Partner Nick Burrows, in our Charities & Education team, reviews updated guidance from the Charity Commission on gift aid donations from a trading subsidiary to its parent charity.
It is not uncommon for charities to set up a profit-making trading subsidiary to undertake part of their activities which fall outside of their charitable purposes (known as non-primary purpose trading) but which contribute to the charity. For example, a charity may set up a trading subsidiary to run a charity shop.
It has also been common practice for trading subsidiaries of charities to donate all of their taxable profits to their parent charity and then claim gift aid relief even if the amount donated exceeds the profits available for distribution under the company legislation. This approach was endorsed by the Charity Commission in its CC35 guidance on charity trading.
The Charity Commission has however now had to retract this position and has issued updated CC35 guidance on gift aid donations from a trading subsidiary to its parent charity following a report published by the Institute of Chartered Accountants in England and Wales (ICAEW). This report highlighted that there can be a difference between taxable profits and distributable profits and that any donations in excess of its distributable profits are unlawful.
The Charity Commission’s updated guidance says "If the accounting profit is higher than the value calculated for distributable profits, only the lower figure can be paid across under Gift Aid. A consequence of this is that when the taxable profits of the trading subsidiary are greater than its distributable profits, the trading subsidiary may have a tax liability."
According to the latest HMRC guidance, if a parent charity receives a donation from its subsidiary in excess of its distributable profits, the charity would be under an obligation to repay that unlawful element.
The new Charity Commission and HMRC guidance applies for any accounting period starting on or after 1 April 2015 but some options are available to overcome the problems in certain circumstances.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
