Updated guidance on trading subsidiaries of charities

By Susan Cattell, Head of Tax (England & Wales) and Christine Scott, Assistant Director, Charities & Pensions

10 March 2016

The Charity Commission, HMRC and ICAEW have published revised guidance relating to the trading subsidiaries of charities and tax.

The revised guidance which should be considered by charity trustees of UK charities, directors of trading subsidiaries of UK charities and their advisors is relevant where donations have been paid or will be paid in future by a wholly-owned trading subsidiary to a parent charity.

Why has the guidance been revised?

It has been common practice for companies which are wholly-owned trading subsidiaries of charities to donate all their taxable profits to their parent charity and to claim relief for the donation using the company Gift Aid scheme.  This was the case even where, in some cases, the amount of the donation exceeded the amount of distributable profits of the company calculated in line with the Companies Act 2006.

The ICAEW obtained a legal opinion which concluded that payments of this nature, received by a parent charity from a wholly-owned trading subsidiary, are distributions under company law.  This means that any part of such a payment made by a subsidiary company that exceeds the subsidiary company’s distributable profits is considered unlawful under the Companies Act.

Charity Commission guidance – Trustees, trading and tax

The Charity Commission for England and Wales has published a new version of CC35 – Trustees, trading and tax.  The previous version of CC35 had previously been withdrawn shortly following the legal opinion being received by ICAEW.

The main change to CC35 is the insertion of a new section 4.5: “Can trustees expect their charity’s wholly-owned trading subsidiary to always Gift Aid all the profits shown in the profit and loss account to its parent charity?”  The short answer given is “No”.

“Company law makes it unlawful for any company to make distributions in excess of distributable profits.  If the accounting profit is higher than the value calculated for distributable profits, only the lower figure can be paid across under Gift Aid.”

The revised section goes on to note that 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.

HMRC guidance – Trading and business activities

HMRC has also updated its guidance for charities set out in 'Annex IV: Trading and business activities – basic principles'.  Sections 45 and 47 have been updated to make clear that any part of a donation payment made by a wholly-owned subsidiary company to its parent charity which exceeds the subsidiary's profits available for distribution is unlawful under the Companies Act 2006.  In addition, such a company will not obtain a tax deduction for any unlawful distributions for accounting periods commencing on or after 1 April 2015.

ICAEW guidance – Donations by a company to its parent charity

The ICAEW updated its technical release on the subject 'Tech 16/14BL: Guidance on donations by a company to its parent charity' setting out the background to the changed approach and considering the steps which need to be taken by charities and their trading subsidiaries to remedy any unlawful distributions.

Practical implications of the revised guidance

The new Charity Commission guidance states that parent charities with wholly-owned trading subsidiaries must bring their operations into compliance with the revised position for any accounting period starting on or after 1 April 2015.  It goes on to suggest that where wholly-owned trading subsidiaries have previously paid a higher figure under Gift Aid the charity’s trustees may need to take advice from a suitably qualified professional advisor.

The amended HMRC guidance notes that if unlawful distributions have been paid by a subsidiary company to a charity in earlier accounting periods the ICAEW technical release sets out that (subject to time limits) the parent charity has a liability to repay the unlawful distributions and the company has a right to receive the sums.  HMRC states that the repayment of such prior unlawful distributions by the charity to the company will not be taxable income in the hands of the company.

Topics

  • Tax
  • Charities

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