Trading arms 'cannot make Gift-Aided donations from reserves to parent charities'

The Charity Commission will update its guidance on charity trading in the light of advice on this issue from the Institute of Chartered Accountants in England and Wales

Charity shop: can distribute all taxable profits to parent charity
Charity shop: can distribute all taxable profits to parent charity

The Charity Commission will update its CC35 guidance to clarify that trading subsidiaries cannot make Gift-Aided donations from their reserves to their parent charities.

Charities’ trading subsidiaries, such as charity shops, exist to make money for the charity. A Gift-Aided donation – or "distribution", in accounting terms – from a subsidiary to its parent charity, results in a tax relief not for the charity as with individual Gift Aid, but for the donor company.

Section D5 of the commission guidance Trustees Trading and Tax: how charities may lawfully trade (CC35) responds to the question "Can a trading subsidiary pay more to its parent charity in Gift Aid than the level of trading profits (in accounting terms) which it has earned?" Previously, the answer was maybe; charities were advised to take advice on the matter. If a charity chose to make a donation that was greater than its trading profits, because it earned more in pre-tax profit, the excess was seen as coming from its reserves.

In a technical release published on Friday, the Institute of Chartered Accountants in England and Wales said it had taken legal advice on the matter because it understood "that the position in CC35 was being questioned".

This legal advice confirmed that claiming Gift Aid on such a payment as described in CC35 was unlawful. As a result, the commission decided to revisit CC35 and the answer to section D5 now reads: "This section has been withdrawn whilst we review our guidance on this issue."

Jane Hobson, head of policy at the commission, said: "We are grateful to the ICAEW and will be revising CC35 in light of this input. The planned update will say that a distribution cannot be made from a trading subsidiary’s reserves for the purposes of a Gift-Aided distribution to its parent charity."

Gillian McKay, head of the charity and voluntary sector group at the ICAEW, said many of its members had already understood that this was the case. She said: "This is not new legislation; we are just making sure our members are aware of this."

Hobson said she was not aware that any charities had encountered any difficulties as a result of that previous version of the guidance. However, charities that have historically made donations from their reserves – and their accountants – must now wait to see whether HM Revenue & Customs will attempt to reclaim tax that went unpaid.

A spokeswoman for the commission said it would be working with the ICAEW, as well as HMRC and the Department for Business, Innovation and Skills, in preparing the update, and it should be published in early 2015.

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