you are concerned about the potential tax impact of this report on you and your trading subsidiary, we can help to advise you of the legal position for your charity, and we can work with your accountants to assist you to address any consequential actions required.

If you are interested in receiving advice on this issue, please contact a member of our charity team.