Non-charitable trading subsidiaries: accounting for corporate gift aid
Christine Scott reports on important new guidance published by the Charities SORP Committee for non-charitable trading subsidiaries on how to account for corporate gift aid.
The guidance is set out in Information Sheet 2: Accounting for gift aid payments made by a subsidiary to its parent charity where no legal obligation to make the payment exists (January 2019).
Purpose and authority
Information Sheet 2 provides guidance on how to:
- Implement amendments to the Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) arising from Financial Reporting Exposure Draft 68 (FRED 68): payments by subsidiaries to their charitable parents that qualify for gift aid.
- Address the consequences of clarification that corporate gift aid payments are distributions under company law rather than expenses, following a legal opinion obtained by ICAEW. ICAS commentary on this topic collates guidance applicable across the UK from the Charity Commission for England and Wales, HMRC and ICAEW.
- Reflect a clarification in the Charities SORP (FRS 102) as to when payments by subsidiaries to their charitable parents that qualify for gift aid are adjusting events occurring after the end of the reporting period. The clarification is made via an amendment to Module 13 of the Charities SORP on events after the reporting period.
Information sheets are advisory only. However, they are authoritative in that they set out the views of the Charities SORP-making Body and its advisory SORP Committee.
FRED 68 amendments
FRED 68 inserts two paragraphs into Section 29 of FRS 102 on income tax: paragraphs 29.14A and 29.22A. These are set out below, along with paragraph 29.14 which is required to make sense of paragraph 29.14A.
29.14. In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the profit or retained earnings is paid out as a dividend to shareholders of the entity. In other jurisdictions, income taxes may be refundable or payable if part or all of the profit or retained earnings is paid out as a dividend to shareholders of the entity. In both of those circumstances, an entity shall measure current and deferred taxes at the tax rate applicable to undistributed profits until the entity recognises a liability to pay a dividend. When the entity recognises a liability to pay a dividend, it shall recognise the resulting current or deferred tax liability (asset), and the related tax expense (income).
29.14A. As an exception, when:
(a) an entity is wholly-owned by one or more charitable entities;
(b) it is probable that a gift aid payment will be made to a member of the same charitable group, or a charitable venturer, within nine months of the reporting date; and
(c) that payment will qualify to be set against profits for tax purposes, the income tax effects of that gift aid payment shall be recognised at the reporting date. The income tax effects shall be measured consistently with the tax treatment planned to be used in the entity’s income tax filings. A deferred tax liability shall not be recognised in relation to such a gift aid payment.
29.22A. An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
(b) the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
Amendments to FRS 102 arising from FRED 68 apply to accounting periods beginning on or after 1 January 2019. Early adoption is permitted without any requirement to early adopt other amendments to FRS 102 arising from the triennial review.
Early adoption is permitted in paragraph 1.18(b) of FRS 102 and must be disclosed as part of the information about the basis of preparation in the notes to the accounts.
Scope of Information Sheet 2
Information sheet 2 provides guidance on the accounting and related disclosures required where there is no legal obligation for a non-charitable trading subsidiary to make a gift aid payment to its parent charity.
The Information Sheet does not:
- Provide specific guidance for non-charitable trading subsidiaries applying Section 1A of FRS 102. However, aspects of the guidance will, nevertheless, be relevant.
- Cover the accounting and related disclosure requirements where there is a legal obligation for a non-charitable trading subsidiary to make a gift aid payment to its parent charity, i.e. where a Deed of Covenant is in place.
- Provide guidance for non-charitable trading subsidiaries preparing accounts under the Financial Reporting Standard applicable to the micro-entities regime (FRS 105).
- Provide guidance on the accounting implications for a parent charity’s individual accounts or its group accounts. However, some limited commentary is available.
The guidance contains the following illustrative examples of accounting for gift aid payments and the associated tax relief on first-time adoption of amendments to FRS 102 arising from FRED 68:
- Example 1: Previously accounted for the gift aid payment as an expense in the income statement when profits arose.
- Example 2: Previously accounted for the gift aid payment in equity when profits arose.
- Example 3: Previously accounted for the gift aid payment in equity when paid.
- Example 4: Previously accounted for the gift aid payments as an expense in the income statement when profits arose: an interim gift aid payment made during the reporting period.
In summary, the illustrative examples are based on the following assumptions:
- There is no legal obligation to make the gift aid payment at the reporting date.
- The reporting entity is wholly-owned by its parent charity.
- The subsidiary entity is a private company limited by shares which prepares accounts in accordance with FRS 102.
- Taxable profits are equal to accounting profits and accounting reserves are equal to the subsidiary entity’s distributable profits.
- The tax rate has been assumed as 20% for years ending 31 December 2017 and 31 December 2018.
- All taxable profits will be paid by the subsidiary entity to its parent charity via a gift aid payment made within nine months of the reporting date. The payment is made after the accounts have been approved.
- The subsidiary entity has elected to apply paragraphs 29.14A and 29.22A of FRS 102 in its accounts for the year ended 31 December 2018.