Treatment of donations by a company to its parent company

It has long been common practice for companies that are wholly owned trading subsidiaries of charities to donate all taxable profits to the parent charity and to claim a tax deduction for this donation under Gift Aid rules. In some cases the taxable profit may not equal the accounting profit and in these cases it was possible to make a gift aid payment in excess of the profits available for distribution, leaving the company with negative reserves. This position was endorsed by the Charity Commission in section D5 of Guidance Note CC 35.

In late 2014 the Charity Commission withdrew its guidance endorsing this treatment and the Institute of Chartered Accountants in England and Wales (ICAEW) issued a technical release ’Guidance on donations by a company to its parent charity’. ICAEW sought Counsel’s opinion on the matter and this confirmed that the payments in question are distributions of profit. As a result, to the extent that the amount paid exceeds the subsidiary company’s profits available for distribution, the excess payment would be unlawful.

In the event that the scenario above has occurred, the excess is likely to be repayable by the charity and adjustments will be required for prior incorrect payments. If this situation applies to your charity we recommend that you seek advice at the earliest opportunity.

This guidance has ramifications for all donations, as the legal opinion applies to all payments, even where not in excess of distributable profits. The technical release is silent on the accounting treatment.
The two options available are:

1. Treat the ‘cost’ as an expense in the Profit and Loss account (current treatment); or
2. Treat the ‘cost’ as a dividend.

Having discussed this matter with the ICAEW technical enquiry department they have not seen any accounts which show this ‘cost’ as a dividend and therefore in the absence of any further guidance they recommend using the current accounting treatment.

HMRC have not commented on the tax position to date. Their current guidance states that dividends paid cannot be treated as a donation and will not reduce taxable profits. It is therefore unclear whether the ‘cost’ if disclosed as a dividend in the accounts would be taxable deduction in these circumstances.

We aware that some firms are advising on changes to the accounting treatment, whilst retaining a deduction for corporation tax purposes. In the absence of a definitive answer we are currently advising our clients to continue to treat the payments as ‘cost’ in the profit and loss account, to ensure the corporation tax deduction. The directors should ensure that they document approval of the payment of profits to the parent charity prior to the year-end through a board minute. Any payment in excess of distributable profits should be avoided.

As further guidance is issued we will review our current position and advise of any change.

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