New guidance on donations from trading subsidiaries to parent charities

On 24 February, the ICAEW, HMRC and the Charity Commission simultaneously released updated guidance on donations made by a subsidiary company to its parent charity, and the thorny issue of donations made in excess of distributable reserves being non-deductible for corporation tax purposes.

It is common for companies owned by charities to seek to make donations to their parent, in an attempt to reduce their taxable profits to zero. In the past, this was often done even if technically the amount donated exceeded the amount of profit available for distribution for corporate law purposes.  Such an approach was previously endorsed in Charity Commission guidance.

However, as a matter of corporate law such payments are unlawful distributions to the extent they exceed distributable profits, and must be returned by the charity to the subsidiary company.

The guidance recently released now reflects an acknowledgement of this analysis, and (in the case of the HMRC material) demonstrates that an excessive corporate gift aid payment of this kind is not allowed as a qualifying donation to the extent of the excess, but the necessary repayment of the amount of a previous unlawful distribution is not taxable upon payment.  The net effect is that some profit remains in the trading subsidiary to be taxed.

It is not clear whether HMRC will pursue tax adjustments for prior accounting periods, though the sector anticipates probably not (given resource issues within HMRC and the fact that the prior approach was endorsed in published guidance). However, for accounting periods commencing on or after 1 April 2015, charities and their trading subsidiaries will be expected to get donations of this kind right to benefit from the tax relief for qualifying donations.

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